The weekly Executive Newsletter from
Uber IPO, Shipping Wars, Expanding your Knowledge Base and More
Friday, May 17th, 2019
Hi, this is Sun and welcome to our newsletter. We have a lot to cover this week so let’s get right to it.
The news of the week has been Uber's disappointing IPO. In case you've been living under a rock, the ride-sharing company went public last Friday at a price of $45 per share, and the stock has been crashing ever since reaching a low point of $36.61 on Monday (a 19% drop), recovering a bit throughout the week and stabilizing at around $42 by the end Thursday.
Was this a surprise to investors?

I don’t believe so. At least not to many who evaluated the company’s rationally, and that rationally stayed away from the stock.

Here’s a recap about Uber.

In according to the company’s S1 form (the form they have to file with the SEC as part of the process of going public), the company has a fleet of 4 million drivers, who all together provide about 16 million trips every day in 700 cities around the world.

Those are astonishing numbers by any metric, but more so are their huge, unbelievable, I mean, truly unbelievable losses.

To check the profitability of a business the first thing we have to check is its income statement, and in Uber’s we can find the following: In 2018, the company made $11.2 BB in revenues, and spent $5.6 BB in those sales (a 50% gross margin), then spent almost $9 BB in operating expenses ending up with a total loss of a bit over $3 BB.

In case you aren’t paying attention, that is three thousand million dollars in losses!.

Is a million still a lot? I think it is, and these losses are three thousand times a million. Dang.

I mean, the fact that a company that's nine years old makes it to the public market with losses measured in the billions is a bit insane to me. But more shocking is that some experienced investors bought into the hype and jumped on the wagon like nothing.

Here’s a quick acid test to see how big of a black hole that is: If you had to cover those losses with new businesses, and assuming that those new businesses would yield a 15% profit margin (a good profit margin by the way), you would need to generate 20 billion in new sales!.

That’s a freaking big, OMG kind of hole.

For a company like Amazon that makes a 5% profit margin, that would mean $60 billion in additional sales.

Of course, Uber is not suggesting that they will close the earnings gap with new businesses, but if they haven’t managed to turn a profit in 9 years, I doubt they will be able to make it now, especially with the pressure from investors and the public scrutiny they are under.

Now, you may be thinking that these losses exist because Uber has been making huge investments in technology development and IP, but nop… no no no, that’s not the case here.

In fact, in their income statement above, you can see that Uber invested only $1.5 BB in R&D in 2018 (13% of their revenues). That is not a small number, but compare that to what they invested in sales and marketing during the same period: $3 BB (25% of revenues).

So, if a so-called "tech" company invests twice as much in marketing than they do in R&D, what does that tell you?

Here's one answer to that: The company doesn't have a real competitive advantage, and for that reason they've been trying to get as much ground as they can, throwing money left and right, trying to stay ahead of the game in most places.

I am not exaggerating. In China alone, a market they later exited, CB Insights reported that Uber spent about $2 BB trying to overcome local regulations, find drivers, and attract users to its platform.

As I explained in the book, Uber's business model benefits from network effects, where the more users they get, the more drivers they attract which, at the end creates a virtual circle that helps them improve their service, reduce pickup times and offer better prices.

But what we can see here is that their true advantage is not technology-based, but instead, it is based on their ability to establish the company in good markets first, before well-funded competition arrives.

According to the information they published in their S1, the company has been subsidizing rides in most markets, trying to reduce driver churn and keep rates competitive.

So, in short, as we say in the investment world, Uber has been "buying its revenues" for almost ten years. And yet they found investors who believed their $80 BB valuation.

Now, you tell me, how the hell a company that losses $3 BB a year is worth $80 BB?

Help me understand that… yes, I’m talking to you.

Are you kidding me?

I mean, I don’t need those many drivers and lobbyist to lose $3 BB in a year, I could definitively lose that much money with fewer people.

Just saying.

But not everyone that bet on Uber is a loser since the banks that helped the company go public pocketed more than 100 million in fees.

