Uber finally stopped the bleeding on Wall Street, but it still has a lot to prove.
The stock rose more than 7% Tuesday after its lackluster debut on Friday. But its shares remain 11% below their initial public offering price. If Uber (UBER) hopes to motor even higher, it will need to persuade investors that it can find a road to profitability relatively quickly, and convince them to stick around for the long haul.
Many investors remain unconvinced that Uber can turn around its fortunes, because it remains in a tough battle for market share with rival Lyft (LYFT). And Lyft (LYFT)’s stock has sunk too since it started trading in late March.
Uber lost $1.8 billion in 2018 — more than any US startup has ever lost in the year prior to going public, according to S&P Global Market Intelligence. Its growth is slowing. It has a difficult relationship with its drivers. And competition is ramping up.
Uber is spending a lot of money on marketing to contend with its smaller, pluckier rival. The company spent $3.2 billion on sales and marketing in 2018, according to Uber’s IPO filing. That accounts for 28% of its overall sales.
Uber said that it is increasing spending on discounts, promotions and refunds as well as advertising. Uber also hired more marketing employees, which led to $111 million in increased compensation and facilities expenses.
The company hasn’t spent nearly as much on research and development to find new business lines. Uber’s R&D expenses accounted for just 13% of total sales. Contrast that with Facebook (FB) when it first went public in 2012, which was spending more than 20% of its revenue on R&D at the time.
Uber CEO Dara Khosrowshahi remains upbeat. According to several news reports, Khosrowshahi sent a memo to employees following the IPO in which he reminded workers that Facebook had a rocky start after it went public, too. CNN Business has reached out to Uber but has not been able to independently confirm the contents of the memo.
But Wall Street demands growth, and Uber will need to find new lines of business to satisfy investors.
Uber needs to diversify
Uber needs new lines of business, according to Derek Wall, CEO of HUBX, a startup focusing on marketplaces for vendors. He thinks Uber should try and position itself as more of a corporate-focused company — and not just a transportation giant for consumers.
Wall said the freight delivery business could be a giant opportunity for Uber. He said Uber may also need to find a way to leverage its massive database to generate more revenue — and eventually profits. That’s something that Amazon (AMZN) and Google (GOOGL) have done a good job with, while Facebook (FB) has stumbled because of its major privacy snafus.
“Uber has to diversify,” Wall said. “The current business model is not sustainable.”
Uber has started to take some baby steps to move beyond an on-demand taxi company.
The company could probably command a higher valuation than Lyft if it continues to grow the Uber Eats food delivery business, Shawn Cruz, manager of trader strategies for TD Ameritrade, told CNN Business on Friday.
Uber Eats is growing rapidly, threatening Grubhub and DoorDash. And profit margins and valuations for food delivery should be higher than the taxi service, Cruz notes.
Uber could also do more to beef up its delivery business — specifically, getting goods to customers’ doorsteps, added Russell Raath, president of consulting at management strategy firm Kotter. He argued that the company could partner with retailers to deliver furniture, for example.
Is Uber in too deep?
But Uber’s financials may make it difficult for the company to quickly move into new businesses, argued Len Sherman, a professor at Columbia Business School.
“Uber is in a terrible position as it continues to lose money. There are no easy paths out of the ditch that they’ve dug themselves into,” Sherman said, adding that he’s not sure that food and freight deliveries will be enough to make the company profitable.
Sherman isn’t sure that Uber can wind up becoming the Amazon of transportation.
Uber faces an uphill battle convincing skeptical investors that it can churn out big profits over the long haul.
“The challenge for Uber -— and it’s infinitely more difficult for them than Lyft — is to show where more growth can come from and build momentum,” Raath said. “How will they make money? That is what Wall Street cares about.”