Uber finally delivers

This is an audio transcript of the Unhedged podcast episode: ‘Uber finally delivers’

Ethan Wu
Big news from ride-sharing land: Uber, which I’m sure you’ve taken before, they’ve made a profit.

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No accounting gimmicks, no BS, just a real, genuine operating profit. $326mn in the second quarter, up $1bn year over year. It’s the first time they’ve done this, and it’s a big change for a company that’s been bleeding money, really since it came on to the scene. Today on the show, we discuss what took it so damn long. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu, joined today in the New York studio by Uber snob Rob Armstrong, who will not take Lyft on principle.

Robert Armstrong
I’m a one ride-sharing company man.

Ethan Wu
(Laughter) You helped them with that $326mn profit.

Robert Armstrong
I’m doing my part.

Ethan Wu
Yeah, very nice. So, you know, Uber’s been one of these just really exceptional, you know, growth stories out of Silicon Valley, you know, starts in San Francisco. Like skills across the country, transforms the way we get around, disrupts the taxi industry. But the weird thing has always been, Rob, that they’ve never made any damn money. But you could imagine, you know, and I think this was the initial pitch from Uber, how they could, right, which is that they’re this perfectly platonic tech layer, you know, between an independent contractor-driver and a customer just wanting to get around town. They take a little slice for pairing up the two and beautiful. They get the network effects, they scale up. It’s a wonderful, lovely business. All is well. They make money. What’s wrong with that?

Robert Armstrong
Yes. That really did not happen. I mean, all of the excitement about this profitable quarter at Uber and it is definitely better to be profitable than it is to be not profitable.

Ethan Wu
Yes. This is true.

Robert Armstrong
There has been a turning point for Uber. The fact is, on their balance sheet, here’s what they have. They have an accumulated deficit on their balance sheet, which is, roughly speaking, all the losses they’ve made over their history, of $33bn.

Ethan Wu
Oof! $33bn!

Robert Armstrong
So $33bn has sunk into this business, has been disappeared by this business and paid in capital is $42bn. So a huge amount of money has been put in and the majority of it has been set on fire so far to make $300mn in one quarter. That’s kind of the history of this business as we have it. So why did that happen? If this was a frictionless technology business that just took a little clip of money, as the money mint went rushing by, it was like, why isn’t this — I’m just repeating your question back to you — but why isn’t this the kind of Microsoft of transportation?

Ethan Wu
Right.

Robert Armstrong
Why isn’t it the Mastercard of transportation where two people do a transaction, they get a fraction of it and they just walk away with free money? No capital costs whatever.

Ethan Wu
Yeah. And I think, you know, to anyone that’s taken Uber, it may be clear why that it’s not so frictionless. I mean, there’s just a lot of stuff involved. The first thing is you’re driving a hunk of metal hurtling down the road at 60 miles an hour.

Robert Armstrong
Yes.

Ethan Wu
And there will be crashes, people will get injured.

Robert Armstrong
Yeah. And the tires will have to be replaced and the oil will have to be changed and all of that. So you could put it like this. In the very best tech businesses, in the very best network businesses, the marginal cost of providing the service is zero. Like once Microsoft has written the software, once Mastercard has built the payment network, selling another unit of the software, selling another transaction over that network costs nothing.

Ethan Wu
Yes.

Robert Armstrong
And Uber, for all its history and for all of its future, will have high marginal costs because a person, who is made of meat, has to be moved around in a huge metal thing.

Ethan Wu
Yes.

Robert Armstrong
And that costs a lot every time you do it.

Ethan Wu
Yeah.

Robert Armstrong
So that’s one difference between those businesses and Uber.

Ethan Wu
Yeah. And you’ve written about this nicely just on the cost side that insurance is a really significant expense for Uber.

Robert Armstrong
Yeah. You would think, well, that’s the driver’s problem, right?

Ethan Wu
Right.

Robert Armstrong
You know, it’s like any other driver. You have your own insurance. But you have to assume the drivers aren’t fools.

Ethan Wu
Yeah.

Robert Armstrong
They’re not like, oh, I’ll drive for you. You pay me a low salary, and if there’s an accident, I’ll pay for it. (Ethan laughs) That sounds great. So that’s like, oh, I’ll go to work for McDonald’s, (Ethan laughs) and if the fryer catches on fire, I will pay for the fire department.

Ethan Wu
Right.

Robert Armstrong
Thanks so much for that good deal. (Ethan laughs) So the drivers have to be compensated for the depreciation on their vehicles and the risk of an accident.

Ethan Wu
Yes. On top of making a wage that you know is better or comparable to another industry.

Robert Armstrong
Right.

Ethan Wu
That’s just a high bar. And so on the cost side, like you said, it’s not free. It’s very far from free for Uber to scale up.

Robert Armstrong
But I would emphasise though, that that is not the fundamental economic question.

Ethan Wu
Yes.

Robert Armstrong
The fundamental economic question is not what does it cost?

