Top-line vs Bottom-line: Uber’s Historic Losses

Uber’s frantic chase for a market grab and top line growth has meant a negative bottom line of a whopping $1.2 billion in the first half of 2016. This, indeed, is an extreme case of the bottom line sacrifice for an impressive top-line growth of 18% in a quarter.  And all this seems like a great strategy as its valuation reaches $69 billion.

But this strategy has its critics, too. Some experts feel that Uber’s indirect subsidizing its users (drivers and riders) can create a temporary shift in its favor but may not guarantee a long-term customer loyalty. When subsidies are withdrawn, the value Uber offers can easily be replicated by others (including traditional taxi services) and Uber may quickly loose its charm!

This is a conundrum that almost all businesses go through to some degree or the other. It can present not just a choice between top-line growth and bottom-line but also a choice between long term investment in soft assets such as people/ systems and chasing an attractive short-term EBITDA. Current market valuation techniques do not take non-GAAP assets not captured by accounting books into account. Valuation models taught in business schools assume long-term cost of capital as well as long term growth. Many a times, positive cash flow and growth shown in distant future year on and around the plan horizon can translate in to a very high valuation at present value terms based on a “terminal value”.

Given these market realities, corporate decisions would always be guided by the desire to achieve a high valuation by “projecting” a bright future – be it by projecting high growth at the expense of present profitability or by projecting healthy short-term EBITDA at the expense of building a sustainable infrastructure. It is up to the investors to kick the tires and make sure that the company has a sustainable business model and has built a good infrastructure in terms of its people and systems, for it to travel the distance to reach that projected bright future!

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