Uber's Massive Cash Burn Problem: 2016 Loss Set To Hit A Record $3 Billion

With a valuation of $68 billion as of December 2016 - more than GM and Twitter combined - Uber is, according to the WSJ's Unicorn Database, the most valuable private company in the world.

And yet, despite its eye-popping valuation courtesy of a growth curve which until recently was truly unprecedented (at least until the company's sudden withdrawals from China), Uber has a big problem: an unprecedented cash burn, which if not getting worse with every passing quarter, is certainly not getting better.

Back in August, Bloomberg reported that Uber's first half loss was roughly $1.4 billion ($580MM in Q1 and well over $800MM in Q2) on just over $2 billion in revenue ($960MM in Q1 and $1.1BN in Q2): it was burning approximately $1.6 dollars in costs and overhead (mostly in the form of an ongoing attempt to price the competition out of business by subsidizing drivers using VC cash).

This follows a loss of $2 billion in 2015, and had, as of Q2, lost at least $4 billion in the history of the company. Of this, however, Uber reportedly lost at least $2 billion in China as a result of a failed attempt to penetrate the local market which it abandoned later in the summer, which while sapping growth potential in China, also supposedly stem losses associated with the Chinese market.

Furthermore, the H1 loss came at a time when its fortunes in the US were said to be changing, and the company vowed it was turning a profit in Q1, only to revert back to its money losing ways in Q2 and onward.

As Bloomberg said at the time, "It's hard to find much of a precedent for Uber's losses. Webvan and Kozmo.com—two now-defunct phantoms of the original dot-com boom—lost just over $1 billion combined in their short lifetimes. Amazon.com Inc. is famous for losing money while increasing its market value, but its biggest loss ever totaled $1.4 billion in 2000. Uber exceeded that number in 2015 and is on pace to do it again this year."

Fast forward three months, when overnight Bloomberg reported that Uber's cash burn problems continued, and in the third quarter, Uber lost another $800 million, bringing its total loss for the first nine months of the year to "significantly more" than $2.2 billion. The good (and bad) news is that even as its cash burn grew, so did Uber's revenue which rose even leaving the world's most populous country, and is said to have generated about $3.76 billion in net revenue in the first nine months of 2016, or about $1.7 billion in Q3 revenue and, according to Bloomberg, is on track to exceed $5.5 billion this year. The problem - if only from a cash burn basis - is that when 2016 closes in ten days, Uber is also expected to have burned a record $3 billion.

Another problem, one which comes as less of a surprise, is that growth in Uber's bookings - the total combined value of the fares that riders pay - is slowing down: these came in at $5.4 billion in the third quarter, an increase from $5 billion in the second quarter and $3.8 billion in the first. The slowdown in Uber's bookings growth can at least partially be explained by the company's decision to leave China. Uber said on Aug. 1 that it came to an agreement with Didi Chuxing to exit China in exchange for 17.5 percent of the Chinese company. As part of the deal, Didi invested $1 billion in Uber. Uber's third-quarter financials don't include the business in China, which were part of the previous quarterly results.

But the biggest problem is that despite the growth in revenues, Uber's losses continue to gross in a proportional manner, suggesting that the company has little if any control over its bottom line: as noted above, in Q1 the loss was about $580 million and by Q2 it significantly exceeded $800 million, including China. That number is likely far higher.

Even in the U.S., Uber's home market, the company continues to lose money. After turning a slight profit in the in the first quarter of this year, Uber lost $100 million in the U.S. in the second quarter. The loss increased in the third quarter, the person said. Lyft, Uber's largest U.S. competitor, has promised investors that it will keep its losses below $150 million a quarter.

What does all of the above mean? During Uber's Q2 presentation with investors, the company's head of finance, Gautam Gupta said that subsidies for Uber's drivers are responsible for the majority of the company's losses globally. Which means that Uber continues to cut prices in an aggressive attempt to gain market share. While for now this plan has worked, and Uber has become a dominant player in most venues in which it operates (except, perhaps, the most important one of all China), this strategy only works as long as Uber has has to, literally, burn to capture market share (something which in the end backfired dramatically on Saudi Arabia in a similar experiment over the past two years), and as long as its investors are willing to keep writing equity checks to the company at ever higher valuations - a down round for Uber would be the beginning of the end.

For now, however, the company's main competition - established taxi and transportation companies - are proving resilient, and despite the aggressive cost pressures from Uber, few have been bankrupted, and while the price of a Yellow Cab medallion has plunged from $1.3 million in 2014 to just $250,000 recently, New York City is still not only dominated by taxis, Uber still has a long way to go before it can get even close to catching up to its competition in terms of volume.

Meanwhile, Uber's success will go on only as long as the company has blow billions in hopes it puts its competitors in bankruptcy before its cash runs out. Alas, a few more years like 2015, in which the company burned a whopping $3 billion despite a rising top-line, and Uber's prospects are suddenly starting to look rather shaky. Meanwhile, the winner in this massive "deflationary" battle to the bottom is the consumer, for whom transportation prices have rarely been lower. So dear Venture Capitalists, please continue to fund Uber and subsidize deflation for consumers in at least this part of the economy: it's clear that between the Fed and Trumpflation, there aren't many such deflationary hiding spots left.