Earlier this year, Ted Bauman warned investors to be cautious of Uber, and he reiterated that as its initial public offering date approached in May. Lately, Uber has been calling itself the Amazon of transportation. While the company did a good job of building hype and maintained momentum up through its IPO date, Mr. Bauman encouraged investors to look beyond the hype.
As Mr. Bauman pointed out in his blog recently, economists ask three vital questions when they consider the prospects of a company. Those include the following:
- Does the company have products that offer value, and are consumers willing to pay for that value?
- How hard or simple is it for competitors to offer the same value?
- Can the business maintain its value while still maintaining a profit?
Mr. Bauman said that investors do not often ask economists about tech companies that are nearing an IPO date, and he called that trend a pity since it can be dangerous. He added that all tech companies are still businesses that are trying to make a profit. Investors should not be distracted by dazzling presentations and catchy headlines.
Since Mr. Bauman is an economist, he asks those three important questions and does extensive research before he invests in tech IPOs. Ted Bauman’s background in economics spans multiple decades and continents. Although he was born and raised in the Northeast, Mr. Bauman went to college in South Africa and graduated with honors. His degree was in economics, politics and economic history.
Ted Bauman’s Verdict on Uber
One of the reasons why Uber compared itself to Amazon was to encourage more people to shell out money at its IPO. The CEO of Uber gave a speech before the IPO and said that the company would expand beyond cars into other categories just as Amazon expanded into more categories than books. When Amazon was new, that was its focus. However, Ted Bauman expressed his disagreement with the CEO’s statement. As Mr. Bauman said, the market structures for car trips and books are different. Since Mr. Bauman has experience in multiple industries and sectors in addition to his knowledge of economics, he knows how to make in-depth comparisons of market structures.
Ted Bauman recanted a brief history of Amazon in his blog. The founder knew that customers would buy books from any location if they could be shipped to them easily and if they could buy them for a good price. Amazon’s sales were modest at first, and the company did not turn a profit until 2009. One of the reasons why Amazon’s profit margins remained smaller up through 2015 was because it kept adding categories, services and new features. The company invested billions in expansion projects.
From this scenario, Ted Bauman pointed out that all markets were and still are national markets with Amazon. The company still sells products that people want and can get at a lower price, and they can have products shipped to them anywhere. The founder predicted that once the company reached a certain level, it could cover its fixed costs. Mr. Bauman said that his prediction was correct. As Mr. Bauman said, Amazon is now a powerful leader. Investors do not want to funnel money into companies that plan to compete with Amazon, and Mr. Bauman said that Uber is no exception.
Why Uber Is Not an Exception
So far, Uber has not made a profit. The company spent $20 billion to get where it is, and it claims that the lack of profit is because it is mirroring Amazon’s strategy. The company has expanded into many cities. It is hoping to become profitable one day by spending money now to build its market share. Mr. Bauman said that it will not reach its goal. As he pointed out, Uber does not have fixed costs like Amazon does. Its costs fluctuate since it must pay drivers.
The company had an idea to replace drivers by using autonomous cars eventually, but it hit a major setback with that recently after one of its test cars struck and killed a pedestrian. Uber does not have a clear way to reduce its fluctuating costs. Also, the drivers receive minimal pay. Poor pay leads to higher turnover, and Uber must pay for background checks and other costs when it hires new drivers.
Another problem that Ted Bauman highlighted was Uber’s patchy market. Currently, it is comprised of several local markets in large or midsize cities. The people who use ride services in those places care more about services than company names. According to Mr. Bauman, another disadvantage for Uber is how easy it is for competitors to enter the market. Lyft and other companies offer ride-hailing services, and they are structured like Uber.
As Mr. Bauman said, since many of the local competitors are smaller, they are profitable and offer lower prices. This puts Uber at a great risk. Mr. Bauman added that drivers can easily go work for a competitor if they get tired of working for Uber. Another cost for Uber is its subsidization of employees, which is necessary to prevent masses of them from leaving.
Ted Bauman’s Advice
Ted Bauman referenced an excerpt from an article that appeared in The Economist. It says that ride-hailing services are local rather than global right now. With unregulated competition, the market is easy to enter. When there are more competitors, a business becomes a commodity. Customers do not care which company gives them a ride as long as they can pay a low price, receive good service and use the services easily. The article also pointed out that this limits the ability of ride-hailing companies to raise their prices. If they do that, they simply lose business. Additionally, loyalty is minimized since employees use their own vehicles.
After recapping that article excerpt, Ted Bauman emphasized that Uber is not a good choice right now. He encouraged his readers to think about the three important questions that were mentioned in the first section. For Uber, Mr. Bauman said that only one of the questions could be answered with a yes. The company cannot provide its value and make a profit, and it is very easy for others to enter the market. Although there may be short-term benefits, investors will likely see disappointing long-term results. It appears that Mr. Bauman’s advice was correct again. Since its IPO several days ago, Uber’s stock dropped. Although employees celebrated the IPO with champagne, it was a grim start. Also, the IPO happened just days after poorly paid drivers held a strike at the company’s headquarters.
Ted Bauman provides other tips to his blog readers and followers. After a successful 25-year career in Africa where he was instrumental in helping more than 14 million people with a notable housing initiative, he moved to the United States. He lives in Atlanta now and joined Banyan Hill Publishing in 2013. Mr. Bauman is the author of the Alpha Stock Alert, The Bauman Letter and Plan B Club newsletters, and he has written several books.