09 September, 2016
My number one requirement of any potential investment is a sustainable competitive advantage. Whatever the industry, if a business has a competitive advantage or a moat to keep competitors out, I'm prepared to investigate.
Ride-sharing business Uber is not a public company but a number of analysts have begun assessing it as, given its current cash burn, Uber will need to raise capital pretty soon.
Unfortunately analysts are struggling to decide whether Uber even has a sustainable business model let alone a sustainable advantage over competitors.
As a recent convert to the benefits of Uber — more convenient than traditional taxis — I was interested to understand why analysts are so sceptical about Uber's prospects.
After all, disruption is today's buzzword and everybody loves companies like Amazon and Apple that turn traditional industries on their head. Uber is synonymous with disruption, with countless businesses seeking to be "the Uber" of their industry.
Uber was founded more than seven years ago as an online transportation network company. Its mobile app has introduced an entirely new way to get from point A to point B, around the world. As at last month, Uber was available in over 66 countries and 507 cities worldwide.
Unfortunately this innovation comes at a tremendous cost and has attracted a growing number of competitors.
Uber lost US$520 million in the first quarter of 2016 and a further US$750min the second quarter. At the current rate, Uber looks set to lose more than US$2.5 billion this year, having lost more than US$2b in 2015.
It is not uncommon for start-ups to lose money early to make money later. Amazon is famous for losing billions on its way to building market share. However, the two main reasons companies lose money in the early days don't apply to Uber.
Often start-ups need to make big upfront investments in fixed costs like R&D or production facilities that don't pay off until the company achieves scale. This doesn't apply to Uber — fixed costs are low since the drivers own their vehicles.
Most of the losses are due to driver costs — like paying drivers to stop them driving for competitors such as Lyft, Curb and Didi. Drivers won't get cheaper — or more loyal — as Uber gets bigger.
Some start-ups subsidise their early client base to dominate the market. They recoup losses later by selling additional products or services to those captured clients.
But Uber can't dominate the market; it's hard to lock in drivers or customers because it is easy to switch to a competing service.
Uber's latest plan is to move to self-driving cars to slash labour costs and boost its bottom line.
It is about to run a trial in Pittsburgh that will see self-driving cars responding to Uber callouts. But even if the trial is successful, it won't be a slam dunk (driverless cars can't yet cope with every route) and it will be expensive as Uber will need to fork out for a network of cars.
I now understand the analysts' dilemma. It is not obvious what Uber's competitive advantage is.
In the spirit of keeping the best til last, the other reason analysts struggle with Uber is that as a private company, it is currently valued at close to US$70b.
This is nose-bleeding stuff — particularly if you can't understand what makes the company special in the first place.