It May Be Necessary For Uber To Stow Its Freight Train

Uber Technologies UBER 1.39% increase; turn green pointing triangle has built up a business in a distinct transportation sector that investors never discuss but ought to at least be thinking about. Its market cap is already close to $7 billion.

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Similar to Uber Eats or Uber Rides, Uber Freight works by electronically matching shipments with available carriers. Shippers and carriers may follow shipments from collection to delivery, and carriers receive upfront pricing.

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CEO Dara Khosrowshahi sincerely hopes you share his passion for the value proposition of such a supplementary company. He was one of the first top tech executives to openly wax poetic about the "seismic change" in the marketplace and his company obligation to be growth-oriented last May, as investors began focusing on profit above growth.

In a message to his staff last year, he stated, "We have had to make absolutely sure our unit economics work before we grow huge," adding, "Freight needs to get even bigger so shareholders see its worth and appreciate it as much as I do."

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The economics of freight are only now beginning to function. Uber's freight business has experienced very modest organic growth for a firm that did over $115 billion in total bookings last year across all of its business categories.

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Prior to Uber's $2.25 billion purchase of managed transportation business Transplace in late 2021, freight, which was introduced in 2017, barely generated $400 million in gross bookings every quarter. On the basis of normalized earnings before interest, taxes, depreciation, and amortization, freight barely managed to break even last year despite Transplace, a company that has been around for more than 20 years.

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Growth will probably cost additional money. Although Uber currently refers to itself as "the greatest logistical cloud ever built," the traditional freight sector is still controlled by a few major firms, including the and over a century-old C.H. Robinson.

In general, this is a difficult season for freight. The manufacturing sector was slowing down, real spending on sturdy and nondurable products was trending downward, and forecasts for levels of service and truck utilization were weaker than those in the previous report from FTR Transportation Intelligence, according to Uber Freight's most recent industry report from last year. The "overwhelming cycle" in freight at the moment, according to Uber's chief finance officer Nelson Chai, means that its business "will certainly continue to lag vs. where we would have wanted."

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The shipping markets have "gone very substantially negative," according to Mr. Khosrowshahi, and this has had a negative impact on the Uber freight company in terms of overall growth and profitability as well.

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Freight is an appealing business to digitize conceptually since it is a highly fragmented industry where most communication still takes place through the phone or fax. Since trucks transport 70% of all goods sold, freight has a large market opportunity. Uber estimates that the global market for freight is $4 trillion, with the US industry alone being close to $1 trillion. Yet, Mr. Khosrowshahi himself stated in a previous article that "market size doesn't matter if it does not translate into profit."

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For a business that needs to demonstrate its scale to investors in order to grab their attention, but can't yet afford to give up expanding profits in its other operations to get there, this might create a Catch-22 situation.

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Uber's recent ability to show financial synergies between Eat and Rides has made it an appealing public company. "Freight profits from the Uber moniker; freight doesn't benefit Uber," Bobby Mollins of Gordon Haskett said.

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To make its platform more appealing compared to rivals in both ordering food and ride-sharing, take into account how Uber is using the same drivers and customers with Eats and Rides. According to the corporation, cross-platform options for drivers result in improved retention and better pay. Consumer spending on Uber has been reported by Uber to be 2.7 times higher among Uber One members than among nonmembers.

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The same kinds of synergies don't exist in freight because the drivers and consumers are different. Large freight clients becoming Uber users in other ways could be one potential benefit. For instance, Uber Freight claims to work with nine of the top ten manufacturers of consumer packaged products. Although Uber hasn't had much to disclose in this area thus far, these connections may be used to generate advertising money on the Uber Eats network and other delivery agreements.

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Until Uber decides to make a significant investment behind it, the big hazards and benefits of freight are likely both in limbo. But when that time comes, investors should be ready to either park the truck or back it up.