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



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

Drew Angerer | Getty

If Uber starts public trading in the coming weeks, it will join a very exclusive but less than desirable club – companies worth at least $ 50 billion and losing money.

Of the 110 US companies with market With a capitalization of at least $ 50 billion last year, only three were unprofitable: CVS, General Electric and Qualcomm. Qualcomm does not really count because his loss was the result of a one-time burden for a change in tax rules.

Uber reported an operating loss of $ 3 billion in 201

8 after losing more than $ 4 billion last year. (The company reported net income last year because of one-time gains of $ 5 billion last year, mainly from the sale of its Russian and Southeast Asian businesses.

This is Uber's key challenge since it Moving away from the Cozy Borders of the Bay Area As venture capital and private equity firms fund futuristic projects, Wall Street is populated by risk averse investment funds and asset managers focused on financial performance, the latter group has never had anything like Uber seen – a company that is already praised as a boasting success, although the business model is still very much in the works.

On Friday, Uber set the price range for the upcoming IPO from $ 44 to $ 50, which puts it in the upper range, a market capitalization of 83.8 billion US dollars Thus, it would be the 65 most valuable company in the US, just behind DowDuPont and ahead of US Bancorp, which achieved a net profit of $ 3.8 billion, or $ 7.1 billion, last year.

"If you're wrong about that and you're paying a very high valuation, you're really looking down," said YCG Investments Chief Investment Officer Brian Yacktman, who manages $ 700 million and Alphabet and Facebook among the top holdings counts in its mutual fund. "If you can buy a company with a similar market capitalization that is currently generating cash flow with much greater certainty of results, take that instead."

Buy or not to buy

Yacktman sees the value in Uber as a service. He knows that it saves time, simplifies payments and enables a much more comfortable ride than in a typical cabin. The delivery of food is also absolutely sensible, as there is a huge fleet of cars on the roads.

But Yacktman just does not get the investment pitch.

The drivers are cost-conscious and have a choice whether it is Lyft (whose shares are well below last month's IPO price), a taxi or public transport. On the other hand, drivers have to earn enough money to stay on the platform while paying for gas and maintenance. After Uber has done everything to make both drivers and drivers happy, and has spent the necessary money for the operation of the platform, Uber has not much money left.

Uber has a metric called Core Platform Contribution Rate percentage of revenue after "direct spending". For 2018 this figure was 9% of sales. This is before considering all investments in emerging products. In the first quarter of 2019, the number is heading south, with Uber expecting a negative margin of between 4% and 7% due to competition and spending on Uber Eats, the food business.

"I would rather buy one of the many profitable companies that now show me the money and wait with Uber to see if this is a sustainable viable business model," said Yacktman.

Large Cap companies that lose money today are being punished by the market. CVS shares fell 22% last year, while GE lost 31%.

Uber has a very different story to tell than the two companies that are in the old markets and looking for opportunities for growth. Uber is only a decade old and is a pioneer in a new industry, aiming for a future of self-driving cars, all of which grew 42% to more than $ 11 billion last year.

Uber's vision is to build a global platform that, in its current form, is a continuing expansion of Uber Eats and a whole lot more.

There is Uber Freight, which connects freight forwarders with companies that address large volumes of goods, autonomous vehicles, drone delivery and Uber Elevate "air traffic within cities." Uber also acquired Jump Bikes, which currently has a network of e-bikes in 20 cities, and the company offers electric scooters in eight cities.

For Uber this results in an addressable market, which according to the company in the US consists of many trillions of dollars. CEO Dara Khosrowshahi says at the start of the video for the online roadshow that the mission of the company is to seize the opportunity to set the world in motion and that it "changes the way people and things change Move point A to point B. " 19659016] Nelson Chai, chief financial officer of Uber, explains to investors that the company "creates the basis for attractive long-term margins".

However, it is an ambitious plan that requires decades – not years – of investment and far more capital than about $ 9 billion the company wants to raise with its IPO. The bet for a public investor is that Uber's experimental projects will eventually become real companies and the company will be far ahead of potential competition to have pricing power.

"With Uber, you have the potential to create an ecosystem reward," said Eric Barden, president of Barden Capital, Austin, Texas. "If that's the case, you can make future profitability more constructive."

Barden does not plan to invest in Uber because he sees too many variables and risks for such a rating. However, it also recognizes that the landscape of public market investment has changed in recent years to strongly favor high-growth investors and that a money-burning machine like Uber can not be dismissed.

Amazon and Netflix are both profitable, but hardly. Amazon's net profit margin of 4.3% was ranked 98th out of the 110 most valuable companies last year, and Netflix's 7.7% ranked 86th.

However, Amazon has risen 542% over the last five years, and Netflix has gained 717%. The S & P 500 climbed only 58% during that time.

"Old valuation metrics no longer always apply," said Barden, who invests in both Amazon and Netflix. "It's hard to make money by undervaluing arbitrage."

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