Can Uber Make A Profit?

Fans of Uber’s hail-a-ride app praise Uber for filling a void in urban, on-demand transportation. But as the company deals with the fallout from the ouster of CEO Travis Kalanick and ongoing questions about its leadership and direction, one of the biggest questions facing investors and the company itself is this: Can Uber turn a profit?

The company is worth somewhere between $28 billion and $62.5 billion, according to valuation experts cited by Bloomberg and others. But Uber’s survival depends on the company’s ability to turn a profit for its many investors, none of whom have yet seen a dime’s worth of return.

If Uber goes public, it will need a tremendous IPO to pay off current investors, which include Morgan Stanley, Goldman Sachs, tech giants Google and Apple (via ridesharing startup DiDi), and a host of mutual funds and private investors.

“Disruption is easy but making money off disruption is difficult, and ride-sharing companies would be Exhibit 1 to back up the proposition,” writes Aswath Damodaran, professor of finance at NYU’s Stern School of Business, in a recent blog. “While the ride-sharing option is here to stay and will continue to grow, ride sharing companies still have not figured out a way to convert ride sharing revenues in profits.”

Damodaran says Uber follows “a flawed business model,” burning through capital as ride prices continue to fall and competing services enter the marketplace.

In the meantime, lawsuits against Uber filed by city attorneys, charges of workplace sexism and other scandals have taken a toll on Uber’s reputation, triggering a consumer backlash embodied in the hashtag #deleteUber. The protest also stems from the company’s controversial “surge pricing,” or rate hikes based on a spike in demand for rides.

Political author and former New America thinktank fellow Steven Hill thinks he understands the core problems Uber faces for long-term viability. Hill is the author of Raw Deal: How the "Uber Economy" and Runaway Capitalism Are Screwing American Workers. In his view, the future of Uber may come down to the simple issue of turning a profit.

“Uber is the most valuable private company in the world,” Hill says. “But they’re not making a profit, so why haven’t they imploded yet? In some ways, they have. There are so many venture capital funders who don’t know whether to stay involved and give more money to turn it around -- or pull out.”

Hill points to statistics that show seven out of 10 Silicon Valley startups fail when their venture capitalists pull up stakes and move on.

“Uber is so much bigger,” he says. “The Saudi Arabia oil fund, Apple and Alphabet are all investors. It’s just not clear what Uber can ever do to become profitable if you look at their business model. Amazon was able to sell things without having a store. Traditional retailers have so much more overhead. That’s what allowed Amazon to compete. But Uber is basically a taxi company. They say they’re a technology company, but you still need a car. They transfer that risk to the driver; they haven’t fundamentally found any cost savings in that process. They haven’t set up a profitable model. They’re using venture capital funding to subsidize rides.”

How Could Uber Turn It Around?

“Uber would have to double prices to have any hope of being profitable,” Hill says. “But they’re trying to drive the competition out of business so they can’t raise prices. They haven’t found a way to be the taxi company of the digital age. They lost $2 billion in China. They lost $3 billion in 2016. That’s the most money lost by a startup ever.”

An Uber spokeswoman declined to discuss a timetable for the company to achieve profitability.

Uber is exploring self-driving cars as a way to cut down on the cost of paying drivers, but that program has been caught up in a lawsuit with Google’s self-driving car developer, Waymo, which charges that an ex-employee stole its trade secrets before joining Uber. Even if Uber prevails or pushes forward with its self-driving car program, the company will have to maintain a fleet of cars, adding to its costs, Hill observes.

“When you talk to people who are experts in the area of self-driving cars and not dependent on venture capital to keep themselves alive, they will tell you that self-driving cars are 20-30 years away,” he says. “You can do it with trains. You can probably do this with long distance delivery trucks going from point A to point B. We’ll probably see that in 5-10 years. But when it comes to city streets, there are so many decisions that have to be made moment to moment.

“When you get past the hype, you realize their test cars didn’t work all that well,” Hill added. “The test car in San Francisco ran six red lights. In Pittsburg, the driver had to take control 30 percent of the time. There were many fender benders. No, these things will improve over time, but the liability and regulatory issues are so huge, this won’t happen any time soon. Investors aren’t going to wait that long for their profit.”

Uber’s explosive growth, he says, stems from simple economics of supply and demand.

“What gave Uber an opening is that taxi service in the United States is not very good,” says Hill. “Where I see the new realization occurring is you can only have so many cars on your streets. To get an Uber car to you in five minutes, Uber floods the streets with cars.” (To look at Uber and regulation in different states, check out MoneyGeek’s 50-state guide to car insurance and road safety.)

Lyft positions itself as a better alternative to Uber “and to some extent that’s true,” Hill says, “but Uber sets the market. If Uber lowers prices, everyone follows. There is more respect at Lyft for drivers, but at the end of the day it’s the same industry. And they have the same problems trying to make this service profitable.”

Image: Nucleo Editorial, Flickr