Explainer: Uber, Lyft, WeWork - Why are these tech companies losing money?
Rising tech companies like Uber and WeWork have been on the news lately, but not for reasons they would have anticipated at the start of the year. What was meant to be a record-setting year for tech companies listed on the stock market has led to major disappointment, with many of these big names losing up to half of their stock value in a matter of months.
Ride-hailing companies Uber and Lyft went public earlier this year, worth $72 billion and $15.1 billion respectively when they first entered the market. However, half a year in and the future of these rising companies do not look as bright. As of 3 October, Uber's value had fallen 35%, and Lyft fell 46%, according to Bloomberg.
WeWork, which provides shared workspaces and services for start-ups, is another company forced to head back to the drawing board. It shelved plans to go public, as confidence in its business model fell, causing WeWork to fall from a value of $47 billion earlier this year, to just $10 billion today, according to Reuters.
We're not all stock traders, but these are big waves happening in the world of tech. Here's an explainer to break down the basics and what exactly is happening to these big names in tech.
What doing “going public” mean?
"Going public" refers to companies putting name up on the stock exchange through an initial public offering, or IPO. These let anyone who wants to, buy shares from the company. These investors, who could be anyone, pay a small amount to own a fraction of the company's business.
Many of these little investments help to boost a company's revenue, leading to more money for R&D, expansion projects that generate profit. Companies often return some of these profits to investors as dividends.
There are some risks to going public. While a private company could've been funded by banks or wealthy investors who believed in the project, getting an IPO means its performance and plans will be scrutinised by the public, who now have a stake in its profitability. Companies need to play their cards well to keep these shareholders from backing out.
Why WeWork isn’t working out?
WeWork's commitment to go public as a tech IPO has put the company under immense scrutiny and it's buckling under the pressure. Forced to go back to the drawing board, the American company withdrew its IPO filing with the Securities and Exchange Commission earlier this week.
The company is known for purchasing locations, prettying them up, and renting them out for small businesses to share as office spaces. Despite the excitement over this model, valuing it at $50 billion, expansion plans had been expensive. WeWork reported an operating loss of $1.37 billion in the first half of this year and $900 million last year – when exactly it will turn a profit is not clear.
It relies on short-term desk and office rentals to generate revenue but could be an unstable way to earn money. The threat of an economic downturn could lead to fewer rentals and empty offices, causing investors to question its sustainability.
Uber and Lyft driving investors away
Uber and Lyft don't own cars, which should drive costs way down. So why are they on the decline as well?
Both companies were hit with deeper scepticism as WeWork announced its postponed IPO this week drew doubt on all these high-valuated tech IPOs.
Take Uber for example. Uber's worrying operating costs were driven up due to several key expenditures. Chief of these was stock-based compensation – returning investors what they are due in time for going public in May. These shares added up to $3.6 billion in Q2.
There was also R&D, which added up to over $3.1 billion. Ambitious investment into flying taxis, driverless cars, e-bikes and new public transport integration into its apps, as well as re-worked app algorithms added significantly to this sum.
On top of these bills, it racked up over $1.6 billion in administrative costs that spiked due to the demands of going public; $1.2 billion in sales and marketing despite laying off 400 marketing employees in July; almost $1 billion in operations support; not to mention millions in depreciation. That's a whole lot of zeroes.
The narrative is similar for its top competitor in the US, Lyft. The ride-hailing company reported net losses of $911 million in 2018. Things got worse after its IPO, reporting a first-quarter loss $1.14 billion.
Sales and marketing also summed up to $803 million, which ate up for 40% of its revenue. These include the generous driver incentives and discounts offered to customers to draw them to Lyft instead of Uber.
These significant costs painted a clear picture of these ride-sharing companies: There was no sign of profit the way things were run.
What’s next for these companies?
One thing in common for all three companies featured is the need for change.
Change for Uber looks bright. With its many services on offer, such as UberEats, scooter-sharing services and Uber Business, focus on different segments of its wide market could find new hotspots for revenue that could build its trust back on the stock exchange.
Things look more challenging for Lyft, caught under the shadow of Uber, which holds more consumers, promotions and integration with other services.
And as for WeWork, things look the bleakest, with funding set to run out next Spring. Given its tarnished reputation, thanks to reckless endeavours by former CEO Andrew Neumann, surely rebuilding its tattered image is first priority. Sales and marketing, you're up.