Uber Stock IPO: These So-Called Alternative Metrics

You know what is the sign of a great management team? An unrelenting focus on earnings per share. If you look at the annual reports of Nike, Dollar General, Home Depot, and Autozone stocks over the past twenty years, you will see regular inclusion of “per share data” along with the management team’s description that this is the metric by which wealth for the investors is created over time.

When a company is not satisfactorily growing profits on a per share basis, it will often create some alternative metric that it will convince current and prospective shareholders that it should care about as an alternative to growth in profits per share.

Right now, Uber is telling the investor community that it should focus on “core platform contribution profit” rather than profits per share because Uber claims it is earning $941 million in this core platform contribution profit, or $0.56 per share in core platform contribution profit per share. In reality, Uber has lost $3.1 billion over the past twelve month, for -$1.85 per share in earnings.

The United States saw this during the 1920s, the late 1960s, the late 1990s, and the past few years in particular. There is always some reason or other given as to why some substitute should be used in place of profits per share, and this is illusory because the ultimate value of a business over long periods of time is created by growing profits per share. As part of a long-term shareholder value creation strategy, profits can be delayed but not replaced.

I would be much more impressed with Uber’s management if it acknowledged that “moats” have almost never existed in the transportation industry, and as such, Uber will require years of intensive capital spending trying to make itself the most trusted brand in the ride-hailing industry but a focus on profits will emerge once its competitive position is further established. Then, investors would be left to figure out the likelihood of Uber executing upon the strategy as well as the time delay for the profits to arrive. Investors could agree or disagree with the premise, and I’d be inclined to disagree, but at least the management team would be trying to run in the direction of the end zone.

Instead, investors are left to wonder whether Uber’s management secretly knows that profits per share will be the ultimate arbiter of value and are just providing some alternative facade as a bridge until the profits arrive. That could be the case, but at this time, it is speculative for investors to assume that Uber’s management team has correctly identified the true North Star of shareholder wealth creation because they are publicly directing investor’s attention to business metrics that are not the underlying cause of value creation.

Billion-dollar losses. Mis-focused management. An industry that has delivered 5% historical returns for investors. The froth and excess inherent in the IPO market. As Mark Twain once indicated that history rhymes, I’ll leave you with Warren Buffett’s quote from the 2007 Berkshire letter: “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

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