Ethan Wu
Right.

Robert Armstrong
The fundamental question is how much can they get paid for bearing those costs?

Ethan Wu
Yes, so this is cost and we’re talking now about revenue. Yeah.

Robert Armstrong
So what is the competitive dynamic? Which means they can’t just jack up their prices to the point where they’re making a lot of money.

Ethan Wu
Yeah.

Robert Armstrong
Right? And why have other tech businesses been able to charge a big margin over their marginal costs and Uber has not?

Ethan Wu
Yeah, well, Microsoft, to just use your example. They don’t have to compete with your legs. (Rob laughs) Or the subway.

Robert Armstrong
(Laughter) Yeah! That’s the thing.

Ethan Wu
Or, you know, asking your friend for a ride.

Robert Armstrong
Yeah, I think that’s really an important point, is whatever Uber charges, it has to be the best combination of price and convenience for the ride that I want to take. And under most circumstances, I have other options. I can take the city bike, I can take the subway, I can get my own car out of the garage if I have a car, there is a local taxi company. And those options persist.

Ethan Wu
Yeah.

Robert Armstrong
And as much of the ride-sharing business as Uber controls, it doesn’t control very much of the getting-around business.

Ethan Wu
Yeah. So we’re talking here, Rob, about in some ways like a highly commoditised service. There’s a lot of people competing to take you from point A to point B, and the costs of that business are very far from negligible. Timothy Lee, who’s a tech analyst and a reporter, has written a very nice piece about this a couple of years back, saying that Uber faces this kind of fundamental trade-off between growth on the one hand and profitability on the other, which isn’t always true of some tech companies. A lot of tech companies can grow while being profitable. You know, Google and Microsoft are great examples of this. Scaling up and making money are not in tension. For Uber, it definitely is because of these revenue dynamics and because of the cost dynamics.

Robert Armstrong
Yeah.

Ethan Wu
And in the last couple of years it seems that Uber’s been under the new CEO, Dara Khosrowshahi, trying to pivot toward profitability and they’ve finally gotten there. But there’s all of these caveats too to this number that they’re reporting this quarter.

Robert Armstrong
I just wanna mention before we push forward to the future.

Ethan Wu
Mm-hmm.

Robert Armstrong
One other important competitive dynamic that an Unhedged reader kind of wrote a letter and said, have you ever thought about this? And that is extending on a comparison that I’ve made to Airbnb. So Uber is fundamentally in the core of its business, a business that I use. I become a customer of moving around my city or my locality. Of course, I also use it when I’m on vacation and whatever else, but I’m kind of aware of the universe of options in my city and I can always choose among them, Uber being just one choice. With a business that is superficially very similar, like Airbnb, almost every time I use Airbnb, I’m using it in a market that I’m not familiar with.

Ethan Wu
Yes.

Robert Armstrong
Where Airbnb is one of a small number of options, it’s like FRBO, Airbnb or a hotel.

Ethan Wu
Yeah.

Robert Armstrong
And so the market is kind of self-limiting because it’s sort of global and I’m doing it at a distance, whereas locally I always have my pick of a smorgasbord. I’ve always wanted to say that (Ethan laughs) on the air, the smorgasbord of transportation options. Smorgasbord.

Ethan Wu
Smorgasbord. (Rob laughs) That’s the title of this episode. Smorgasbord of transportation options.

Robert Armstrong
Smorgasbord. But, you know, as of right now, to get us back on track with your growth point. Uber is growing.

Ethan Wu
Yeah.

Robert Armstrong
Now it’s making money, has a profitable quarter. And you know, revenue growth is 17% in the quarter.

Ethan Wu
Yeah. I think it’s telling that they’ve spent, you know, in recent quarters, so much emphasising the other lines of the business that Uber’s growing out. So they’ve got this freight business that’s scaling up. They’ve got a food delivery business, they’ve even got an ad segment. If you take Uber these days, you’ll get an ad for, you know, I get them for like JPMorgan Wealth Management or for Amazon or whatever. Because this ride business, it seems like they’re trying to move toward, OK, it’s maturing. We’ve kind of capped down on growth. We have a dominant market position and it’s still not that profitable. So let’s just kind of cut costs and eke out the money we can and try to get growth elsewhere in the business.

Robert Armstrong
And I also think that we need to take the current profit with a tiny grain of salt.

Ethan Wu
Yeah.

Robert Armstrong
And to think about the totality of the business and its history. So let’s take that classic example of a lemonade stand. So my son comes to me this summer and he says, Dad, I want to sell lemonade on the street and make some money. I say, great. So I go to the grocery store, I buy a bag of lemons and a bag of sugar, a couple of bags of ice. I give him my picture and my table to put on the lawn of my house, which I pay for. And then he says, lemonade, lemonade. And some poor suckers come along and they buy three cups of his lemonade for a dollar each. And he holds the $3 up to me and he says, look, Dad, I made $3. And then off he goes to the store to buy whatever it is that kids buy at the store.

