Uber IPO in the boiler room

It takes time to dismantle a company as large as Uber. I was one of the first to hit the buzzer and call “bullshit”. You can catch up with these gems: Uber. BS earnings. Tech journalists didn’t do forensics. So I did and Will Uber be the death of Softbank And the start of it all Uber. Beginning the postmortem 
The whole bunch is here:
What if a Venture funded and wildly unprofitable company employs all the propaganda of a Nation, uses fake news, embedded journalists, positive feedback loops and all the tricks of the behavioral sciences?
On that note…
On July 19th 2018, Morningstar released a research report predicting that Uber would become profitable in 2020 and could achieve an IPO value of $110 billion.
Morningstar’s report is dis-information and is buried in uber complexity. 
Because the report is large and stuffed with misleading’ness, rather than an on-point rebut, I’ll break down the gist of the thing.
Uber financials and the mystery bumps
The table below combines the actual historical data with Morningstar’s forecast, and shows year-over year changes in Revenue, EBIDTAR expenses and EBIDTAR contribution margin.

The contribution margin of growth 2014-17 improved very gradually, and Morningstar’s post-2020 forecast shows similarly gradual EBIDTAR margin gains. But…
…Lo and behold, there is a 45 point margin improvement in 2018 versus 2017 growth and a 40 point margin improvement in 2020 versus 2019, which drive P&L gains of $1.5 billion and $2.5 billion respectively. Morningstar offers no justification. It just happens.
Morningstar’s assumes demand will grow completely independently of the ability of drivers to make money or the prices customers pay.
The double-digit demand growth forecasts are driven by Morningstar’s valuation based entirely on crude calculations that claim to measure the size of the aggregate market demand for ridesharing, food delivery and other products.
Morningstar claims
Overall rideshare market will grow at a 29% five year CAGR 
Uber will grow at a faster 39% rate. 
“Hmmm. 39% growth for years for an already large company entering its second decade in a well-established industry. Nah” – me
Morningstar data on the total market demand for urban car services extrapolates the single revenue datapoint of New York City taxi revenue in 2014, this in turn is used to inflate growth multipliers by combining demand for transport in hundreds of huge, rapidly growing non-US cities. It’s a distortion that ignores the fact that with few exceptions, Uber’s efforts to penetrate these faster growing markets have been financially disastrous.
Propaganda free analysis would disclose that Uber’s rate of revenue growth has slowed over its nine years of operation and was only 20% in 2017, in part due to efforts to reduce its financial losses. Nothing in Morningstar’s report explains why, despite large continuing losses, Uber will suddenly increase revenue growth to 60% in 2018. Further and the report ignores the fact that its historical revenue growth was largely driven by multi-billion dollar subsidies.
Morningstar’s forecast of Uber growth in non-car service markets offers no evidence that Uber Eats generates positive cash flow or actual GAAP profits or moving toward GAAP breakeven. Pesky details.
Morningstar mentions “network effects” > +40 times
…invoking a financial talisman to eliminate the need for economic evidence.
“Uber’s network effects benefit drivers and riders; the benefits for each create a continuous virtuous cycle” – Morningstar
Morningstar cites Facebook’s network effects as a comparable example of network benefits for consumers.
But Uber has none of Facebook’s network economies, where each additional user makes the company and its platform more valuable to all other (existing and potential) users.
Uber users may like its prices and service, but they do not care how many other people download the app.
“Network effects” supposedly explain Uber’s capacity utilization advantage, as they eliminate the…
“…need for bright yellow cars to roam about, waiting for a hand in the air to match with it.” – Morningstar
Where in the report is any evidence that Uber has a capacity utilization advantage over traditional taxis that could have any material bearing on its growth and profitability forecasts?
Morningstar misrepresents the economics of drivers
To stem losses, Uber has been unilaterally increasing its “commission” from 20% to 30% while also eliminating many driver incentives. These changes resulted in the driver share falling from 83% in 2014 to 68% in 2016. And that…
…increased Uber’s EBIDTAR contribution by over $2.6 billion, and improved EBIDTAR margins from (118%) to (50%). But Uber would have still had triple digit negative margins if the driver share had remained above 80%. The only major progress Uber has made towards a breakeven P&L required pushing driver compensation to (or below) minimum wage levels.
Morningstar’s forecast ignored the importance of the Uber/driver revenue split to Uber’s bottom line, and asserted that 21-22% Uber shares (similar to 2017 actuals) will remain stable for the next ten years.
Even though it would be arithmetically impossible for both Uber and drivers to increase their share at the same time, Morningstar constructed its financial assumptions on this scenario. 
Autonomous car and flying car programs
Morningstar details Uber’s long term potential to exploit businesses such as autonomous vehicles (AVs) and flying cars (Uber Elevate) but then totally excludes the cost of developing them from their valuation estimates.
Perhaps these investments will increase the value that IPO investors will get (long-term potential greatly exceeding near-term costs) or
Perhaps they will actually decrease Uber’s value (the low probability of far-off returns doesn’t justify the costs and risks)
…but Morningstar just disappears the critical issues.
Morningstar defense of Uber’s AV program rests on boiler room claims that autonomous vehicles would allow Uber to reduce the price of rides by 60%. Drivers do account for roughly 60% of the costs of a traditional taxi operation, but the introduction of autonomous vehicles would significantly increase other costs and would additionally demand that Uber becomes a highly-capital intensive business since it could no longer push all the costs and risks of AVs onto its drivers.
“That mystery set of omissions would fuck up the 110 billion dollar valuation scheme” – me
The end?

H/t to H. Horan

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