Here's a question: is there a kind of equilibrium that private companies like Uber can risk breaking in terms of ultimate public valuation by staying private for too long and taking too much investment pre-IPO?
If would-be shareholders have seen Buffet type investors going in (or attempting to go in) with absolutely colossal cash injections pre-IPO, might it appear like too much of the explosive growth potential has already been squeezed out before the IPO? And therefore there is less incentive to buy the stock speculatively, making the stock price lower at IPO. Isn't this a bad thing for investors looking to get in late stage? Put another way, could Buffet's investment have actually risked its own likelihood of eventually paying off, due to its size?
As Buffett is a value investor, there's a very simple set of rules he follows that I recall learning from a similar-minded portfolio manager:
1) set a price the company should be valued at
2) pay less than that price
3) don't be wrong
So while Buffett's investment would be colossal and substantially raise the price of the company, all that investment says is that he thinks it is currently undervalued, and he likely isn't trying to throw enough money in Uber's direction to fix the entire pricing error, from a finance standpoint.
There would actually likely be more damage caused if value investors publicly turned down investing in a pre-IPO company.
Uber grew net revenue from 2017Q1 to 2018Q1 by 67% to $2.5 billion, which is unprecedented at that scale, and did it while significantly reducing losses. Uber is either the dominant player, or has a stake in the dominant player, in every rideshare market around the world. A lot of governance and litigation risks have been mitigated or reduced in the last year (CEO leaving, very public board infighting, Waymo lawsuit, etc).
The drama last year caused a depression in valuation, but the financials remained solid and the business has good management, leading to an opportunity for Buffett to acquire a stake at a discount.
Full disclosure: I work at Uber, but the numbers I quoted are public and the opinions are my own.
Do you know if this revenue figure accounts for the “top line revenue problem” (inclusion of government charges, refunds and fare promotions in top line revenue) mentioned for the 2017Q4 numbers at the 13th Naked Capitalism article [0] on Uber?
Incidentally that article also casts doubt on whether recent slowing of cost growth is material to profitability. It doesn’t look to be fully updated through 2018Q1 though.
I can't comment on Uber's financials or accounting practices, but I can add some context on the author linked: Hubert Horan has published numerous articles with very negative outlooks on Uber over the last few years.
A good example is one of his original articles from 2016 [0], which calls Uber out for having -143% profit margins in 2015. In 2015Q1, Uber's revenue was $287MM and loss was 385MM. Horan claimed there was "no evidence that Uber’s rapid growth is driving the rapid margin improvements achieved by other prominent tech startups as they “grew into profitability.”"
However, 2018Q1's revenue was 8.7x and losses were only 1.2x the 2015Q1 numbers. Horan was clearly wrong, and underestimated the potential of the business. I believe he still doesn't 'get it'. If you don't believe in the potential for any growth business, the numbers can look bad on paper, but time will decide who will be vindicated and who will be disproven.
Buffett's general MO is to find distressed or other undervalued companies and offer a large chunk of money, negotiating very favorable terms.
Take their deal with Bank of America, wherein they received preferred stock which paid 6% annual dividend (so they end up higher up the capital structure than the common) as well as a dilutive warrant to purchase 700M shares of common stock at a strike price of about $7 at any time until 2021 (currently at 29.49)
The article answers why the deal went sour:
> Coming so soon after that cash infusion, Buffett’s attempt to take a stake in Uber while it was on the rocks may have been too late to squeeze favorable terms from the company.
Buffett probably couldn't get the type of deal he wanted, mostly because they were able to secure cash independently.
> Buffett's general MO is to find distressed or other undervalued companies and offer a large chunk of money, negotiating very favorable terms.
Are there other viable strategies for a large investor? I can't imagine it's a very good plan to pay market value for shares in companies that are already currently very successful. By definition you're buying "at the top".
Buffett bought 75 million Apple shares last quarter, paying market price for a very successful company. His investment philosophy is based on making the distinction between the market price of something and its intrinsic value, and looking for discrepancies between the two [1].
I think Buffett et all are betting Uber is not “at the top” and still has significant room to grow. If new investors are buying at a 62B (recent tender offer), they’re expecting some level of increase over the next 18 months and when Uber goes public.
