S1E5: Uber

Decoded’s Take

• Uber is the most richly valued transportation and logistics company in the world despite its low margins and insignificant profits. Investors continue to bet that its business model will enable it to dramatically expand margins and profits compared with traditional logistics counterparts.
• Uber’s ride sharing business is 1) bigger 2) more profitable and 3) growing faster than its delivery business
• Even though Uber operates in 10,500 cities across 70 countries, 22% of its business comes from just 5 metro areas: Chicago, Los Angeles, New York, Sao Paulo, and London. Further, 15% of its rideshare bookings start or end at an airport!

The Business

Uber is a worldwide technology-powered logistics company with more than 150M monthly active users in 10,500 cities across 70 countries. Each of these users make, on average, 5.8 trips or orders per month. Its business can be roughly broken down into three segments:

• Mobility: most of this segment can be attributed to its core ride sharing business, or what the word “Uber” has come to mean in pop culture.
• Delivery: most of this segment can be attributed to Uber Eats, which primarily delivers meals from restaurants, though it also supports groceries and convenience items.
• Freight: a freight brokering service that connects Shippers with Carriers. While this segment accounted for 14% of Uber’s 2023 revenues, most of this revenue is pass through to carriers and actually decreased 25% YoY. It’s the only segment that isn’t profitable, isn’t especially disruptive, and doesn’t seem to be a core focus for the company. We won’t spend any time on this segment.

Uber used to invest heavily in building self-driving technology through its Advantaged Technologies Group (ATG), but sold that business to Aurora in 2020. Today it owns a 21% of Aurora.

In all of its businesses, Uber does not employ the “supply” side of its marketplace. Its drivers are classified as independent contractors. In some jurisdictions, this classification has been challenged or even deemed illegal, so today Uber does technically employ a very small portion of its workforce, but the scale is so small we can ignore it. Regardless, Uber does not pay its workers a salary. Every “Trip” and “Order” is a separate job, in which Uber charges the customer and then remits the money to the Driver and/or Merchant, taking a cut in the middle. Uber takes ~ 30% cut of ridesharing fares and ~20% of delivery orders for facilitating the transaction.

Uber is the only company in the world that offers both ridesharing and food delivery through the same worker pool. A customer may grab a ride to work in the morning, order lunch, and grab a ride home in the evening, all on the Uber app. Similarly, a single Driver can seamlessly switch between giving human rides or acting as a delivery courier. The capability to offer both services increases each active consumer’s dollar value to Uber and its workforce and provides greater scale to Uber’s logistics network, further boosting its network efficiency. By simply having more workers running around a city and more demand on its platform, Uber can increase the effective working time (eg when Drivers or Couriers are on a Trip or Order vs driving around idly waiting for a job), which increases worker pay and reduces costs for the consumer.

To increase user loyalty, Uber has introduced the Uber One membership, which charges consumers a monthly fee. In return, consumers get free (or reduced) delivery fees, discounted rides, and other benefits. The idea is that very few consumers will want to pay for multiple platform memberships, so if Uber manages to convince a customer to sign on for the Uber One membership, they’ll be able to capture more of that customer’s business. Indeed, Uber’s 19M members generate 30% of all of Uber’s gross bookings and spend 3.4x more than non-members. Lyft, DoorDash, Instacart, and other gig platforms have all introduced similar memberships.

Finally, Uber generates advertising revenue on Uber Eats, which reached a $900M annual run-rate as of Q4 2023. Brands (such as Ben & Jerry’s) can buy preferential placement within the Uber Eats app to encourage more purchases of their products from retailers, merchants (like restaurants) can promote their listings over others, and merchants can also generate special offers for consumers. 

The Numbers

Uber had $138B of net bookings, $37.3B of revenue, and made a net operating profit of $1.1B in 2023 (3% net operating profit). Its Rideshare segment accounted for $68.9B of bookings (50%) and Delivery accounted for $63.7B of bookings (46%). Freight made up the rest.

Though Rideshare accounted for about the same amount of bookings as Delivery, it’s a much more profitable business, accounting for $19.8B (~30% cut of gross bookings) of revenue compared to Delivery’s $12.2B (~20% cut of gross bookings). Adjusted EBITDA (Uber’s handwavy metric for segment profitability, used here only for comparison purposes) was $5B (7% margin) for Rideshare vs $1.5B (2% margin) for Delivery. Further, though Delivery grew quickly over the last several years, its growth has slowed to roughly ~15% YoY, while Rideshare continues to grow at >30% YoY.

Uber’s business also has some interesting concentration patterns. Though Uber operates in more than 10,000 cities in more than 70 countries, 22% of its Rideshare bookings come from just five metro areas: Chicago, Los Angeles, New York, Sao Paulo, and London. In this business, the “whale” cities really do matter. Further, 15% of its Rideshare bookings start or end at an airport. Nothing screams “product market fit” like an airport ride.

