Uber: A look at how Uber makes money and turns losses into profits in one article

Since Uber withdrew from China, its voice in China has gradually decreased, and the problems exposed by Didi have also made Chinese people more or less skeptical of the car-sharing model. After Uber replaced its radical founder, introduced professional managers and went public in 2019, the company's development strategy also shifted from early rapid expansion to efficiency and profitability. Its fourth-quarter financial report shows that Uber's taxi business has achieved profitability, and the entire company has taken another step towards full profitability in 2021.

Below we take a 360-degree look at the company's ways to make money and turn losses around through Uber's 2019 investor report document:

Part 1 Company Status

Uber sees itself as a super-large global technology platform company that serves a multi-trillion dollar market with its core technology and infrastructure.

The company's business services include taxi-hailing, food delivery, freight, new mobility (bicycles, etc.), autonomous driving, helicopters, etc. Currently, the company's business covers 69 countries and more than 900 cities around the world.

The company has unparalleled scale and significant growth, with loyal monthly active customers covering multiple products and markets.

In 2019, the company's total order volume reached US$65 billion, with a compound growth rate of 50% over the past four years and a year-on-year growth rate of 35% in 2019. The number of monthly order users exceeded 111 million, a year-on-year increase of 22%, and a net increase of 20 million year-on-year. The total number of orders delivered by the company in 2019 was 7 billion, a year-on-year increase of 32%. In the fourth quarter, there were 5 million drivers on the entire platform.

The company's core competitive advantage is to launch, expand and optimize its business by leveraging its unique platform assets, which include leading technology, operational excellence, large-scale network, brand recognition, product experience and scale efficiency.

Leading technologies include differentiated and proprietary demand forecasting, scheduling, matching, pricing, routing and payment technologies applied across business units.

Operational excellence includes: Regionally local operations that better support platform users, strengthen relationships with cities and regulators, and accelerate new product launches.

Large-scale networks are large, efficient, and intelligent. They become smarter with every trip, using data to power mobility.

In terms of brand recognition, the company is among the top 100 brands in the world and can use its brand and influence to launch and expand new businesses.

In terms of product expertise, the company drives the standard for on-demand mobility, providing users with a secure, intuitive, and continuously improving experience.

In terms of scale efficiency, global scale brings operating cost and efficiency advantages.

Providing a one-stop shopping and operation platform for modern urban life, including mobile solutions, platforms for accessing various public transportation systems and third-party services, as well as catering delivery services.

The company has made significant progress since its IPO. In 2019, it continued to grow at a faster pace, with total orders and adjusted net revenue increasing by $15 billion and $2.6 billion year-on-year, respectively.

The company continued to innovate its products, improve user loyalty experience, enter new customer segments (comfort cars), and provide leading safety features. It maintained its leadership in the core taxi and food delivery markets. The commission rate increased from 19% in the first quarter to 21% in the fourth quarter. It increased the adjusted EBITDA margin from -31% in Q1 to -16% in Q4.

Part 2 Online car-hailing business

The online car-hailing business accounts for 76% of Uber's total orders and ranks first in all major operating regions. It holds a 15% stake in Didi in the Chinese market and a 15% stake in Grab in Southeast Asia.

The revenue of online ride-hailing business accelerated in 2019, and the frequency of user usage remained strong. In 4Q19, the total order amount increased by 20%, and the adjusted net revenue increased by 32% year-on-year. The average number of trips per user per month was 5.7 times.

The company has three long-term growth paths for achieving sustainable profitability in its online car-hailing business. The first is high-potential growth markets, such as Japan, South Korea, Germany, Spain, Italy, and Argentina. In the fourth quarter, the order volume of these high-growth potential markets increased by 4 times. The second is high-value segmented products and user scenarios. In the fourth quarter, the company's total enterprise service orders were US$1.2 billion, the growth rate of special car service orders was 54%, and the order volume of Uber taxi business provided to medical institutions increased by 300%. The third is sustainable low-cost products, such as carpooling, tricycles, and motorcycle businesses. The year-on-year commission rate in the fourth quarter increased by 800 basis points.

The taxi-hailing business is already profitable, and there is still room for profit margin improvement. The improvement in the taxi-hailing business profit margin mainly comes from the increase in commission rate, the improvement in operational efficiency, and the rationalization of market cost investment (online taxi companies no longer irrationally subsidize drivers and passengers in exchange for rapid growth).

In the fourth quarter, Uber's commission rate for online ride-hailing services increased to 22.5%, and the long-term goal is to reach 25%. The adjusted EBITDA margin of the online ride-hailing business is 24.4%, which can be further increased to 45% in the future. Some countries that account for 25% of the total order volume have already reached this goal.

