Why Uber is a zero; Ride-sharing companies' regulatory challenges; Super Pumped: The Battle for Uber; SoftBank Seeking to Take Control of WeWork Through Financing Package
1) My colleague Enrique Abeyta, whose new newsletter, Empire Elite Trader, is in beta testing with our Empire Financial Partnership members, shared with me his thoughts on why Uber (UBER) is likely to be a zero...
In my "Hunting Unicorns" presentation last week at the Stansberry Conference, I recommended shorting the shares of ride sharing "technology" companies Uber Technologies and Lyft (LYFT).
After the conference, I had the chance to visit my old Wall Street colleague who now resides in Northern California. He had a formidable career on Wall Street working for some of the biggest hedge funds in the world, including Omega Advisors, SAC Capital, and David Einhorn at Greenlight.
We first met in 1998 when he was working at hedge fund Pequot Capital for legendary technology investor Art Samberg. This was right as the tech bubble was really beginning to inflate, and we were reminiscing about the absolutely insane things we saw in those markets.
I often tell people that while I have lived through multiple historic financial crises in my career – including Long Term Capital Management, the attacks on 9/11, and the Global Financial Crisis – nothing compares to the craziness I saw during the tech bubble.
As we reminisced about the insanity of 1998 to 1999, I thought to myself that the private equity "unicorn" stories today are exactly the same. The only difference is that this time, private-equity investors have funded most of the craziness, rather than individual investors.
How many of these companies will even exist in two years? Is there any reason they should?
Uber is an awesome product. I use it all the time. But in the past 12 months (ending June 30) it has lost $8.1 billion! Even excluding the $4 billion that was non-cash stock-based compensation, the company still burned $3.4 billion of cash (operating cash flow losses of $2.7 billion and capital expenditures of $626 million) – and the cash burn is accelerating.
Enrique notes that the numbers for Uber's chief competitor, Lyft, aren't nearly as bad...
With revenues less than one-fourth of Uber's, Lyft's net loss was proportional – $2.3 billion over the past year – but it's not burning nearly as much cash ($365 million), and the trend is favorable. The company actually had positive $15 million of operating cash flow in the second quarter.
He concludes:
I wouldn't be surprised if we look back in 18 months and Uber has filed for bankruptcy. In fact, that would be a logical expectation.
Eventually, I think Uber will likely join the likes of Excite, the Globe, boo, and Pets.com on the junk heap of history.
2) But according to Enrique, hemorrhaging cash isn't the only headwind facing Uber...
These ride-sharing companies are facing a lot of regulatory challenges right now.
Our friends at Stansberry Research have done a great job outlining the pressures they're facing in California thanks to the new law that will force "gig economy" companies like Uber and Lyft to classify their drivers as employees rather than independent contractors.
I would say that this would crush Uber's economic model, but I'm not sure you can break what is already so broken.
Enrique also cited this article from the U.K., Uber's UK VAT liability confirmed. (You need to register for a free account to access the article.) Excerpt:
"The Uber Group is involved in an ongoing dialog with HMRC, which is seeking to classify the Uber Group as a transportation provider. Being classified as a transportation provider would result in a (20%) on Gross Bookings or on the service fee that the Company charges Drivers, both retroactively and prospectively."
Uber London's accounts do not provide any indication of the total sum being recorded as a contingent liability at Uber London's parent, the Uber Group.
But various sources tell us the bill could be as large as £1bn, or more. These are not small sums...
One thing's for sure. It's a tax case that could have a huge bearing on Uber's profit-and-loss at some point, with equally important implications for Uber's operations in Europe, which also bear similar VAT exposure.
3) Speaking of Uber, I enjoyed reading the new book about it, Super Pumped: The Battle for Uber.
What a crazy – and, in many ways, disgusting – story. Here's a good Vanity Fair article with an extended excerpt from the book: "I'm a Terrible Person": Behind the Epic Meltdown That Ended Travis Kalanick (yes, he is indeed a terrible person). Excerpt:
The group came up with what it believed Uber's image was to outsiders, written in bold, black ink: A bunch of young bro bullies that have achieved ridiculous success. It was a hard point to argue.
Nonetheless, Kalanick began to push back on Jones's findings immediately, rebutting the data he saw on the wall. "Nuh-uh," Kalanick said. "I don't believe it, man. I don't see it." His lieutenants were flabbergasted. Even in the midst of the most sustained set of crises in Uber's history, Kalanick couldn't see the literal writing on the wall...
Kalanick soon realized his mistake: He had pissed off the very people trying to protect him from a press corps that was about to tear him apart. As he chased his communications executives down the hotel hallway to try and convince them to stay, Hazelbaker confronted him.
"How dare you!" she screamed, inches from Kalanick's face, as the rest of the group watched in shock. "I've walked through fire for you and this company! You did this TO YOURSELF!"...
Sitting on the sofas in Hazelbaker's living room, Uber's top executives shared pizza and beer and mulled their options. Meanwhile, Kalanick continued his theatrics, writhing around on Hazelbaker's carpet. Kalanick kept repeating the same thing over and over: "I'm a terrible person. I'm a terrible person. I'm a terrible person."
Whetstone tried to console him, half-heartedly. "You aren't a terrible person. But you do do terrible things," she said...
Second, he said Kalanick needed to take a leave of absence. "You either shoot yourself in the foot, or the press will end up shooting you in the head."
4) Another one of my predictions that I made in my September 19 e-mail about "The Whee Company" appears to be coming true:
Existing investors, led by SoftBank, wanting to avoid a total wipeout, will throw good money after bad and invest $1 billion or $2 billion in a distressed round that values the company at $5 billion.
(The valuation will probably be higher. But as has been the case for years, it will be as phony as a three-dollar bill, because SoftBank will set it at the price it needs it to be, not the real market price.)
Here's an article about the latest developments from the front page of today's Wall Street Journal: SoftBank Seeking to Take Control of WeWork Through Financing Package. Excerpt:
SoftBank has prepared a financing package that would give it control of WeWork and further sideline its founder Adam Neumann in exchange for relieving the shared-office startup's looming cash crunch, according to people familiar with the matter.
WeWork is racing to find a way to shore up its financing after its New York parent company We Co. pulled its plans for an initial public offering and Mr. Neumann resigned as chief executive under pressure.
My fifth and final prediction remains the same: None of this makes any difference, and the company files for bankruptcy a year from now.
Best regards,
Whitney