Nov 29, 2017 · 6 minutes

On Tuesday, Federal Judge William Alsup delayed the Waymo/Uber trial, saying what the tech press, investors, and regulators should have been saying to Uber for years:

“I can no longer trust the words of the lawyers for Uber in this case. If even half of what is in that letter is true, it would be an injustice for Waymo to go to trial.”

If you want any more analysis on that, go read my story from Monday. Technically that story was about Uber’s data breach and cover up… the scandal from last week. But Uber’s years brazen lying and disregard of customers, competitors, the rule of law, and human decency mean you can pretty much read any story we’ve written about the company since 2012, swap out the nouns, and get an accurate read on the situation: Uber only cares about one constituent-- it’s next investor. And-- yes-- as the data breach scandal made clear, that includes new CEO Dara Khosrowshahi, and the man he continues to report to, ousted CEO and controller of the board, Travis Kalanick.

Blah blah blah evil blah blah blah.

But one thing, sadly, and one thing alone may still hold Uber accountable for all of this moral decay and disregard of human safety: It’s market share slipping. And according to Edison Research, that’s happening.

From a research report that went out this morning by analyst Richard Windsor:

While attention is focused on SoftBank’s moves to take a 13-15% stake in Uber, the deterioration of Uber’s fundamentals is a warning that its dominant position may already be slipping. Q3 17A revenues were $2.01bn up 21% compared to $1.66bn in Q2 17. However, net losses grew faster with Q3 17A net losses at $1.46bn, up 38% from the $1.06bn it lost in Q2 17A. This represents a deterioration in net margins to a loss of 73% from a loss of 64% in Q2 17A.

I don’t always agree with Windsor’s analysis. But Uber is clearly in a catch-22 here. It has gained its dominant position by using “cash like a weapon.” With access to cash at any price starting to become limited and an IPO in the near term unlikely, Uber has to start to stem its losses. This is a big reason it threw in the towel on China. Uber had made efforts towards that end in the second quarter, and was applauded for it amid the turmoil of Kalanick’s ouster.

But clearly, in the third quarter as Didi continued to fund and bolster Uber competitors around the world, and Lyft upped its own game and cash troves, Uber got stuck: Go back to what works and buy market share at any cost or risk its dominant US position?

With its ego-centric valuation already the biggest sticking point in the Softbank deal, it can hardly afford to do either.

More from Windsor:

Given the year that Uber is having it is possible that the losses have been increased by non-operational items such as compensation payments and restructuring.  However, these headline figures come from an investor communication which typically will exclude costs and benefits that come from non-operational sources. Hence, we suspect that the 870bp decline in margins is operational in nature and represents a deterioration in the company’s underlying performance. This should be of huge concern because if its home market is going to descend into a bloodbath of cutthroat competition, then Uber is going to be raising a lot more money and most likely at much lower valuations.

Lyft needs to prep an IPO as soon as possible. As we’ve written since 2016, the reason it couldn’t before -- assuming it’s own financials would support such a thing-- is that when Uber had endless access to cash, it could offer dramatic subsidies and destroy Lyft’s quarter on a whim. But Lyft gaining market share as Uber’s own business deteriorates and it feels the squeeze of its self-made valuation trap is an entirely different situation.

What Uber cannot do is go public. That valuation, plus all those risk factors, plus even more skeletons that could come out of the closet. Even Khosrowshahi, who rebuilt a company in the glare of the public eye, has said he doesn’t see an IPO until 2019.

The longer this trend continues, Uber’s inability to go public will create a bigger and bigger headache, the same way it has for other decacorns like Dropbox and Pinterest. It will become and even more unpopular place to work, as more employees lose hope of ever getting the promised riches of being part of the most scandal-ridden and highly valued private company in Valley history.

More from Windsor:

We are quite surprised to see such a deterioration as despite Lyft’s recent increases in share, Uber is still hugely dominant in its home market, USA.  So far in 2017 Uber’s lack of focus has led to Lyft being able to confidently expect to improve its market share to 33% from 20% at the beginning of the year. This leaves Uber on 66% which based on my rule of thumb for network based businesses, is still enough to eventually win the market, but its margin for error has been substantially reduced. This rule of thumb states that a company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit.

Coming into 2017, Uber had a 20% cushion before Lyft could really start causing it some problems, but this cushion has now been reduced to just 6%. Uber’s figures are implying that Lyft is beginning to impact Uber’s ability to make money which is a real problem. Google is now Lyft’s biggest backer as it represents the best way for it to get its self-driving technology (Waymo) to market.  As of Q3 17, Google has $100bn of cash on its balance sheet giving Lyft potentially much deeper pockets than Uber. This combined with how much it has closed the gap on Uber over the last 9 months, means that Lyft is now a real threat…

This is critical because Uber’s $70bn valuation compared to Lyft on $11bn is based on its dominance of the market and the unassailability of its network effect.  Consequently, the real valuation of Uber may be far lower than even the $54bn that SoftBank is offering existing shareholders to purchase some of their stock. These investors include Benchmark and Menlo Ventures who may have already have arrived at this view and concluded that $54bn is a great exit price.

That $70 billion price has been based on a lot of things, actually:

  • Global domination (already failed)
  • Domination across logistics, via UberEats and other delivery functions (hardly setting the world on fire, challenged by Amazon in the long run)
  • Autonomous vehicles (It allegedly stole technology to underpin this effort, and is in the middle of a massive legal battle as a result.)

Losing its dominance in the US, would only be the latest promise made to investors that Uber has failed on.