What Is Uber Doing With All That Cash

There’s a pattern in tech IPOs where the company, preparing to go public, makes a significant acquisition which is used to direct the growth narrative.

• Facebook acquired Instagram building it’s mobile presence and signaling the start of it’s social conglomerate strategy
• Twitter acquired Bluefin to link to TV (and the advertising $ there)
• Google acquired Applied Semantics which was the core of AdSense

When a firm IPOs, it’s the first chance the wider community has to get a look at its books. The market then estimates the growth ceiling based on current operations. To build the valuation you need to show how you intend to grow the business and convince your investors that there’s still money to be made.

If you’re already valued at $62.5b that could be a tall order. No matter what the PE ratio is, people will argue that it’s too high or too low and given the low asset base, the market may struggle to find comparators and to value the stock correctly.

So what about the $11b in cash raised so far? Sure some of it has gone to expansion (in China in particular) but don’t be fooled into thinking that Uber has a growth at all costs strategy. Travis Kalanick and the executive team have seen enough companies crucified for unprofitable growth that have served as a warning to ensure that they can demonstrate solid fundamentals before they IPO. But let’s say that they have burned through 25% of that raised amount (remember, China was on track for $1b/y, 12m a go).

That leaves $8b sitting around and while it might make strategic sense to build a warchest (and thus prevent your competitors from raising it) , the market is not going to reward Uber for having cash laying around.

Which brings us back to an acquisition, the Carnegie-Mellon (self driving cars) and the Decarta (mapping software) purchases future proof and create independence for the existing product offering but neither create that growth story. I’m going to look at two options; there are lots more, like “do nothing” or “grow internally” but I want to focus on acquisitions:

1. Acquiring a competitor (Didi, Grab, Lyft, Hailo etc.)

There isn’t a lot of precedent for this pre-IPO (even Instagram was more of a complementer than a competitor to Facebook) and Uber already has a presence (or has demonstrated it is able to build on) in any market they choose. Plus you’re inviting accusations of monopolistic behavior which is one of the tools that Uber uses to attack incumbents in the market.

This becomes more plausible if you look at non-core services, like UberEATS. Uber was late to market with their food delivery product and is going to have to capture marketshare from direct competitors (Deliveroo, FoodPanda, Ele.me) as well as existing incumbents (the current home delivery system). The tech is similar and Uber doesn’t benefit from the scale of it’s other operations (at this stage) so it’s undifferentiated and late to market, not the growth story that investors want to hear.

2. Diversifying Further

When people are asked “what does Uber do besides move people?” the response is UberEATS but UberRUSH might be the one worth having a close look at. Just like food delivery, package delivery is hyper competitive but here Uber can leverage the scale of their network. They already have the liquidity of vehicles on the streets, moving people, so it makes sense to pickup and dropoff packages that are on the way.

This forms a virtuous cycle, by transporting packages and passengers you can increase utilization (more  at a lower cost because you are moving both at once. There are some elements to manage around time-criticality (I don’t want to stop for a package when I’m late for a meeting) but this can be done with price discrimination.

This also sets Uber up for a really exciting end point with the UberRUSH product. If you can nail the last mile delivery, there’s a strong incentive to vertically integrate and this is where the acquisition space gets really interesting. Imagine if Uber decides to connect all of their last mile delivery services by acquiring a logistics company. Uber keeps the local distribution centres and the international connections and divests the rest giving them end-to-end solution that delivers internationally but leverages their existing system for last mile delivery. That should allow them to significantly undercut the incumbents on pricing and they’re right back into the familiar pattern of being the disrupter but without nearly as large a regulatory overhead.

This is particularly important in markets where there is strong resistance to regulatory change. Uber can establish and grow the delivery market which provides them with a driverbase that can be quickly converted to passenger transport giving them scale much quicker than competitors in the event of regulatory change.

The other thing to like as an investor is that an end-to-end delivery solution has the potential to give Uber a much larger slice of the revenue pie. Typically Uber receives 25-30% of a passenger fare but with a delivery service they would be providing the bulk of the value and could demonstrate to the market that they are capable of capturing additional value from their product line.

What Does The Future Look Like?

Imagine it’s your birthday and your mom (in California) wants to send you cookies (in New York). She bakes them and packages them up, then she opens the UberRUSH app and in 3 minutes a driver is there to collect the box. Meanwhile at your end, you get a notification saying that there is a package from your mom that you can get delivered any time after 3pm. When the cookies get to the distribution center closest to you in New York there’s another message confirming the delivery time and asking if you’d like it delivered to your location or to somewhere specific. There’s final a notification when the vehicle is arriving outside work and less than 24 hours after they were baked, those cookies are in your hands, along with a birthday card.

That’s a growth story I’d invest in.

 

Disclaimer: I worked for Uber until April 2016. To my knowledge, there is no internal plan as described above, this is just a thought exercise by me, based on what I think Uber should do, for my own edification.