Ethan Wu
A fractional share of Uber.

Robert Armstrong
A fractional share, (laughter) a tiny fraction of a share of Uber. And the point is, he didn’t really make $3. He doesn’t have $3 in profit. He’s got $3 minus the lemons that I bought, the sugar that I bought, the rent I’m paying on the house. The life of drudgery working as an FT journalist (Ethan laughs) that I’ve endured all these years. And he’s just dancing around with his three bucks. And that’s a little bit. That analogy applies to Uber. They have made $325mn of operating profit in a single quarter on the back.

Ethan Wu
Yes.

Robert Armstrong
Of upwards of $40bn of money flowing into the business.

Ethan Wu
Yes.

Robert Armstrong
The best way to make $300mn at ride-sharing is to start with $42bn of investment. (Ethan laughs)

Ethan Wu
Right. And, you know, I think another way of making this point is to just ask the question, who made money?

Robert Armstrong
Yes.

Ethan Wu
On Uber, right? The executives surely did. The people that invested at the very beginning and, you know, 2009 and the 2010s and then sold the public markets in 2019, maybe they made some money. But if you bought on the IPO price, which is $45, the stock today is 47.

Robert Armstrong
Yeah.

Ethan Wu
Which is not a good return (laughter) now over five years.

Robert Armstrong
Now, it is important to remember that there’s one thing, which is the internal economic dynamics of the business, and then there’s the stock price.

Ethan Wu
Yeah.

Robert Armstrong
Stock price implies that the business is worth $95bn. I think that’s the number. Yeah. So $45bn investment in, the stock market’s saying the cash flow that’s coming in the future is gonna be worth $95bn.

Ethan Wu
Yes.

Robert Armstrong
So collectively, the market is saying that investment was at least in the black.

Ethan Wu
Yeah.

Robert Armstrong
Of course, that’s speculative; stock market gets things wrong all the time. But that’s a vote of confidence in the business that Uber has built.

Ethan Wu
You know, the management is projecting confidence. The CEO in this quarter’s earnings call said they would be making operating profits for many quarters to come. And they said investors have been too bearish on Uber, have misunderstood the unit economics. We always knew we were gonna be profitable, but just, you know, kind of the fundamental baseline for this market expectation. Like you said, $95bn market cap to come to pass, is they’re gonna need a lot more quarters of profits and they’re gonna need better profits than this for quite a while. And we haven’t had a major recession since Uber’s been around. Investors could be right about the unit economics, that they’re just not that good, that this is a break-even business plus a little bit more.

Robert Armstrong
The ultimate measure of a business is not whether it shows profit at the bottom of the income statement. The ultimate measure of a business is whether it makes a good return on investment.

Ethan Wu
Yes.

Robert Armstrong
All the money that’s tied up in the business, are you making a better return on that money than you would be if you just bought Treasuries or if you put your money to work in some other way, in a savings account or whatever. Uber has proven that it can stop the bleeding. It has not proven that it is a high-return-on-investment business, a high-return-on-capital business.

Ethan Wu
Absolutely.

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All right. We’ll be back in a moment with Long/Short.

Welcome back. This is Long/Short, that part of the show where we go long a thing we love, short a thing we hate. Rob, a couple of weeks ago in this section, I talked about seeing Barbenheimer and why maybe despair for humanity. But, you know, man, I got to tell you, I’m sure the endless reaction cycles to movies in general, you know, like, can we find something new to talk about? I feel like I’ve read pieces reacting to the movie, pieces reacting to the reaction to the movie pieces reacting to the reaction to the reaction to the movie. I’ve read too many. I’m over it. Let’s move on to something else.

Robert Armstrong
The Oppenheimer/Barbie comment period is now over. (Ethan laughs) Please close your laptops, op-ed writers, and move on. I’m with you, Ethan.

Ethan Wu
Yeah. Man.

Robert Armstrong
I am long the 10-year US Treasury and I am saying that specifically because . . . 

Ethan Wu
It’s a painful trade.

Robert Armstrong
. . . Fitch downgraded the United States’ sovereign credit rating this week. Everybody agreed this was a silly thing to do. I am with them and I’m looking at the 10-year yield today at 4.17 per cent and I would like to signal my willingness to lend the US government money at that price. (Ethan laughs) I think it is both rational and patriotic to do so.

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Ethan Wu
Oh, yes, yes, yes. They should just sell some kind of like war bonds to you specifically to finance the deficit. Rob Armstrong. (Rob laughs)

Robert Armstrong
The Rob Armstrong Bond.

Ethan Wu
(Laughter) That’s right. All right, listeners, we’ll be back in your feed on Tuesday with another episode of Unhedged. Catch you then. Unhedged is produced by Jake Harper and edited by Bryant Urstatdt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie and Jess Truglia. FT Premium subscribers can get the Unhedged newsletter for free. A 90-day free trial is available to everyone else. Just go to FT.com/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

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