Uber Investment Hype Proves to Be Dubious

In the past few years, Uber has proven to be one of the most innovative and disruptive tech companies in the world. Uber’s simple premise allows anyone to drive their own cars like taxis, under one unified app-powered service. And their idea turned out to be golden, as traditional taxi companies are pushed to the wayside by Uber’s simplifying tech. Almost a million people work as Uber drivers today, and people have taken 5 billion rides with the company last year.

However, it’s service is also controversial, as Uber doesn’t actually employ drivers, or own any cars in and of itself. Their app simply connects people who need a ride with the drivers who are in the area. In the process, Uber takes 20% of the fare, and the rest goes to the drivers.

With the amount of presence Uber gets in the media, as well as their great success, it’s no wonder their recent IPO has become the talk of the town in financial circles. Even though it was a private company, Uber was estimated at around $100 billion. To put things in perspective, that’s more than the worth of Starbucks, the biggest coffee giant in th US. With that in mind, it’s no wonder that Uber’s IPO is so closely followed by financial experts and the general public alike.

Obviously, any IPO is a major event for investors. The moment when a company starts selling shares in a public market is an opportunity for investor profits later on. The holy grail of stock investment is getting in on the ground floor, and waiting for stocks to significantly rise in value. And these days, the best chances for such a gain is investing in disruptive stocks early on. Which is why Uber is such a big deal; by any metric, it is clearly a disruptive stock.

However, Uber’s second day of stock trading has seen them perform much worse than both the company executives and market experts expected. This turn of events has been confirmed by internal memos circulated by Uber CEO Dara Khosrowshahi.

This has caused financial experts to examine the profitability of Uber more closely, and they’ve arrived at an interesting conclusion. Even though Uber’s shares have been long awaited, it turns out the company will not prove profitable for budding investors. Like most tech startups, Uber is not profitable at the moment. But market professionals claim that, unlike their counterparts, they don’t have great chances of increasing their profits in the long term.

Many have compared Uber’s lack of profits to Amazon’s and Facebook’s early years, where these tech giants burned through a lot of money while they were building their platforms. And investors who got in on the action early have reaped enormous rewards.

But when it comes to Uber, the situation has proven to be somewhat different. First of all, Uber has spent a larger budget in the past few months than Amazon had in its first couple of years. And second of all, while Uber is only now doing its IPO; it’s not a new company by any metric. This is a tech company that’s a decade old, and still not showing any profits.

The reason for that is quite simple, according to experts — while it’s a tech company, its revenue has largely nothing to do with technical innovations. Simply put, they make and lose money just like any taxi company would.

In comparison, Facebook makes their profits from ads. And while they spent a lot of money building their ad platform in the first few years; since then, their costs have been largely flat. And increased profits have surpassed them. On the other hand, estimates show that Uber’s fares aren’t nearly enough to cover their expenses. By the time they cover their overhead costs, there are no profits left. And seeing as their costs won’t get any lower as they scale up in size, there is seemingly no profitability in sight. While Facebook spends basically no money on each additional ad once their infrastructure was developed, Uber has additional costs with each new driver they employ.

That’s not to say that early private investors in Uber did not reap any benefits. For example, ex-cyclist Lance Armstrong is one of them, who invested $100,000 back in 2009. Since then, the value of Uber has skyrocketed.

But analysts claim that people who invest into Uber’s publically traded shares now, won’t get any amazing returns. The company is already huge, and it doesn’t seem their profits will outpace costs in any meaningful way. While Uber’s services have made the lives of many more practical, as well as brought good value to its drivers — investors may want to look the other way.

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