Can Uber Maintain Its Momentum?

The poster child of ride-sharing, Uber is the most valued private company with a valuation of over $60 billion. It has recently been investing heavily in self-driving cars. Early this month, it made its second acquisition in this field. 

Uber’s Acquisitions

Early this month, Uber acquired Geometric Intelligence and launched an AI lab to improve its self-driving cars and delivery routes. Formed in 2014, Geometric Intelligence focuses on an area known as “sparse data”, which allows computers to make inferences using relatively small data sets. Terms of the deal were not disclosed.

It expects AI to help cars recognize objects on the road, estimate the time for Uber food delivery, or provide better matches for carpool rides. The new lab will be led by Gary Marcus, a cognitive scientist at New York University and will use the staff from Geometric Intelligence.

In August this year, Uber announced its plans to acquire Otto, which was founded by four former Google executives, including Anthony Levandowski, one of the original engineers on Google’s self-driving team and Lior Ron, who headed Google Maps for five years. Otto has developed a kit that lets big-rig trucks drive themselves on highways.The deal is estimated to be worth $680 million.

The ride-sharing industry faces several regulatory hurdles and by focusing on AI, Uber is just adding more regulatory hurdles. AI has a long way to go before it is proved to be safe and is regularized. And it also raises the question, Just because we can, does it mean we should?

Uber’s Financials

Founded in 2009 by CEO Travis Kalanick and Garrett Camp in San Francisco, Uber has now grown to over 500 cities in 76 countries. It earns revenues in the form of transaction fees for every ride booked through its app. Analysts estimate that it charges a 20% fee on the fare.

Uber does not disclose its financials. However, according to a leaked report published early this year, Uber’s net revenue in 2014 was $495.3 million and $663.2 million in first half of 2015. Its sales and marketing expenses was its largest expense category at $246 million in 2014 and $295 million in the first half of 2015. From the first to the second quarter of 2015, gross bookings increased from $1.5 billion to $2.13 billion. It paid out $2.72 billion to driver contractors in the first half of 2015, just under 75% of bookings.

Net revenue grew about 18% from $960 million in Q1 2016 to about $1.1 billion in Q2 2016. Losses before interest, taxes, depreciation and amortization grew from $520 million in Q1 2016 to $750 million in Q2 2016. Subsidies for the drivers account for most of the losses. In 2015, Uber lost at least $2 billion and in its seven-year history, it has lost at least $4 billion.

Uber remains venture funded so far with $11.5 billion in funding received from investors including Saudi Arabia’s Public Investment Fund, Morgan Stanley, AITV, Baidu, Benchmark, Bennett Coleman and Co, BlackRock, CrunchFund, Cyan Banister, Data Collective, Fidelity Investments, First Round, Foundation Capital, Founder Collective, Garrett Camp, Goldman Sachs, GV, HDS Capital, Innovation Endeavors, Jeff Bezos, Kleiner Perkins, Lone Pine Capital, Lowercase Capital, Menlo Ventures, Microsoft, New Enterprise Associates, Sherpa Capital, Summit Partners, Techstars Ventures, TPG Growth, Tusk Ventures, Valiant Capital Partners, and Wellington Management. Its last round of funding was held in June 2016 from Saudi Arabian public investment fund, maintaining its valuation of $62.5 billion. Uber has about $8 billion in the bank and will soon receive $1 billion in cash from Didi. Uber also has access to a $2 billion credit line and a $1.2 billion loan.

But with no profitability in sight and several regulatory hurdles, an IPO is tough at the current valuation. CEO Kalanick wants to delay the IPO as long as possible. I was recently in Berlin where, it seems, Uber is not allowed to operate. I couldn’t use the service at all. Many other cities are taking the stance to regulate Uber. This will prove to be a formidable challenge in the long run.

Uber’s Price War With Lyft

Lyft is Uber’s major rival in the US. It operates in over 150 cities in the country and has a fleet of more than 100,000 drivers. Analysts estimate that Lyft recorded $130 million in revenues in 2014 and had grown to $46.7 million in revenues in the first half of 2015.

While Lyft claims to have market share of 20%, Uber says it has 84-87% of the market. In July, Uber delivered 62 million rides to Lyft’s 13.9 million. The price war between the two ride sharing companies is leading to losses on both sides. Lyft has losses of about $150 million in a quarter while Uber’s US losses were about $100 million in the second quarter of 2016.

Lyft is also venturing into self-driving. It has teamed up with General Motors to develop self-driving cars and plans to roll out a pilot at GM’s campus in Michigan by the end of the year.

Lyft is also venture funded and has raised $2 billion from investors including Icahn Enterprises, Rakuten, Coatue Management, Andreessen Horowitz, Founders Fund, Mayfield Fund, FLOODGATE, K9 Ventures, and fbFund. Its last round of funding was held in December 2015 when it raised $1 billion in a round led by General Motors at a valuation of $5.5 billion. It is a modest number when compared with Uber’s valuation, but it too has grown significantly from the $700 million valuation in April 2014. Lyft was reportedly looking for a buyer, but hasn’t had any luck yet.

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Photo credit: Núcleo Editorial/Flickr.com.