Part 3 Takeaway Business

The food delivery business currently accounts for 22% of the company's total orders and is moving along the path of the online ride-hailing business.

The operational advantages of the food delivery platform: world-class marketing technology, global operations, leveraging Uber’s brand recognition, and a huge installed base (110 million monthly ordering users).

The financial model advantages of the food delivery business include: higher average order value (50% higher than that of taxi-hailing), lower insurance costs (the proportion of the order value is less than 1/5 of that of online ride-hailing), and platform cost leverage (sharing the platform with online ride-hailing).

The development path of the food delivery business is similar to that of the online car-hailing business. The first step is to invest in this large-scale market opportunity. The potential market size is $2.8 trillion in global catering transactions, and the target market size of food delivery is $795 billion. The second step is to use existing infrastructure, brands, operations and technologies to expand rapidly. From the figure below, we can see that the food delivery business, based on the Uber platform, has expanded faster than Uber. The third step is to build the world's largest distribution network (except China).

The food delivery business is committed to achieving the first or second position in each service market. The investment in 2019 has achieved strong output, and the 25 first and second markets accounted for the vast majority of total orders, including the United States, the United Kingdom, France, Mexico, Japan, Australia and other countries. The commission rate for food delivery increased from 6.4% in the fourth quarter of 2018 to 9.5% in the fourth quarter of 2019. The company strategically expanded its food delivery business through other means. Actions include acquiring a majority stake in Cornershop (Latin American market), reselling the Indian food delivery business to Zomato, and exiting the Korean market.

US market case: The investment has achieved very promising results. The strategy is to enrich the platform's catering supply (the number of available restaurants increased by 60% year-on-year; launched membership subscription services), improve financial efficiency (the commission rate increased by 500 basis points to the high 10th percentile), and give full play to the platform's synergy advantages.

We are heading towards achieving our long-term profit margin target by improving commission rates, operational efficiency and rational market investment.

The company's long-term commission rate target for its food delivery business is 15%, and its adjusted EBITDA margin is 30%.

Part 4: Freight/New Mobility Business/Autonomous Driving

Currently, these businesses account for 1% of the total order amount, and these businesses are intended to bet on the trend of industry change.

The company’s approach to freight and other businesses is to expand responsibly, with a focus on unit economics.

The target market size for freight in the United States and Europe is $13 trillion. The company aims to use Uber's brand, technology and products to build a global responsive logistics network. The adjusted annualized net revenue for freight in 4Q19 was $876 million.

The new mobile business provides users with a comprehensive transportation solution within the Uber app, which has significant business opportunities. In the US market alone, trips within 3 miles account for 46% of domestic car trips in the US. The adjusted annualized net revenue of this business in the fourth quarter was US$140 million.

ATG: Strategically investing in autonomous driving, the company has a market-class team and partners, advanced technology and a clear commercialization path.

The figure below shows the company's heavyweight strategic partners, including Toyota, Volvo and other companies.

Before shared autonomous vehicles mature, the ATG business unit is well-adapted to the hybrid era.

Part 5 The Road to Profitability

The company's path to achieving revenue growth and profits by 2021 is: (1) invest in high-margin and sustainable low-cost products; (2) acquire and increase usage by high-value platform users; (3) take a restrained attitude towards variable and fixed cost investments and leverage economies of scale; and (4) invest in product and technology innovation to continuously improve user experience and operational efficiency.

Positive and negative factors for profit margin improvement: The positive factors are the quarter-on-quarter profit margin improvement and improved efficiency and cost savings in the ride-hailing business; the negative factor is that global competition in the food delivery business remains fierce.

The company has sufficient liquidity (i.e. cash) to achieve its 2021 profit target.

Conclusion: Is Uber worth investing in?

(1) The company enters the stage of turning losses into profits, and market confidence will increase;

(2) The taxi market and food delivery market still have great potential, and transaction volume will continue to grow rapidly. It is expected that the growth rate in the next few years should be above 20% to 30%.

(3) The commission rate will continue to increase to drive the company's revenue growth. The company expects the long-term target for the commission rate of the taxi business to be 25%, which is currently over 20%. The long-term target for the commission rate of the food delivery business is 15%.

(4) As the company's revenue grows, the overall operating leverage efficiency will be reflected and profits will be significantly released.

(5) The layout of new businesses has a promising long-term trend.

Risk points:

(1) If the turnaround target is not achieved and the progress is lower than expected, the market reaction will be very bad.

(2) Intensified competition in the food delivery market has eroded profit margins and slowed down the company’s pace

(3) Diversified business and lack of focus led to being defeated by competitors one by one

Appendix: Report download address