A widely shared New York Times op-ed last week explored how venture-backed startups are tightening their purse strings as they mature into respectable, publicly traded companies.
So-called “VC subsidies” have allowed a generation of consumers to live “Balenciaga lifestyles on Banana Republic budgets,” wrote the columnist, Kevin Roose. “Now, users are noticing that for the first time — whether because of disappearing subsidies or merely an end-of-pandemic demand surge — their luxury habits actually carry luxury price tags.”
Indeed, the article pointed out that Uber (UBER) rides cost 40 percent more than one year ago; DoorDash (DASH) has steadily increased fees the past year; and that Airbnb (ABNB) rentals were 35 percent higher in the first quarter of 2021 compared to last year.
For investors, Roose’s analysis raises a variety of related questions: Are these firms starting to turn a profit? If so, how much? And does that make their shares more attractive?
To start, consider Airbnb. The firm’s earnings report for the first quarter of 2021 show a net loss of about $1.1 billion, compared to a loss of just $340 million in Q1 2020 — not exactly a sign that Airbnb is doubling down on profitability. The good news for profit-hungry Airbnb investors is that much of the firm’s quarterly loss is from interest paid on loans taken out during the pandemic: a whopping $421 million in loan interest expenses, compared to just $1 million a year before.
Airbnb commands just around 5% of the overnight lodging market; if the firm doubles or triples that market share, then the stock will rise in parallel. At the moment, Airbnb’s profitability shouldn’t be of too much concern to investors, who should think of ABNB as a growth opportunity.
Then there is Uber, the dominant U.S. ride-hailing platform. Uber had a good first quarter this year: its net loss of $108 million compares favorably to its $968 million net loss in Q4 2020, and even more so alongside its gigantic loss of $2.9 billion in the first quarter of 2020. Higher rates contribute to Uber’s growing profitability, but an even bigger factor is the company’s narrowing business focus. The ridesharing pioneer sold its Eats business last quarter in India, where a competitive landscape stunted growth and drove up customer acquisition costs. It sold off its driverless unit last December, and offloaded its scooter unit, Jump, last July. The firm recorded $1.68 billion in divestiture gains last quarter alone.
For profit-hungry Uber investors, these are encouraging signs. But even more encouraging than the revenues is what these divestitures represent: Uber doubling down on what it’s best at: moving people (and increasingly, food) from Point A to Point B, and in select markets that it knows best. The company is no longer overstretching itself.
Then you have DoorDash, the first of the nascent meal delivery platforms to go public last December. Unlike the other gig economy stocks, DoorDash seems to do better amid a pandemic (when people are stuck at home and indoor dining is limited) than in normal times, when people are happy to dine out. The company’s profitability numbers back that up: During the second quarter of 2020, at the apex of pandemic restrictions, DoorDash managed to record income of $23 million; in the first quarter of 2021, the company lost $110 million.
But for a company as new to public markets as DoorDash, a lack of profitability is not overly concern. What’s most important for the meal delivery service’s long-term share prices is its ability to command market share, particularly given the small margins involved in meal delivery. DoorDash, up against competitors like Uber Eats and GrubHub, must maintain and grow its customer base if it hopes to scale and start earning consistent profits.
In short, Roose is right that these gig economy companies are increasingly focused on profitability. However, they are still racking up losses. For investors, those losses need not be deterrents; but investors should ask themselves whether they expect those losses to last forever, and adjust their investing strategies accordingly.