If you read these pages or listen to our TEK2day Podcast you know we avoid companies with little in the way of defensible intellectual property (“IP”) or a sustainable competitive advantage. We have consistently articulated this sentiment about Uber for the past several years.
Further, Uber has less operating leverage than one may conclude after a quick glance at the company’s financials. We have recast Uber’s P&L (ex-stock comp) to include the “Operations and Support” expense line in “Cost of Revenue”. We do not believe that the “Operations and Support” expense line has significant operating leverage. After adding Operations and Support to Cost of Revenue, Uber’s Gross Margin for the June Quarter declined from 45% to 31%. We believe that a low 30s percentage Gross Margin over time represents a truer depiction of Uber’s P&L and that including Operations and Support in COGS is a more accurate accounting treatment.
Uber’s management must keep operating expenses on a short leash (we are aware of the recent headcount cuts) as the company pursues a path to profitability. R&D at 16% of June quarter Revenue is reasonable and a bit on the low side for a company that is trying to differentiate itself via a substantial investment in local transportation services to be delivered by the new Uber app. Sales & Marketing at 32% of June quarter Revenue is not outrageous. G&A at 27% of June quarter Revenue is too high. Perhaps Uber can materially reduce G&A expense/waste and allocate a portion of the savings to R&D? Either way, a 30% Gross Margin has more in common with a hardware company or professional services company – sectors that typically carry more pedestrian valuations than do richly valued Technology companies.
Click HERE if you prefer the PDF version of the above P&L insert.