One of the key elements in the path to profitability that they painted for investors is that driverless cars will reduce their costs of goods sold (COGS) significantly.

While I agree with that, I don’t believe Uber will survive long enough to see that future (judging by their numbers), and if it does, it will not have a strong balance sheet to invest in acquiring those fleets, limiting their options to leasing or renting those from players that will most likely be in a better position to capture a bigger piece of the margins.

A final side note, I also feel that Uber got rid of their founder and former CEO Travis Kalanick too early, and that is probably part of the reason the company is spinning down onto this spiral of lameness.

Yes, it is true that under Kalanick Uber was kind of a mess, with reports of misbehavior among employees and a self-destructing culture, and the guy himself probably went too far sometimes, even trying to steal technology from one of his largest investors, Google.

But while I wouldn't applaud Kalanick's behavior (at least not publicly anyway), I do know first-hand that sometimes you need those guys that are willing to bend the rules to get a company off the ground.

It is just too hard sometimes to turn nothing into something, and you need people that can maneuver any hurdle and obstacle that comes their way.

Kalanick, I feel, was that kind of guy.

You need rule breakers to do just that, to break the rules, but Uber’s new CEO seems too politically correct to me, and not the kind of guy that will close a $3 BB gap any time soon.

Here’s his answer to some important questions, including the $80 billion one: What’s Uber’s path to profitability?

In case you're too lazy to go watch that video, here's a transcription of how he answered that very specific question:
"There are cohorts of countries that are profitable and is about getting other cohorts of countries to the same maturity level."
Ok, I get that, but if that path was so clear why didn't they disclose specific information about how much they lose per-ride on each market in their S1, so that investors could make their own numbers and come to their own conclusions?

More specifically, why didn’t they show, with numbers, how they will get out of red-land.

Now, was he the wrong pick for the job?

Not at all.

I believe that what investors wanted was a guy that could deliver the impression of a mature company as they approached their IPO to get their money back, and Dara Khosrowshahi can deliver them exactly that.

So Kalanick’s exit was probably part of a bigger and less noble plan that kicked off a long time ago to literally, I mean literally, take investors for a "ride".

Shipping war alert: Walmart launches its "free" next-day delivery program
In another note, Walmart sucker-punched Amazon last week, by launching its free, next-day delivery almost three weeks after Amazon announced that 1-day delivery will be the default speed of its Prime service.

Now, if you asked me, I’d say that Walmart is better positioned than Amazon to win in the retail space. They have a better Value Network for retail, good experience, strategic assets and a mean balance sheet that can take care of things.

First and foremost, Walmart already owns real, brick and mortar stores, nearer to its customers, where it already hires people who can fulfill and ship orders. I feel that is a substantial competitive advantage that Amazon can't overcome easily.

Walmart’s next day delivery will be free in orders above $35, while you need a Prime membership ($119 per year) to get free next day delivery.

So round one goes to Walmart.

Second, Walmart has been in an acquisition spree trying to get key capabilities to better compete with Amazon, so whatever gap exists between those two business models, Walmart is working hard to close.

So let’s call round two a tie.

Now, it seems to me that Walmart will take a frontal, in your face, approach in its competition with Amazon and that it will not pull punches when it comes to attacking the e-commerce giant.

Shortly after Amazon announced its new 1-day shipping default delivery, Walmart twitted:

"One-day free shipping...without a membership fee. Now THAT would be groundbreaking. Stay tuned."

Gotta love a good ol' bare-knuckle fight between two big boys, so I’ll get the popcorn ready.

And yes, I’d give round three to Walmart for the frontal approach.

In short, Walmart figured out the key to winning in the landscape, something that SEARS couldn't.

On another note, as we reported through our LinkedIn page, Amazon also announced this week that it is offering $10,000 and two months worth of salary to employees that want to start a delivery business.

That seems to be like a good complement to their plans to bypass FedEx and other shippers to reduce final costs to customers (they also began construction of a $1.5 BB airport, which we also reported on).

