Before the pandemic, people were saying that technology investment was deflationary. The bear market in tech stocks, though, may be inflationary. Before, tech companies were able to underprice their services because of a limitless supply of investment dollars, but now that the investment has dried up, these companies must succeed on their own merits.

During the roadshow for Uber’s IPO, investors were being pitched on a futuristic company whose mission went far beyond ride-sharing to something about increasing the capacity utilisation of a car. You drive to work, where your car sits in the parking lot all day. Then you drive home, and the car sits in your driveway all night. The typical car only has a 4 per cent capacity utilisation. Ideally, there would be far fewer cars on the road that were full of passengers, resulting in a capacity utilisation rate approaching 100 per cent.

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Uber is far from achieving this mission, and perhaps it is better that the pragmatic Khosrowshahi is in charge to figure out how to make the numbers work than the idealistic founder Travis Kalanick. Wall Street is occasionally capable of looking past the short-term occasionally (think about Amazon’s first decade or so as a public company), but with Uber, there is a lot of scrutiny on the quarterly numbers for signs of progress. This earnings report showed a lot of progress.

Uber said it had generated $US382 million in free cash flow — its first positive free cash flow in a quarter, meaning it generated more money from its business operations than it lost.
Uber’s strong results, on the heels of more mixed reports from other tech companies like Amazon and Microsoft, were not without blemishes. The company still lost $US2.6 billion, including $US1.7 billion from its investments in other ride-sharing businesses such as Aurora, Grab and Zomato.

What about high petrol prices and their effect on Uber’s profit margins? Across the economy, there aren’t many examples of high petrol prices leading to decreased consumption, and that’s true for Uber rides. Uber had been relying on food delivery to support revenue and margins, but margins are now increasing in its mobility segment. And Uber is once again attracting drivers, as ride-sharing becomes more economically appealing.

It’s impressive that Uber survived what was an extended bout of mismanagement and the pandemic, and is coming out stronger. Ride-sharing can work, and it took a bout of inflation to prove it.

Bloomberg, New York Times

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