The top-five ride-hailing companies have a combined valuation of close to US$183.5bil (RM770.1bil), having raised US$83bil (RM348.6bil) from both private and public offerings over the years. But to-date, all are loss-making with cumulative losses in excess of US$50bil (RM210bil) – Pankaj C Kumar reported in Starbiz on 28 August 2021.
From New York to Sydney and from Tokyo to Singapore, the ride-hailing business has been well sought after by private equity investors. Some of these start-ups have even migrated to being full-fledged public companies. Names like Uber and Grab have even become household names.
According to data compiled by businessofapps.com, the global funding for these ride-hailing companies between 2015 and 2020 hit US$72bil (RM302.4bil). The peak in fundraising took place in 2017 when some US$18.1bil (RM76.2bil) was raised. The table on ride-hailing companies summarises today’s top-five ride-hailing companies and their respective valuation, the amount of funds that have been raised, and their respective accumulated losses to-date.
Uber, DiDi Chuxing (DiDi) and Lyft’s valuations are based on the latest market prices, as these companies are all listed. Grab is valued by its SPAC merger deal, while Go-Jek is valued based on its recent merger with Tokopedia.
Among all of them, DiDi, which was listed at the end of June, is the latest to be listed in the market, when it raised US$4.4bil (RM18.5bil) via an initial public offering (IPO) in the United States. That IPO valued the Chinese-based company close to US$70bil (RM294bil). But its share price has almost halved because of regulatory concerns as China has placed the company under a cyber-security review after it failed to comply with regulators’ demand to undertake a network security assessment.
The business model of ride-hailing companies has evolved over time. Some of them today are not just pure taxi services in the traditional sense but have ventured into other businesses.
Today, ride-hailing companies provide services like food delivery services, financial services like insurance products, personal loans, unit trust products, e-wallet services; and consumer-related services like grocery shopping, on-demand courier services, on-demand car cleaning services, and even on-demand bill payment services.
With the added services that are being provided and explored by these companies, they have continuously shown innovation in their business direction, and with an increasing presence in more and more countries. Growth has also been coming whenever they are opening up new markets.
Two of the largest ride-hailing companies are Uber and Grab. Uber recently announced its second quarter (Q2) 2021 results while Grab has announced its Q1 2021 results. Despite the increasing presence of these ride-hailing companies, their financials have not been great, and instead, they have been reporting losses after losses, quarter after quarter.
For example, in the latest quarterly results, Uber’s revenue rose 35% quarter-on-quarter
(q-o-q) and more than doubled from a year ago to US$3.93bil (RM16.5bil), but both its adjusted earnings before interest, tax, depreciation, and amortisation (Ebitda) and net earnings remained weak.
Adjusted Ebitda for the Q2 period worsened by 42% q-o-q, but was much better than last year’s Q2 loss of US$837mil (RM3.52bil) by 39%. Although Uber reported a smaller quarterly net loss of US$799mil (RM3.35bil), or an improvement of 55% and 56% q-o-q and y-o-y respectively, the question on everyone’s mind is “When will it turn profitable?”
For Uber, it is not just this quarter that it reported losses, it has been loss-making since day one. The chart on its financial results basically shows Uber’s financials over the past 10 quarterly periods and it also exhibits another trend – the more the company expands into new markets or new services offered, the losses are sustained at very high levels.
Having raised some US$32.7bil (RM137.3bil) in various funding rounds and its IPO, Uber has made cumulative losses of about US$22.1bil (RM92.8bil) since its inception in 2010. Uber’s balance sheet as at June 30, 2021 showed the company’s current shareholders’ fund was at just US$13.5bil (RM56.7bil)
Grab has almost the same storyline. Having raised some US$10.8bil (RM45.4bil) up to the end of last year, its balance sheet showed that the company has total accumulated losses of US$10.4bil (RM43.7bil) up to the end of 2020. With the reported net loss of US$652mil (RM2.74bil) in Q1 of 2021, Grab’s cumulative losses would have now ballooned to above US$11bil (RM46.2bil).
Some investors may wonder how is it possible that these companies continue to be valued at financial matrices that have no relevance in the traditional sense, as they are not measured by price to earnings multiple, but other more sophisticated methods to justify their sky-high valuations.
For all these companies, understanding their financial statements can be tricky. While the focus can be on the top-line, the actual numbers that matter are the Ebitda and net losses reported.
Valuation is based on projected cash flows and the resulting net present value of the future cash flow that gives investors the company’s fair value.
This fair value is thereafter a reference point for investors to derive various multiples such as the enterprise value (EV) to revenue multiple or even the EV/Ebitda multiple if the denominator is a positive figure. EV is simply the market value of debt and equity of the company and this is then divided with the revenue or Ebitda of the company to derive a multiple.
The trick is really about forecasting future cash flows of these companies and thus the narrative these companies use whenever they are going for the next round of fundraising is to show investors what is their business strategies, in terms of new product offerings or new markets that they are venturing into, and when they will potentially be profitable, if at all.
For companies like Uber, even after 10 years of reporting losses, the company is still worth some US$76.5bil (RM321.3bil) – all because it is able to paint a picture of hope, that it will continue to grow and expand its market share and reach, never mind if accumulated losses have reached US$22.1bil (RM92.8bil) and counting.
Clearly, the business model of these ride-hailing companies is not sustainable. While the growth stories can continue to sustain market valuation, it will come a time when investors finally realise that the business model adopted by these ride-hailing companies is simply not feasible in the long run. After all, business is about making money and not merely expanding and penetrating new markets to generate sales.
It reminds me of the dot.com era, when “traditional” valuation methods were discarded for more innovative or creative methods. In the end, the “bubble” burst and they were no longer in the scene. Will that happen here?
Reference:
Is the ride-hailing business sustainable? Pankaj C Kumar, The Star, Starbizweek 28 August 2021
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