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Why Uber's $5bn loss is not its biggest problem

It may be the big, sexy number which grabbed the headlines but Uber’s $5bn quarterly loss, among the largest recorded by any US company since the financial crisis, is actually not its biggest problem. 

Wall Street had seen this coming. A loss of this magnitude was almost certainly a one-off linked to the colossal cost of the ride-hailing company’s $80bn US stock market float in May. 

But Uber shares still fell sharply following the announcement. Why were investors so spooked?

Buried among the detailed figures on its balance sheet  sits some alarming evidence of the scale of the struggle Uber faces to become a profitable, sustainable company

The most disconcerting figure is how much money the company brought in, and how that compares to the same three months last year.

A protester holds a sign reading "Uber/Lyft Get Billions" while demonstrating at Los Angeles International Airport in May. Uber's "take rate", the amount it makes on each ride, is key for its bottom line.   Credit: Patrick T. Fallon /Bloomberg

The rise in revenue was just 14pc, its lowest-ever growth rate, and the growth rate for its ridesharing business, which brings in 80pc of its revenue, was just 2pc, barely outstripping US inflation. In Latin America, revenue actually fell by 24pc.

Put simply, Uber is failing to exhibit the rocket-like growth that would suggest its service is catching on around the world. Gene Munster, of venture capital firm Loup Ventures, said Uber's ambitions for world domination were not paying off. He said: "Bottom line: as a growth company, you have to beat your revenue numbers, and that didn't happen this quarter."

The 6pc growth rate in new passengers for its taxi business, the same as rival firm Lyft’s, was a “disappointment for Uber, as their global exposure should be growing riders faster, even off a larger base". 

One big issue is increasingly tough competition. Earlier this week Uber’s big US rival Lyft suggested that prices could rise as the two companies called a truce in an aggressive pricing war which has triggered the use of discounts and promotions to lure customers to the service. 

The market responded positively to this, with shares in both companies rising as investors hoped they could eke out more profit from riders. Dara Khosrowshahi, Uber chief executive, also told analysts that competition was becoming “more constructive”. 

But his battle isn’t just with Lyft. Around the globe, Uber is facing intense competition from rivals. In some big urban markets it is less dominant than a few years ago. In London, for example, Estonian firm Bolt and Indian firm Ola have launched a ferocious counter-offensive against Uber. 

It was tough competition from Didi Chuxing, a Chinese rival, which ate into Uber's revenue from Latin America, previously one of its biggest growth areas. As long as smaller firms are lining up to siphon off market share, its prices will have to remain competitive. 

Khosrowshahi cited the “take rate”, the amount Uber makes on each car journey, as a positive sign. “We have a business in the rides area that has a 20-plus per cent take rate,” he said, arguing that this was “very strong” for a company of Uber’s size. 

Maintaining this is obviously key to Uber's future, and Khosrowshahi even said it would rise in the second half of the year. But the company faces a delicate balancing act.

If it eats into driver earnings, Uber could have a problem. Drivers have gone on strike in protest at declining rates of pay, with big demonstrations in May shortly before its flotation bringing parts of San Francisco, where Uber is headquartered, briefly to a halt. 

Less than 10pc of Uber drivers stay with the company for longer than a year. That retention rate might get even smaller if drivers are asked to swallow any more losses. 

Without cutting drivers’ pay any further, the company faces the prospect of having to jack up fares for passengers. Historically, people have flocked to the app because of Uber's low prices when compared to established taxi operators. Higher fares would give the upper hand to its competitors.

On a call with analysts, Khosrowshahi was upbeat, arguing that efficiency and size will eventually win the day.

“We’re very confident that this company, at maturity, can be cash-flow positive,” he said. “We can scale expenses and get really efficient with our marketing and incentives spend.”   

Khosrowshahi argued that ultimately Uber's main competitor is car ownership. The hope, he said, was to reach a situation where people have no need to own a car. 

The company currently makes up just 2pc of global car journeys taken each day, and has grand ambitions to persuade people to sell their cars and use the app instead. 

But the numbers on this remain shaky. A recent study commissioned by Uber and Lyft concluded that app-based taxi firms do contribute to congestion. 

Rather than persuading drivers out of their cars and into shared rides, they could in fact be luring people off public transport and adding more cars to the road. 

Data from HSBC suggests that using Uber or Lyft stops becoming cost-effective as soon as someone has to drive more than 700 miles a year, cutting off a large swathe of the huge $2.5 trillion total addressable market Uber says it wants to access. 

Even as urban populations grow, there's a ceiling on Uber's attempt to challenge car ownership because it's too expensive or inconvenient for people to use taxi apps for long journeys or in rural areas. 

Uber does have some advantages. It could coexist with challengers as a premium option, because it has more drivers and could offer shorter wait times and a faster service. 

Its Uber Eats food delivery service also continues to grow rapidly, and it hopes this will be a way to tempt people into other parts of the business, such as in Japan, where it has become an "Eats-first" business. 

It is also trying to partner with cities in order to grow into public transportation and shared scooters and bicycles, and develop flying and autonomous taxis to remove the cost of paying drivers. 

But these are currently tiny parts of the business. With the exception of Uber Eats they have yet to make any real impact on Uber's financial performance. A great deal more spending will be required to reach the point of profitability.

Khosrowshahi is asking investors to keep the faith. "It's hard to compare Uber to other businesses because it’s a unique entity. It’s one of those rare brands in the world," he said. "Myself and my team are well-prepared but we’re very early in this incredible journey."

Let’s hope they are in it for the long haul.