Oracle’s Larry Ellison Calls Uber “Almost Worthless”
Some of us have been wondering all along where the value in Uber stock is coming from. Oracle founder Larry Ellison has called it “almost worthless,” and he may be right.
As famous and accomplished as Larry Ellison is, with his personal fortune of $70 billion from founding one of the world’s largest software companies, Oracle, he’s not a stock analyst. However, he is famous enough that when he speaks, people are going to at least listen. He also knows a thing or two about business and really doesn’t like what he sees with Uber, and not without good reason.
What’s wrong with Uber does not take much analysis at all to discover though, and anyone in business with the most basic of an understanding of how business works will get that the point of a company is supposed to be to make a profit. If you are losing money instead with no real end in sight, that should be not just a red flag but a huge one.
Uber’s market cap is not a modest one by any means, and even though it’s come down quite a bit lately from the $78 billion the stock was worth back in June, to currently sit at $57 billion today, that’s still a lot of money invested in a company whose business model may be seen as even beyond terrible.
There have been some who have been on the skeptical side about Uber’s valuation, but for the most part both the public and Wall Street has preserved a hopeful attitude about the stock, or at least perhaps more hopeful than they should merit. We have expressed our big concerns about Uber in a couple of articles along the way, but no one else has come out quite as concerned as we have, at least until now.
This in a way has been surprising, but on the other hand, we understand how things go on Wall Street, where you are forced to tint your glasses pretty rosy and the general mood is one of prescribed optimism. This isn’t to say that there haven’t been analysts who saw them taking a hit, but even those analysts seemed to us to be more optimistic than they should have been.
Perhaps we needed someone to step up like Tom Hanks’ character in Big and say that they don’t get it. Larry Ellison doesn’t get it, and he is pretty clear on why he doesn’t get it, and is not mincing words either.
Ellison didn’t just speak out about Uber, as he also thinks that upcoming IPO We Work is almost worthless as well. Playing the lottery can also be seen as almost worthless, not completely worthless mind you since you could still get lucky, but getting lucky at the lottery isn’t that likely, and neither is getting lucky with Uber stock.
Killing a Competitor Doesn’t Count for Much if You Both Die
Ellison is particularly disturbed by how Uber is sacrificing themselves further in seeking to capture market share from their main competitor Lyft, which he sees as a waste of money because he doesn’t believe that they will be able to win them over longer-term.
How well that they retain this business shouldn’t even matter, because if you aren’t retaining business that is unprofitable, that’s actually a good thing. If everyone moved to Lyft, Uber’s bottom line would significantly improve actually, as sad as that might sound.
That’s not the goal though, although the goal also shouldn’t be to undercut your competition when both you and your competition are undercutting each other to the point of extreme pain. Uber needs to find a way to get away with charging more for their service, so that they may one day find their head above water. You can only go so long without oxygen, and even though Uber has shown that it can hold its breath for a long time and at least get a semi-thumbs up from people, this cannot last forever.
Uber’s dynamic with Lyft isn’t something that has been talked about all that much, so kudos go out to Ellison for bringing this issue into the public eye more. A lot of the problem with this virtual car service war that both parties are out to defeat one another even if the battle takes them both down, and we’re seeing both of them get more and more battered as the fight continues to wage on.
Debt and equity markets are really to blame for all this, and in particular, their fascination with technology. If you went to your bank looking to arrange more financing for a business idea of undercutting the competition and suffering big losses, and had your hand out, your hand would remain empty and your business would meet its logical fate pretty quickly.
You might go there with some big dreams but we usually need some concrete and detailed plans to go along with this, a roadmap that at least makes it likely that our dreams will come true someday, but if we are just losing money with no reasonable end in sight, this just seems like a crazy idea all around no matter how big our reach is.
People have been happy to bet on Uber’s broken dreams and overlook the reality of their situation, but as we can see from the price of their stock, we’re seeing this hope wane, as evidenced by Uber’s loss of over $20 billion in market capitalization since the end of June.
August was a particularly bad month for this stock as they went from $44.54 per share on July 26, all the way down to $30.70 on September 3. That’s a loss of a third of their value in just 5 weeks.
It’s Fine to Dream, But We Need to Focus on Reality as Well
As is often the case when you get a big selloff like this, the selloff ended up being a little overdone, and we’ve rebounded a bit now, to $33.82 at the close on Thursday. Uber hit the market at $42 back on May 10 though, so this leaves us sitting a whole lot lower and charging a pretty hefty tax on those who have been long the stock, a dream tax perhaps.
Ellison calls Uber’s choosing to lose even more money to gain more market share as “idiotic.” Even worse, they may actually see themselves as being down to the idiotic in that they are having a great deal of trouble even wanting to do the right thing here, and that will likely remain their biggest challenge.
The real problem here isn’t that we have one idiot on our hands, it is that we have two, which results in a battle of the idiots. We know for sure that both have overextended themselves in this price war and this may very well come down to the last man standing, and as bloodied as Uber has become, they may envision themselves as the likely survivor here.
They sure have expanded the market for taxi drivers, but when you do this in a way that everyone wins but you, this might indeed qualify as in the realm of the idiotic.
We don’t usually see price wars go this far, but this one sure has, but the better approach may be to let your competitor take on more business at prices below cost and have them accelerate their own demise while you look to slow down yours. This is not the path that Uber has chosen to take though as Ellison so bluntly points out.
There is also the traditional car service market to contend with, one that has refused to join the battle, although we’re talking about companies that are much, much smaller and could not withstand the heat in this kitchen for very long without simply dying. Lyft and Uber have the debt and equity markets to fund their war though and they have managed to stay on their feet for the most part so far, but this could soon change.
These companies have thus far enjoyed some big regulatory advantages over traditional car service companies, by claiming that they are not in the car service business but instead in the technology business, providing technological support to independent drivers. The drivers themselves have been the main beneficiaries of this sidestepping actually, but all this is expected to change soon.
If you can do nothing but lose money under the most favorable of business conditions, if these conditions deteriorate, this is only going to make things worse. This concern is what is mostly behind Uber’s fall of late, and we’re not even at the implementation stage yet.
There are actual analysts out there working on all this though, and the picture that they are seeing is a grim one as well. The consensus right now is that Uber is expected to lose $4.99 a share in 2019, and a further $3.64 a share in 2020. We haven’t looked much beyond that and like old maps, we might want to say that dragons be there, and in this case, dragons may indeed be there.
In a real sense though, the dragons are already here, and breathing plenty of fire on this company already. With all the stocks out there that we may be investing in, why anyone would want to put their money on the line with this one is the biggest mystery of all here. Hope may spring eternal in some cases, but perhaps not in the face of fire breathing dragons like this, where reality eventually will have its say.
Chief Editor, MarketReview.com
Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.
Contact Ken: ken@marketreview.com
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