One of only 3 unprofitable companies worth more than $ 50 billion

Dara Khosrowshahi, now CEO of Uber, July 7, 2016 in Sun Valley, Idaho

Drew Angerer | Getty

When Uber starts trading publicly over the coming weeks, it will be a very exclusive but less than desirable club – companies worth at least $ 50 billion who lose money.

Of the 110 US companies with a market capitalization of at least $ 50 billion, only three were unprofitable last year: CVS, General Electric and Qualcomm. And Qualcomm doesn't really count because the loss was a result of a one-off tax code change.

Uber reported a $ 3 billion operating loss in 201[ads1]8 after losing more than $ 4 billion the year before. (The company recorded a net profit last year due to a $ 5 billion worth of profit, mainly from selling its Russian and Southeast Asian businesses.)

This is Uber's key challenge when moving from the cozy borders of the Bay Area, where Venture capital and private equity companies fund futuristic projects, for Wall Street rigs, populated by riskier mutual funds and securities managers who focus on financial performance. The latter group has never seen anything like Uber – a company that is already valued as a screaming success, even though the business model is still working a lot.

On Friday, the Uber set the pricing area for the upcoming IPO of $ 44 to $ 50, giving it a market value of $ 83.8 billion at the high end. It would make it the 65th most valuable company in the United States, just behind DowDuPont and ahead of US Bancorp, which generated net revenue last year of $ 3.8 billion and $ 7.1 billion, respectively.

"If you are wrong about this and you pay a sky-high valuation, you really look below," said Brian Yacktman, chief investment of YCG Investments, which manages around $ 700 million and counts Alphabet and Facebook among the top stocks in Fund. "When you can buy a business at a similar market value that currently produces cash flow with much more security for the outcome, why not take it instead?"

Buying or not buying

Yacktman sees the value in Uber as a service. He knows it saves time, makes payments easy and provides a much more comfortable ride than your typical cab. Food delivery also makes perfect sense, given that there is a large fleet of cars on the streets.

But Yacktman does not get investment height.

Riders are cost-sensitive and have choices, whether it be lift (whose warehouse is far below the IPO price from last month), a taxi or public transport. In the back, drivers need to make enough money to stay on the platform while paying for gas and maintenance. Having done what is possible to make both riders and drivers happy and spend the money needed to run the platform, Uber doesn't have much money left.

Uber has a metric called platform contribution margin, which is the percentage of revenue left after "direct expenses". That figure came in at 9% of revenue for 2018, and it is before accounting for all investments in new products. In the first quarter of 2019, the figure is turning south, while Uber expects a negative margin of between 4% and 7% due to competition and expenditure on Uber Eats, the food supply business.

"I would rather buy one of the most profitable profitable companies that show me the money now, and take a waiting time with Uber to decide if this is a sustainable, profitable business model," Yacktman said.

Large-cap companies that lose money today are penalized by the market. The CVS shares have doubled 22% in the past year, while GE has lost 31%.

Uber has a completely different story to say than the two companies, which are stuck in older markets and are struggling to find opportunities for growth. Just a decade old, Uber pioneers a new industry and is working towards a future for self-driving cars, while growing 42% last year to over $ 11 billion in revenue.

Uber's vision is to build a global platform that includes riding in its current form, a continued expansion of Uber Eats and much more.

It is Uber Freight, which connects trucking companies with companies that supply large quantities of goods, autonomous vehicles, drone delivery and Uber Elevate with a view to addressing "air transport within cities." Uber also bought Jump Bikes, which currently has a network of e-bikes in 20 cities, and the company offers electric scooters in eight cities.

For Uber, it's all about an addressable market that the company says is in many trillions of dollars. CEO Dara Khosrowshahi says at the beginning of the online roadshow video that the company's mission is to ignite the possibility of moving the world and that it is "changing the way people and things move from point A to point B." 19659016] Nelson Chai, CFO of Uber, follows to tell investors that the company "lays the foundation for attractive long-term margins."

But it is an ambitious plan that requires decades – not many years – of investment and far more capital than the $ 9 billion or so the company is seeking to increase in its IPO. The impetus for a public investor is that ultimately Uber's experimental projects turn into real-life businesses, and the company will be far enough ahead of any potential competition to gain price power.

"With Uber, you have the opportunity to create an ecosystem premium," said Eric Barden, president of Barden Capital in Austin, Texas. "If that's the case, you can be more constructive about future profitability."

Barden has no plans to invest in Uber because he sees too many variables and risks for that kind of valuation. But he also acknowledges that the public market that invests the landscape has changed in recent years, to the willingness of growth investors, and that a cash-burning machine like Uber cannot be rejected.

Amazon and Netflix are both profitable but just barely. Amazon's net profit of 4.3% last year ranked 98th the 110 most valuable companies, and Netflix's 7.7% margin was 86. However, Amazon has risen 542% over the past five years, and Netflix has achieved 717%. The S&P 500, meanwhile, has climbed only 58% over that stretch.

"Old valuation methods are not always valid anymore," said Barden, an investor in both Amazon and Netflix. "It's hard to make money playing underrated arbitrage."

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