What is the actual cost of a single Uber ride? Amongst the numerous conspiracies facing the ride-hailing company, this basic and simple question is always left unanswered. Currently, the company is in the midst of trying to resolve a dispute with its old chief executive officer, Travis Kalanick while it tries to hire a new one. However, the questioned asked above may actually be the most important one of all for determining the value of Uber Technologies Inc. The company has built itself up on massive subsidies to both drivers and riders and has made huge losses during this process. But, the problem is that Uber is yet to show that it has the ability of maintaining growth without these subsidies.
This week, the ride-hailing service will provide details to investors about its second-quarter financials and this will give further insight on whether it is a possibility for the company to be profitable any time soon. Even though Uber is private, it has begun releasing some limited financial data of its quarters. In the fourth quarter last year, Uber had reported a loss of $991 million, but for its first quarter this year, the company disclosed in May that the loss had reduced to $708 million. According to an executive at Uber, there will be a further improvement in margins in the upcoming financial report.
However, the company is still spending quite heavily on subsidized rides in some markets. With a boardroom battle ongoing over the control of the company, the issue of its valuation is hardly academic. Benchmark Capital, an early backer of the firm, has filed a lawsuit against former CEO Travis Kalanick and have even fought with several other investors, who in turn have offered to buy the venture capital firm out. Yet, the question that has everyone vexed is the worth of the company. Earlier this month, Benchmark had indicated through a series of tweets that it believed Uber would be worth more than $100 billion soon.
Yet, outside investors, who are contemplating buying shares in Uber, have indicated that they believe the company is worth a lot less and even lesser than its current valuation of $68 billion. Company shares are already being discounted by other investors. According to the latest documents released, Uber shares were marked down by nearly 15% by four mutual funds that have investments in the company.
The primary reason Uber is suffering from losses is because of its drive to win the global market share regardless of cost. This strategy had been developed on the assumption that Uber would be able to become dominant in numerous big cities, which will enable it to raise prices eventually. Even the CEO at that time, Kalanick had said that the low fares were only temporary. But, it has already been eight years and the strategy has become doubtful because there is still intense competition in a variety of markets. Uber has to come up with a solution for eliminating its subsidies without losing customers as that would only bring down its valuation.
Analysts have said that Uber’s day of reckoning is drawing nearer as the company will have to raise prices. When that happens, it is expected that demand will go down quite substantially. Since 2010, Uber has managed to raise funds worth $15 billion, which has allowed it to discount fares and give out bonuses to drivers that have gone higher than $1000 at times. Transportation industry experts had analyzed in 2015 that the customers were only paying 41% of the actual cost of their fares. The company’s home city of San Francisco is its most mature market and it is still offering big discounts there.
As a matter of fact, back in June, Uber had been offering 50% off to some of its passengers for their next 10 rides and carpool rides were charged at $3, which was considerably cheaper than two years ago. An Uber executive said that Uber had introduced a new ‘upfront’ fare system for dealing with its pricing problem. Under this system, the app gives passengers a price quote before they start their ride. In essence, it gives Uber the opportunity of charging more for a ride without increasing fare per-mile explicitly.
An algorithm has also been incorporated in the new system for better pricing to reduce losses. The executive, who asked not to be named, also said that a passenger requesting a carpool ride on a route where finding other shares is unlikely, will be quoted a higher fare so Uber doesn’t have to bear the cost. The executive also stated that in the last year, the company had cut down its blanket subsidies considerably and had also gotten better at targeting its promotions to both drivers and riders. Investors have argued that subsidies are crucial when a ride-hailing service is launched in a new city.