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Uber puts brakes on growth at any cost strategy and investors will be happy

The company is trying to stop growing where it doesn't make sense

For now, Uber offers an  SOS service

Uber Technologies Inc seems to have decided to stop chasing stupid growth. This is exactly what investors wanted, yet the company’s latest results, announced on Monday, show how far Uber has to go to be sustainable and rational.

In the third quarter, the total value of Uber rides, restaurant meal deliveries and other transactions increased 29% from a year earlier — the slowest rate of increase since Uber began reporting that figure. The total figure of $16.5 billion was also a little short of analysts’ expectations, as was the growth in average monthly customers using Uber services at least once. That most likely contributed to the after-market decline in Uber shares.

What Uber seems to be doing is precisely what investors want now. The company is trying to stop growing where it doesn’t make sense. Third-quarter revenue from rides, excluding what Uber classifies as excessive driver incentives and driver referrals, increased 23% in the quarter, rebounding from a growth slowdown. The adjusted revenue growth for Uber Eats, the restaurant delivery service, also accelerated.

The divergence between slowing growth in total transactions and a faster pace of revenue in crucial segments suggests that Uber has increased consumer prices, reduced incentives or made other tweaks to keep more revenue from each ride or food delivery — even if that means some people are turned off enough not to use Uber at all. This is rational, yes, but acting like a sensible company may also crimp Uber’s eventual size and ambition. 

Uber also said it’s aiming to have positive adjusted earnings before interest, taxes, depreciation and amortisation in 2021. That is far earlier than analysts have expected Uber to be profitable — or profitable-ish. Lyft made a similar pledge last month to be in the green by the end of 2021 on a massaged profit number that excludes stock compensation and some other costs.

It’s useful to step back and see how much has changed for Uber, Lyft and other young and richly-valued companies. Ever since these companies went public in the first half of this year, Uber and Lyft have been forced to shift gears and chase profits, or some semblance of them, rather than boasting about how big they can grow if they swallow more of people’s current spending on transportation.

This is the new normal for young companies like Uber: Investors want them to grow, but not if the growth is achieved with unsustainable spending or rash financial trade-offs. There in the penalty box is WeWork, the office leasing startup that did exactly that.

I will say that a forecast for profits-ish in two years is a long time in this constantly shifting industry. Heck, just a year ago, Uber might have been valued at $120 billion. Both Uber and Lyft have said recently that price wars have eased, presumably by curbing the cut-rate fares for riders and bonuses or other incentives for drivers.

But competitive dynamics can change quickly. The takeout and food delivery company GrubHub Inc., for example, said recently that it’s going to try to steal market share from companies like Uber by offering to slash order delivery fees from at least some popular chain restaurants, plus other growth-minded steps. It’s possible Uber might feel the need to follow GrubHub’s lead, particularly if other US competitors do the same.

Uber is in a tricky position. Its potential ceiling is much higher than Lyft’s because Uber has spread its tentacles into many parts of the world and expanded far beyond its original business of car rides at the push of a smartphone app. That expansion also makes it difficult for Uber to improve its economics and quickly pivot from chasing growth to chasing profits. For every dollar of revenue in the first nine months of this year, Uber bled 25 cents of cash from its operations. That is a high rate of cash oozing out of the company, and it’s not trivial to reverse the trend.

Uber and Lyft also have to contend with interest by regulators and lawmakers to impose more restrictions on the companies or force them to increase driver earnings and cut back on the number of cars on the road in large cities. That will put pressure on the companies’ revenue and profits, crimp the use of those ride services or both. Uber may slow the financial bleeding faster than planned, but its new profit mindset doesn’t change its essential character: a highly valued company that may — or may not — be an economically viable one.