However, the way I see it unless Amazon gets this offer right, those employees may end up delivering packages for Walmart as well.

In trying to get this idea implemented, Amazon may run into the same predicament that Uber has where they have to hire drivers as "contractors" (not employees) which leaves the door open for them to work for the company’s competitor as well, which in the case of Uber is Lyft.

So, this may be a great case of the wrong strategy perfectly executed that could cause Amazon a good-sized, bloody, and nasty self-inflicted wound.

By the way, I’m thinking of writing some kind an analysis the way Amazon Prime works for a future edition of this newsletter, so if you have useful information (best if includes numbers), please send it my way.

Food for Thought:
I just realized this week how well Microsoft has transformed from a company that made a mediocre desktop software, and that made most of its money from licenses fees, into a fully-fledged cloud business that makes recurrent revenues from customers and organizations around the world.

A brilliant move, beautifully executed by its CEO Satya Nadella.

In the book, I mentioned how Procter & Gamble (P&G) went from a humble beginning as an artisanal maker of soap and candles, to master Mechanical Engineering with the introduction of mass production and automation, and how it kept learning about its markets and later expanded its knowledge base into Consumer Psychology through the implementation of professional marketing tools such as data analytics and rule-based decision making.

I added this in the book as a great example of how a smart organization keeps pushing the boundaries of its "knowledge base" to expand its businesses and grow in other directions, a case that was extensively covered by IMD Business School professor Howard Yu in his book Leap: How to Thrive in a World Where Everything Can Be Copied.

In Microsoft, I just see another case of a company that has expanded its knowledge base into the next frontier: cloud computer, and how it is profiting today from something they started to work on several years ago.

A little bit like Apple expanded its knowledge base into smartphones, and how Netflix expanded its own from Rental DVDs into content streaming.

I think there’s a big lesson here for us executives and innovators in the front line: We must start today to build the revenues that will support our company in the next 5 to 10 years.

We can’t wait until we need those revenues to go and try to build them as it will probably be too late, and too expensive then.

That’s just something for you to think about.

If your core business is thriving now, what will make you money when that business dries out and suck?

What’s your next "knowledge" frontier?

What I've been up to
Right now I keep working through my specialization on Financial Management with the University of Illinois and hopefully will get that completed by the end of June.

My idea is to add a heavier dose of finance into the book and the things I write (including this newsletter), as I feel that finance is a big weakness that many executives have (including myself).

That one is keeping me busy, but I already have a stack of interesting books and articles that I'm planning to read in preparation for the next edition of Strategy for Executives. I will probably share a few of those titles next week and will open the mic for feedback and suggestions.

At work, I keep trying to get a piece of the vertical-farms space, a technology that I believe has the potential to change the farming industry as we know it.

We just committed $30 MM for a pipeline of validation projects, and I have been visiting a few potential locations for those.

I may cover vertical farms in more detail in a future newsletter edition, so if that’s something you feel like wanting to know more about let me know.

Finally, I was featured in an article by Slack this week on innovation. Not a big deal (only two quotes really) but hey, if I don’t toot my own horn who will?

Here’s the article in case you want to take a look at it.

Anyways, that’s been enough for today, time to get back to work. We need people like you trying to change the world, because honestly, it's kind of a mess right now.

Let me know what you think about this newsletter, shoot me an email with any suggestions that you feel could make it better, or if you want me to cover a particular subject in a future newsletter.

You are part of this newsletter
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Also, please forgive any typos and grammatical misbehaviors. Don’t forget I write this in between trips, and sometimes I don’t have enough caffeine in my system. I'm actually writing this very line from my second home: seat 2A in an American Airlines flight.

Finally, I’m ok if you want to forward this newsletter to other people, but please make sure you only share it with people who would appreciate this type of content. It is your job, just as much as it is mine, to keep this newsletter as a space where alike people, like you and me, can share a few good ideas.

Checking out now, talk to you next Friday.


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