Also... "why did we allow so many unprofitable companies IPO? When did losing money become acceptable and the new normal for publicly traded companies?"
This shows a fundamental misunderstanding of how public markets work.
Could you go into detail about why there's a lack of understanding of the business model, or how public markets work?
Uber, for example, could probably lay off 80% of its engineering staff and turn profitable if it was truly necessary. This would be stupid, because then they can't build new products (and thus compete) but they are default-alive [1].
The original author says that these companies "dump" stocks at IPO, but fails to recognize that (1) institutional investors who purchase most of the supply of stock at IPO are highly sophisticated and (2) there is a lot of regulation around proper disclosure of financials of public offerings.
Hell, the one recent tech company which tried to "dump" stock at IPO got laughed out of the public markets (WeWork).
I agree with the above poster that this article is nonsense and shows a complete misunderstanding of how markets and valuations work. Of course you would expect companies that are not profitable because they are investing in growth to lay off employees in tough times!
Do you have a citation for that bold assertion or want to prove it?
[EDIT: The linked chart shows Uber losing 8.5 billion in FY 2019. This 80% figure implies approximately 10 billion in engineering salaries, or 10k engineers making 1 million a year.]
The original article cites revenue numbers without understanding the business fundamentals. In Uber's case, its 2019 losses are severely misleading. $3.6 billion of those losses were losses associated with performance-based equity compensation around its IPO [1, p. 55]. According to GAAP, they losses for 2019, but in reality they should be amortized across the previous few years.
The costs associated with engineers (I assume "research and development") are listed as $4.8 billion. This means by just cutting engineering Uber still is in the hole by around $3.7 billion per year. But if you throw away all the engineers, your growth prospects are screwed anyway, so you might as well throw away most of marketing as well ($4.6 billion), at which point you're in the green by $0.5 billion [1, p. 64]. You could also save much of the $0.5 billion you're spending on administrative overhead, so maybe Uber is profitable by $1 billion or so.
[1] https://s23.q4cdn.com/407969754/files/doc_financials/2019/ar...
I think we're going to find out if that's true or not.
Uber has burned through many billions of investor cash. To show a reasonable return on that cash it would need to generate not just profit, but a lot of it.
Whether it can do that in markets like taxi's and food delivery is a quite debatable point as competitors will continue to spring up quickly especially when Uber tries to put the prices up enough to generate the kind of profts needed at their scale.
But that would not be sustainable as you point you, as they could not compete, the Author talked about profitable SUSTAINABLE businesses, not just profitable
A lot of people say these things, but:
We don’t know if that’s true. If they turn off the hype and marketing juice and stop spending more money acquiring customers than the revenue they accrue, do we know that they’ll become profitable?
We really need something more specific than, “just lay off all the expensive tech workers and bam, instant profitability.”
What we need is a specific plan, that we then go over with a fine-tooth comb looking for unintended consequences that could bite our “rightsizing” plan in the ass.
Many a company has set out to cut costs and drive towrds profitability, but very few make it. Honestly, very few make it. Most of the time, when a CEO sets out to make a systemically unprofitable company profitable, they end up in Chapter 11.
It’s really, REALLY hard to pull off, and it’s not for lack of trying or inexperience on the part of management. It turns out that for most companies, the right way to become profitable is to grow your revenues, not cut your costs by 80+.
JM2C.
I understand that they're investing in growth, but the key points still stands - money is flowing down the drain with the promise that it'll all be worth it "some day."
Which is why I initially estimated keeping 20% of engineers. Then Uber would be slightly profitable in the short term, pre-coronavirus.
In my case, I have often seen the case that companies have certain stable modes, and many unstable modes. It could easily be that after slashing 80% of their engineering workforce, and cutting their marketing, they subside into becoming a slightly higher-tech taxi company.
But what about the remaining 20% of engineering? Do they want to work for a company that has let go 80% of its engineers, and has given up on self-driving cars and drones and whatever else they were dreaming of?
Or will the rest of the talent head for the exits, their options hopelessly underwater forever, because investors have no interest in the faded hulk of a company that was once a Unicorn?
It could be that if they try to shrink to 20% of their engineering talent, they keep on shrinking involuntarily, shedding their best talent in all areas, not just engineering.
I don't know for a fact what will happen, but for the moment, if I had to bet, my bet is that if they try to cut 80% of their engineering and most of their marketing, they will keep on shrinking until they become a penny stock.
It would probably be easier for them to have Private Equity come in and take the company private first. If they have to cut that much flesh off the bones in public, it's going to be brutal.
I disagree. Most importantly, what we are seeing with so many companies being unprofitable is historically unusual. Now, I guess in 2020 everything feels "historically unusual", but it's kind of BS to denigrate someone by saying "they fundamentally misunderstand how public markets work" when the public markets didn't work this way until quite recently.
See https://markets.businessinsider.com/news/stocks/ipos-for-unp...
The question is why, not how.
In hindsight, we can question the decision-making.