That is typical Buffett, invest in proven successful companies. About buying at the top, maybe Buffett sees that Uber still has long way to go up. Based on history, he is usually right.
>Take their deal with Bank of America, wherein they received preferred stock which paid 6% annual dividend (so they end up higher up the capital structure than the common) as well as a dilutive warrant to purchase 700M shares of common stock at a strike price of about $7 at any time until 2021 (currently at 29.49)
According to the article, BH was seeking terms that had a big upside and protection against downside:
> Under the proposed agreement, Berkshire Hathaway would have provided a convertible loan to Uber that would have protected Buffett’s investment should Uber hit financial straits, while providing significant upside if Uber continued to grow in value, said the people, who spoke under condition of anonymity because the discussions were private.
that's the standard way buffett ferrets out companies in distress that he can invest in with lower risk than anyone else can get (see gm bailout).
if i had to guess, buffet realizes that self-driving cars are many more years away than uber has runway, and regulators are shifting to classify drivers as employees, increasing labor costs. profitability gets pushed out, creating a cash-flow problem for uber, which buffett can take advantage of.
No, he realizes that whenever self driving cars appear they won’t hurt Uber’s dominance, and that Uber’s core business is inherently very profitable and will rapidly show it under a rational CEO who will rationally allocate capital and not damage Tye brand.
see, with that "No..." you seem to be indicating that what follows is contradictory to what i said, and that you'll support your contradictory position, but neither of those things followed.
that was disappointing. i'd welcome a well-supported rebuttal. sure, he might think those things (neither of us knows) but they're totally beside the point.
debt has higher priority than equity, so buffett would get paid in most underperforming scenarios.
he may even have been asking to be preferred debt, so that he gets paid before other debtholders. if the company fails, he’s still be first in line to get paid to limit losses in that case. that’s the downside protection.
if he still believed in the company even as it underperformed, the debt could be converted to equity (probably at very favorable conversion prices), basically buying the equity at a discount. he’d then be in position to exert some measure of control over management.
in most underperforming cases he at least gets his money back plus some interest (not bad, but not great). in some cases, he gets cheap and possibly preferred equity in uber that’s already worth more than he paid, and possibly a lot more eventually.
You are one of the fairly few companies in the world who a) can use $3 billion and b) do not have ready access to the capital markets. I happen to be one of the fairly few people in the world with $3 billion and virtually unlimited flexibility to deploy it how I see fit. Yours is clearly a valuable business with strong cash flows and a lot of defensibility; that's worth something.
Want my money? It's not going to be cheap, but it's available in quantity.
It is easy to frame this deal as the vindication of Uber's business model. But it is not. Especially without knowing who approached whom for the money. It was reported that Uber was looking for loans during the same time:
The problem was finding the sensible purchase price. Buffett is an astute businessman who always looks to buy a dollar for the less than that. And in this case the price was:
Under the proposed agreement, Berkshire Hathaway would have provided a convertible loan to Uber that would have protected Buffett’s investment should Uber hit financial straits, while providing significant upside if Uber continued to grow in value, said the people, who spoke under condition of anonymity because the discussions were private.
Without knowing the inside of the deals it is difficult to comment but convertible loan normally turns to equity at next funding round. So, it dint matter if Uber's next round was a down round, Berkshire would have taken some equity in the company. Additionally, if things turned ugly or at the loan's maturity Berkshire's loan would have priority to claim the company's asset.
If Uber can avoid going bankrupt until self driving vehicles become available, they're likely to become one of the most profitable and expansive businesses - perhaps that ever existed. Of course the two conditionals there are the game. They need to not run out of money, and self driving vehicles need to come into play.
The article is sparse on details, but it looks like he was trying to angle his loan to get the both of best worlds. If they end up being unable to keep afloat his investment would have been "protected", whatever that means. Yet if they did manage to reach their goal, then he likely would also have had a major share. Win-win from his perspective. And lose-lose from Uber's, unless they were unable to find any other source of funding. And since they were, the deal fell through.
It looks a lot like buying billions of dollars of tickets for a trillion dollar lottery, with a clause that you can get your money back if none of the tickets end up being a winner.
With no specific knowledge and without having read the linked article, I can guess based on Buffett’s MO: he smelled blood in the water and potential to get a really sweet deal.