Analysis

Since Uber is essentially comprised of two business lines (ridesharing and delivery) each comprising roughly half of its total volume, let’s look at how these two businesses compare. Uber Eats grew at a rapid pace in its first few years of operation, but its growth has slowed post-pandemic, while Uber’s rideshare business continues to deliver strong growth, even though it’s the more mature business. Furthermore, ridesharing demonstrates higher EBITDA margins – more than 3x that of Delivery. I don’t really know why this is the case, but my guess is that, fundamentally, the rideshare business has stronger product-market-fit. On the consumer side, I would categorize the delivery business as a luxury while the ridesharing business is more of a necessity. After all, most consumers aren’t willing to pay exorbitantly high fees for food to be delivered (the alternatives are eating something at home or getting one’s own takeout) while they are willing to pay for transportation when they don’t have another good option. This would also explain Uber’s higher take rate on ridesharing vs delivery – the fee structure on ridesharing is much more favorable compared to the limited amount of money available in a delivery order after paying the restaurant and courier. On the worker side, Uber’s own data shows that workers who work as ridesharing drivers have ~20% higher retention and ~50% higher engagement than those who work as delivery couriers. While Uber doesn’t provide an explanation for this phenomenon, I suspect that it ultimately comes down to ridesharing drivers being much happier with their pay than delivery couriers.

Though Uber’s platform provides invaluable services for the consumer and flexible desirable work for workers, both ridesharing and food delivery are very competitive markets with no cost to switch (eg a consumer doesn’t really care if they take an Uber or a Lyft, or get food delivered by Uber or Doordash). Unfortunately for Uber, that means it is always forced to compete on price (assuming “good enough” service quality), keeping margins low. In the early days, each of the players tried to grab more market share from competitors by subsidizing consumers’ use of the platform – charging consumers less for providing service than what Uber must pay its workers. For a long time, investors debated whether companies like Uber will ever become profitable due to this tricky dynamic. It’s a classic Prisoner’s Dilemma. Uber and its competitors will all be better off if they didn’t pay consumers to use it, but if any one of the players subsidize consumer use, they’ll quickly grab market share and gain an advantage over competitors. The logical move is to subsidize consumers regardless of what competitors do, which leads to the Nash Equilibrium of everyone giving out free rides and free food and burning billions of dollars. Uber was the most aggressive of them all, raising and burning more than $25B of capital but finally proving skeptics wrong when it achieved its first profitable quarter in Q2 of 2023.

This “burn as much as possible as quickly as possible” dynamic shifted when investors finally got tired of the death spiral and basically decided to collectively stop the flow of capital to Uber and its competitors. Further, most of the major platforms went public over the last few years, and public investors care A LOT about strong financial performance, lacking the patience of private investors for loss-making enterprises. Smaller players that never achieved scale died. Today, each market around the world effectively acts as an oligopoly (many with 2 players), with none of the players trying especially hard to kill one another. After all, from a regulatory standpoint, it’s always better to have *some* competition (rather than being the big bad monopoly) and it also allows the players to catch their breaths and try to make some money.

That said, even when not trying to kill each other, they don’t make THAT much money. In 2023, Uber net operating income as a percentage of revenue was a whopping 3%. Lyft and Doordash have yet to generate positive operating margins. These margins look pitiful compared to other large tech platforms like Airbnb (15%), Google (27%), Facebook (35%), and Microsoft (42%). At this rate, it’ll take many more years before Uber makes enough money to pay back all that cash it burned. Like airlines, Uber and its competitors have created tremendous value for the world but have so far managed to capture very little.

Despite these challenges, investors continue to assign high valuations to platforms like Uber.  Uber is currently trading around $160B (more than 80x P/E). It is the most richly valued transportation and logistics company IN THE WORLD. Its value is almost 2x the value of all US airlines COMBINED. It’s worth more than UPS’s market cap $125B, despite UPS earning $9.1B of operating profit in 2023 vs Uber’s $1.1B. Some may argue that this is completely irrational. But there are key differences between UPS and Uber to take note of: 1) Uber’s business is still growing (at 17% YoY) while UPS’s shrunk by 10% in 2023, 2) Uber pays its workers on a per-trip / per-order basis, reducing its susceptibility to demand changes or shocks that may leave it on the hook for paying for infrastructure / workers that don’t bring in revenue and 3) Uber is a technology company with a 150M monthly active users. It’s easy to imagine Uber’s profits continuing to grow as its business lines mature and Uber further develops revenue sources like advertising. After all, its YoY topline growth of $5.4B dropped almost $3B to the bottom line, turning its operating loss of $1.8B to an operating profit of $1.1B. 

Regardless of whether investors ultimately get rewarded with lots of profits, the world has certainly benefited tremendously from Uber’s transportation and logistics network. Today, you can instantly call a car that can take you just about anywhere from London to New York to Sao Paulo, all powered by the Uber technology platform and driver network. We truly do live in amazing times.