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John Engle
John Engle
Articles (610) 

Uber's Plan for a Profitable 2021 Requires Questionable Accounting

While the company's adjusted Ebitda may turn positive this year, GAAP losses are set to continue

February 11, 2021 | About:

Uber Technologies Inc. (NYSE:UBER) reported earnings for the fourth quarter on Feb. 10. Despite posting another big loss, as the market expected, the ridesharing leader promised investors that profitability is at last on the horizon. Indeed, Uber claims to still be on track to achieve profitability in 2021 on an adjusted basis.

Adjusting to losses

When public companies report earnings, they are required to use an accounting standard known as generally accepted accounting principles, or GAAP. GAAP accounting allows analysts and investors to evaluate corporate performance across a range of businesses and industries with a common set of assumptions and definitions. On a GAAP basis, Uber lost $968 million in the fourth quarter, which is largely in keeping with its performance in recent quarters.

Uber, however, does not confine itself to merely reporting GAAP earnings. Like many other companies, Uber also likes to include a number of non-GAAP metrics, such as adjusted earnings before interest, taxes, depreciation and amortization. Such adjustments can, according to writer and analyst Will Kenton, make it more accurate measure of financial performance than ordinary Ebitda:

"The adjusted Ebitda measurement removes non-recurring, irregular and one-time items that may distort Ebitda...Standardizing Ebitda by removing anomalies means the resulting adjusted or normalized Ebitda is more accurately and easily comparable to the Ebitda of other companies, and to the Ebitda of a company's industry as a whole."

With an adjusted Ebitda loss of $454 million in the fourth quarter, less than half the loss it booked on a GAAP basis, it is easy to see why Uber has been a fan of the metric since before it went public.

Promised profits encourage analysts

Even on an adjusted basis, Uber has continued to post steep losses, but that may soon change. Company management has repeatedly promised that positive earnings are near at hand. This prospect has been met with an enthusiastic response from Wall Street, garnering a number of analyst upgrades ahead of its latest earnings print.

Despite the challenges presented by the economic and social disruptions of 2020, Uber is still on track to achieve positive adjusted Ebitda in 2021, according to Chief Financial Officer Nelson Chai. In the company's Feb. 10 earnings press release, Chai reiterated the goal of turning the corner on profitability this year, if only on an adjusted basis:

"In Q4 we continued to deliver improving Adjusted Ebitda performance, up $171 million quarter-over-quarter, and remain well on track to achieving our profitability goals in 2021."

Uber's continued confidence appears to have kept most analysts onboard in spite of a somewhat lacklustre overall result in the fourth quarter. Morgan Stanley (NYSE:MS) analyst Brian Nowak, for example, declared in his post-earnings update that Uber's "mixed" financial results failed to undermine his confidence in the company's ability to scale its operations profitably.

When a profit is not a profit

While creative Ebitda adjustments are far from uncommon in corporate finance these days, Uber's approach has raised several eyebrows. The ridesharing company has actually become somewhat notorious among finance sleuths for its aggressive accounting practices. Indeed, as Jordan S. Terry of Stone Street Advisors observed on Feb.11, Uber has a track record of rather "breathtaking levels of audacity" on that front.

Of key importance is Uber's exclusion of stock-based compensation from its adjusted Ebitda calculation. While SBC is technically a non-recurring expense in a corporate accounting sense, it has been standard practice at Uber and shows no sign of stopping. On Feb. 11, stock market analyst Keubiko delivered a particularly withering assessment of Uber's ignoring key expenses:

"UBER is going for the gold in the Adjusted Ebitda Olympics. Highly profitable if you ignore the expenses."

Uber is effectively "adjusting" a significant portion of its expenses out of existence with, at best, a tenuous justification. As legendary short seller Jim Chanos (Trades, Portfolio) pointed out on Feb. 11, negating the adjustment turns Uber's promised profitability into still more losses:

"When UBER says it will be 'profitable' in 2021, that means they will lose $300-400 million in the 4Q."

My verdict

At its most basic, profitability is a fairly black and white affair. A company either makes a profit or it does not. While the prospect of Uber's near-term profitability may encourage some analysts and investors at first glance, a closer look at how the company intends to calculate that profitability probably ought to give them pause.

In my assessment, Uber's reliance on questionable adjusted Ebitda metrics to define its profit trajectory could prove problematic over time. While improving adjusted Ebitda can point the way to eventual profitability, the company will only truly be profitable when it can deliver positive earnings on a GAAP basis. There is little prospect of that happening anytime soon.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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