There are multiple positive and negative reports on Uber's financials in several publications, but the one(s) I've found most convincing are those put forth by Hubert Horan. He's written a 14+ part series [1] on both the financials and the general reporting surrounding Uber, along with an academic paper [2]. He makes compelling points, and is pretty damn thorough.
It's impossible to know for sure, but it may have swayed his decision.
I thought those were interesting articles (that coincide with my own heavy skepticism towards uber), but see you got heavily downvoted. Are you aware of/have links to criticisms of Horan?
Hubert has been wrong since the beginning, he’s never had detailed enough financials to support his wild conclusions. Buffets offerto invest is just more proof of how wrong the naked capitalism series has been.
Can you link to any rebuttals of Horan's argument? I found his articles to be pretty convincing, but am open to reading the other side.
I'm not a finance person, but it seems like how Buffett wanted to hedge his investment would mean that he isn't so rosy on Uber that he's willing to go in without guarantees.
The available financials (read them) don’t allow backing out Uber’s cost if investing in side businesses, or international customer acquisition costs, or per market profitability. Yet he made bold claims in all those areas.
Care to explain why you believe this was a mistake? Opinions of IBM's future performance aside, even if he were right we wouldn't know until years from now - value-based investing takes a while to pan out.
The video in the article explains it pretty well. In essence he over-valued IBM and then ignored their decline for years, even while the company's core business continued to dry up. He finally just exited, taking huge losses in the process.
The problem with value investing is that it works great for traditional companies with normal products, but many of the fundamental analysis models fall apart with "tech" companies who's largest asset may be the brand itself.
For example Uber, they own few vehicles, have few employees, and no exclusivity. How do you run a fundamentals analysis on that? A lot of traditional models would tell you that company is worth near nothing.
I think you're confusing value investing with looking at a simple Price/Book ratio. Value investing is much more than that. One method of fundamental analysis involves making a prediction about ~10 years earnings/cash flows and comparing that to the 10 year risk free rate (usually the US 10 year treasury).
The fundamental analysis models don't fall apart with tech companies, it's just much harder to project revenues for a new, volatile, growing business than an old mostly stagnant or slow growing company.
many of the fundamental analysis models fall apart with "tech" companies who's largest asset may be the brand itself
"Largest asset may be the brand itself," isn't that the definition of a reputation bubble? Sounds like a bubble to me, just a very long term one. There are some who say that the Bay Area/SV startup scene is a combination of real innovation and a bubble caused by ready availability of investment capital, which in turn is the result of governments injecting huge amounts of liquidity into the economy to kick the can down the road on the natural cycles of economic recession.
He wouldn't go for "pure value investing" even when he started. He started first with all sorts of arbitrage plays, and later on he put together a partnership where he used his investor's capital to acquire a controling stake in companies and then sell them off (what nowadays is called an activist investor, like Bill Ackman).
The folksy pure value investor that we know today didn't appear until much later, in the mid 1970s. To be fair though, this is what made him the most money.
> For example Uber, they own few vehicles, have few employees, and no exclusivity. How do you run a fundamentals analysis on that? A lot of traditional models would tell you that company is worth near nothing.
Don't forget almost no barrier to entry. It's relatively easy to go from nothing to be a local player dispatching cars in a small neighborhood which your friends drive.
Some people claim that there is a barrier to entry which is that "Uber has all the drivers". However every big city I go you see local players. Not only Lyft and Yandex, but regular cabs, or regular cabs dispatched by an app (as opposed to telephone) etc.
No barrier to entry, yet despite two years of the most horrendous (and self inflicted) press imaginable, Uber still has a massively dominant position?
Reminds me of another company with no barrier to entry, Coke. It’s massive profits led Sam awaiting to spend millions creating Sams Cola, which crushed Coke in taste tests and got massive distribution from the get-go. And utterly failed.
If you can understand the massive barriers to entry Coke really had, you’ll begin to understand how massive Uber’s competitive barriers are.
