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Uber Burn

John Rowland

Posted on November 10, 2019 21:58

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If ever there was an example of pouring in good money after bad, Uber just may be it.

If you ran a company that generated revenues of $10 billion (so far this year), could you manage to squander away $17.4 billion, ending up with a $7.4 billion net loss? That's billion with a "B."

Well, Uber has done just that.

Uber was founded over 10 years ago and reported a third-quarter loss of $1.2 billion (which comes on the heels of a second-quarter loss of $5.2 billion). Uber's CEO (Dara Khosrowshahi) has acknowledged that "there is the expectation of profitability, and we expect to deliver for 2021," and here's the bad part . . . "by targeting 'adjusted EBITDA profitability.'”

To finance and accounting geeks, this kind of CEO-speak is a red flag.

EBITDA simply refers to earnings before interest, taxes, depreciation and amortization. It's a financial metric for assessing a firm's operating cash flow and its associated ability to service debt, being somewhat different from the profit measure of net income -- which is a goody most investors lust after.

But even if Uber accomplishes its adjusted EBITDA profitability by 2021, "actual" profits will be non-existent; it will still be burning up a "ton of money."

Publicly-traded companies are required to create and report financial statements based on GAAP (Generally Accepted Accounting Principles), a reasonable set of accounting standards designed to provide transparency and legitimacy to financial markets.

"Adjusted," as in "adjusted EBITDA profitability," is a handy, frequently-used euphemism for getting around these GAAP standards. Call it fudging the numbers or putting lipstick on a pig.

Sometimes though, adjusted non-GAAP reporting can have a legitimate function in providing context for isolated, one-time events such as "asset write-downs or organizational restructuring." But when a firm repeatedly relies on the use of these non-GAAP methods year after year, as Uber does, investor beware.

To be fair, many companies play the same accounting game; it's perfectly legal, so long as GAAP numbers are reported along with the "adjusted" items.

Moreover, while Uber's managed to Pac-Man its way through $2.52 billion of cash so far this year, they're not the only one singularly efficient in the art of the cash burn.

Lyft, WeWork, Netflix, Tesla, and frackers are also among those getting in on the fun.

So how does this financial nonsense perpetuate?

The members of this "Everything Bubble" rely on "new cash from new investors to bail out and remunerate the existing investors" in a style and magnitude that would make Charles Ponzi blush.

So invest wisely.

John Rowland

Posted on November 10, 2019 21:58

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