Uber Intends to Cut Costs as Investor Optimism in Technology Wanes

May 30, 2022
4 min read

Travis Kalanick and Garett Camp founded Uber in 2009; the services have been available to the public in San Francisco, California, since 2011. It has over 8 million active users and is responsible for over 1 million cab journeys each day.

Uber is one of the few technology businesses worth more than $50 billion around the globe. Uber has already garnered $8.2 billion in equity capital and is available in over 60 countries. Uber's business strategy allows users to just tap their smartphone and have a cab arrive at any location in the quickest time feasible.

How Does Uber Make Money?

A typical cab company's primary source of revenue is the money collected from each voyage, and Uber is no different. Although Uber has positioned itself as a cheaper alternative to regular cabs, this strategy has shown to be fairly viable.

The most important requirement for a taxi service is expertise. This information is gathered through firsthand observation of users, including passengers and drivers. The information on 'dead miles,' which a driver must drive without any passengers, is important as it tells about traffic patterns and also about taxi demands. These miles are meaningless to the drivers because they are not paid if their car is not serving a customer. To access the same information that Uber obtains every day, a third party would have to pay a significant amount of money.

The most apparent source of revenue for Uber is trip commissions. They often vary from 15% to 30%, depending on the pricing bracket for that sort of taxi, the driver's experience, and the market's age. After trip commissions, 'surge pricing' is Uber's second-largest income stream. Surge pricing is applied when demand for taxis exceeds supply or the number of taxis available. It automatically sets reasonable pricing based on an algorithm in order to generate the greatest profit. Surprisingly, the driver earns the same amount of money regardless of the surge. It makes around 40% more money with a 2x surge than they would with normal rates, even though the taxes are twice.

Uber may generate a lot of money by encouraging users to hold ready-to-pay money in online wallets. Uber compensates its drivers as independent contractors rather than full-time employees with benefits, eliminating the additional costs that most traditional businesses must incur.

Uber's Recent Loss of 5.9 Billion Dollar

Uber Technologies Inc.'s top executive informed employees that the company would slash marketing expenditure and reduce recruiting as it focuses on profitability, the latest example of corporate prudence in the tech sector.

Investors have grown less tolerant of corporations gaining market share at the expense of their bottom lines, according to Uber's CEO, Dara Khosrowshahi.

"We are working for trillion-dollar markets, but quality does not matter if it does not lead to a profit," he said in an email last Sunday about his recent meetings with investors. "We have to show them the money."

Uber's CEO, Mr. Khosrowshahi, stated that they would approach hiring as a luxury and consider when and where they add workforce.

Technology corporations that fueled the US economy during the pandemic are facing some of their most challenging problems. The company's stocks have dropped by more than 40% so far this year, surpassing the Nasdaq Composite Index by 25%.

The stock prices of Uber, Netflix, Facebook parent Meta Platforms, and Amazon have been hammered by concerns about increasing interest rates and the reversal of certain major trends that boosted tech profits. Inflation, labour shortages, interest rate hikes, and supply chain difficulties are some of the major issues cooling the long-awaited sector.

Late in April, Amazon announced the worst quarterly sales increase in nearly two decades. Last week, Meta said that it would reduce mid-to senior-level employment hiring. Netflix lost subscribers for the first time in more than a decade in the first quarter of 2022, indicating that the trend will continue. According to Apple, sales could decline if COVID-19 returns to China.

Uber and its competitor Lyft invested a lot of money for years to win users and market share, losing billions of dollars in the process. Despite the losses, Uber was one of the most eagerly anticipated stock market launches of 2019. The outcome upset Wall Street, which was looking for a route to profitability.

Uber and Lyft establish goals to become profitable before incurring certain expenditures. Last year, they achieved those objectives. These adjustments remove costs such as interest, taxes, and stock-based pay that some executives consider unrelated to the company's core activities.

"The market is clearly undergoing a seismic transition, and we must respond accordingly," he added.

Uber's net loss increased to $5.93 billion in the past three months since March from $108 million a year earlier, owing to losses on investments in Chinese ride-hailing giant Didi Global Inc. and others. The firm has not stated when it intends to break even.

Uber has previously said it expects positive cash flow through the end of the year. If it achieves that target, it will be the first time the company's core business makes more cash than it spends.

Other startups have made similar commitments. Airbnb Inc., the home-sharing behemoth, revealed last week that it expects to make its first full-year profit this year.

The epidemic damaged Uber's main equestrian business, but their food supply benefited them by staying at home. To survive the pandemic, the organization lost about a fifth of its staff and sold self-propelled artillery.

Uber's revenue more than quadrupled in the March quarter, as demand for rides recovered after the Covid-19 surge late last year, and the company's food-delivery business expanded despite restaurant re-openings.

While shipping reserves rose 12% in the third quarter, growth slowed sharply after nearly doubling a year ago. According to Mr. Khosrowshahi, delivery "should increase very rapidly." Investors are worried about how the company will react to inflation, he added.

Due to a year-long driver scarcity, Uber and Lyft have had to raise their trip pricing. Riders return faster than drivers, according to both firms.

Last week, Uber said its driver base had reached a peak after the epidemic, and it did not need to spend a lot of money to increase service delivery. During the pandemic, many ride-share drivers began delivering food. Uber says it is in a better position to attract drivers to return to boat customers as it has a food delivery business.

Meanwhile, Lyft announced last week that it would continue to invest in its platform to maintain a sufficient supply of drivers. Last week, its shares plummeted due to higher driver expenses and a weaker-than-expected profitability estimate for the upcoming quarter.