Barrier to entry typically means something something physical or formal. Needing to build a billion dollar fab is a barrier to entry in the micro chip business, needing more than a decade of training is a barrier to entry to being a doctor. Having to produce a better product than your competitor isn't generally considering a barrier to entry, that's more on the competitive advantage side of things. Coca-Cola has an amazing brand, and that's very difficult to complete with. Uber works really, really well, there are a lot of details that aren't just "push button, get car". I've used used a few of the alternative apps, and while they generally clear the bar of "working", they are a long way from being as good as Uber. That said, it's a one way ratchet, and some of the apps are catching up quickly.
Sidenote on barriers to entry: one of the original meanings of "disruption" was the tearing down of barriers to allow new entry and competition in a field. Ubers steamrolling of medallion schemes constitutes such a kind of "disruption". Of course, once disrupted, there's no closing the door behind you.
Are you confusing America for the world? Uber's position is not massively dominant in Europe, and they've pulled out of SE Asia with their tail between their legs because of a competitor.
MyTaxi is neck and neck with Iber in Europe, but doesn’t exist in the US. Even after leaving a bunch of countries, overall Uber is by far the biggest rife sharing company in the first world. It’s beating Lyft in the US by more than 5-1.
Cokes Brand was built on mouth feel, ie once someone develops a preference for Coke, they are generally immune to switching sodas. Coke did a ton of marketing to reinforce hat.
Uber’s moat is built on its brand as well, not just the massive awareness of their services, but the fact so many people have their app, and they have the most drivers. More drivers makes the customer experience that much better.
Just looking at app installs, it will take Lyft years and will cost hundreds of millions just to catch Uber in US app installs.
Agreed on this one. I'll also add, low barrier to clone but high barrier to localise. Both are not good for Uber.
Sri Lanka launched it's own (privately owned) ride hailing/sharing app ahead of Uber entering our market. A lot of drivers work with both companies, but Uber is being squeezed out bit by bit. There's a lot of money in the local player to be sure, but even then, it's crazy to think that the giant international player couldn't take on our local market all that well.
This is despite the local player doing all the hard work of training the market to understand how this concept works. Both drivers and riders needed significant investment. Uber came into a primed market and failed to capture it despite burning money on ridiculous bonuses for drivers at the start.
Recent sales in Asia prove this inability to capture localised markets is not a one off.
Because those numbers are thrown out by journalists who don't understand finances. Uber is, and has always been, very financially sound and no where near the "collapse" that the media likes to tout. They're hated (by a small and fervent population) for a good reason, but it has no impact on math
They did not gain $2.9 billion in cash from that. The transactions gave Uber ownership stakes in combined businesses. They got 27.5% of Grab. They got 36.6% of the Yandex merged entity. The gain referred to in the article is for accounting purposes.
That's incorrect. At the most recent quarter rate, Uber will burn closer to $1 to $1.2 billion in cash over the next four quarters, assuming zero further margin improvement (unlikely given their growth rate + priority on lowering their burn).
It's public information that they currently have $6.3 billion in cash and an available $1.5 billion term loan on top of that.
Uber's cash + the loan facility is likely to last a minimum of five years. More likely, they'll reach profitability or near it within six to eight quarters at the rate they're growing the business + reducing losses. A small adjustment (10%) upward in pricing over several quarters, a small reduction in their operational cost to sales ratio, on top of their high growth rate = very easy path to break-even.
Well, Uber lost 4 billions, and has 6.5 in the bank + 1.5 promised, so two years. “Years” is technically correct, but with their burn rate and at this scale, I would not snub billionaires in their position.
I understand (from drawing similar models at Deliveroo) that you can actually predict quite well your demand, efficiency, maturity by city and have rather accurate loss prediction, and I suspect that Uber expects to loose less than 3 billions in 2018 (and try very hard to be profitable in the last quarter of 2019 prior to their IPO), and with that in mind, “years“ makes more sense, but… that’s like when a test pilot says ‘things are fine’ inches from disaster: still not a ride for everybody.
If would-be shareholders have seen Buffet type investors going in (or attempting to go in) with absolutely colossal cash injections pre-IPO, might it appear like too much of the explosive growth potential has already been squeezed out before the IPO? And therefore there is less incentive to buy the stock speculatively, making the stock price lower at IPO. Isn't this a bad thing for investors looking to get in late stage? Put another way, could Buffet's investment have actually risked its own likelihood of eventually paying off, due to its size?