Uber Q1 FY2022 Results

Last week, Uber announced the earnings results of Q1 FY2022 and the numbers show that its operation continues to recover well after Covid-19 disruptions. Here are the highlights:

  • Gross Bookings: Gross Bookings increased by 35% to $26.5 billion
  • Mobility & Delivery Gross Bookings: Mobility saw 58% in Gross Bookings while Delivery had a 12% YoY growth
  • Revenue: Revenue rose by 136% to $6.8 billion. Total revenue was boosted by the acquisition of Transplace. Nonetheless, Mobility and Delivery revenue grew by 195% and 44% respectively
  • Net loss: While net loss was an astounding $5.9 billion, $5.6 of which came from the loss in value of equity investments in other companies. Loss from operation stood at $482 million, down from $1.5 billion a year ago
  • Free Cash Flow: FCF for the quarter was -$47 million, up from -$682 million a year ago. Uber’s operation cash flow was $15 million, up from -$611 million in Q1 FY2021

For Q2 FY2022, forecast Gross Bookings is between $28.5 to $29.5 billion, resulting in growth of 30% to 35%, on top of the 114% growth booked in Q2 last year. The company also expects to generate positive free cash flow for the full year of 2022. Investors and analysts must love the forecast by Uber as the drop in its stock price last week was much less severe than Lyft’s. And they should like what they see from Uber, especially when we dig into the numbers a bit more.

As mentioned above, revenue growth outpaced gross bookings growth in both Mobility and Delivery. Mobility take-rate hit 23.5% in Q1, back to the pre-pandemic levels, and it’s still short of the long-term target of 25% set on Investor Day 2022. Delivery has seen a steadily increasing take-rate for the past 3 years, reaching 18% in Q1 FY2022, which is already higher than the target of 15%. Delivery is a highly competitive space with the presence of heavyweights such as DoorDash or Instacart. I wonder if this heightened take-rate will remain stable or if Uber will reduce its cut to attract and retain merchants.

Uber's take rates

The good news for Uber is that such an increase in revenue didn’t come at the expense of profitability. Mobility’s adjusted EBITDA margin came back to the 2019 levels while Delivery’s was positive for two consecutive quarters in a row. Last quarter saw Freight become adjusted EBITDA profitable for the first time in the company’s history. Since the management team forecast to have positive FCF for the whole year, this trend seems to become a norm moving forward, rather than a fluke. Furthermore, the Fed plans to have more rate hikes in the coming months to curb inflation. At a time like this, companies will do well to demonstrate to investors that they can generate profits. To that end, Uber is in the pole position to reach profitability in an industry whose unit economics have long been questioned.

Uber Delivery adjusted EBITDA
Uber Mobility Adjusted EBITDA Margin

There are a few levers that can help Uber grow both the top and bottom lines. First, airport rides. Rides to and from airports used to account for 15% of Mobility Gross Bookings. From the low during 2020, share of airport gross bookings have grown to 13% of Mobility. There is still room to get back and probably exceed the pre-pandemic levels. Additionally, the same goes for Mobility as a segment. Its Gross Bookings is still down by compared to the 2019 levels. Total GBs for Mobility in 2021 trailed that in 2019 by $14 billion. Once that gap is closed, the higher take rate from this segment can only help with the bottom line. Additionally, the next lever is ads. The ads business is growing healthily as annualized run rate rose to $225 million in Q1 FY2022, more than double what was reported a year ago. Almost one out of four Delivery merchants is an active advertiser on the platform. As Sponsored Video Ads is available on a pilot basis, we should see more merchants advertise and more ads revenue. Last but not least, new verticals. These verticals have been doing about $4 billion in annualized run rate every quarter in the last few months. That’s less than 10% for all Delivery GBs in 2021. Given the latest developments such as the deepened partnership with Albertson, the expansion of Eats in Germany, the new deal with BP, the collaboration with Rakuten and Amazon Prime in Japan, and the introduction of group ordering, I expect new verticals to grow substantially soon.

In summary, I find the earnings report positive. Uber stock has been battered for months as its price dropped by 44% in the last year. Folks are concerned about the business model and they have reasons to be. Uber functions as a middleman working with a lot of important stakeholders: consumers, drivers, merchants and lawmakers. Maintaining those relationships on a global scale in different cultures and political agendas is extremely difficult. For good measure, competition is fierce with deep pockets as well. To invest in the company means that one believes in flawless strategy AND execution. One down quarter wouldn’t do as much damage to Apple as it would to Uber because the former has a dominant market share and is in a much better position than the latter. With that being said, Uber management navigated a pandemic by pivoting to Delivery, which changed the business forever. Could another management team have done better? Possibly, but we never know. The fact that Uber now has a friendlier image than it did, that its Delivery business is an equal of Mobility and that it has other levers to pull is a testament to the work of the management. Just look at Lyft. Even though its revenue is smaller than Uber Americas, its revenue growth rate hasn’t recovered as quickly. That’s due to Delivery, because as mentioned above, Uber Mobility’s business is still down compared to the 2019 levels. That goes to show how important it was for Uber to react and execute effectively during the pandemic. While it’s highly challenging to stay competitive and create profit in this industry for factors mentioned above, it’s precisely such factors that can make Uber’s moat robust if they can get execution right. A big if, indeed. I get where the skeptics come from, but personally, I am still on the believer side, for now.

Uber US & Canada revenue growth vs Lyft revenue growth

Disclaimer: I own Uber stocks in my portfolio.

Apple Q2 FY2022 Results

On Thursday, Apple announced the results of their Q2 FY 2022. Overall, the company recorded almost $97.3 billion in revenue the last 90 days, a record for Q2 in Apple’s history. That means they generated more than $1 billion a day. The 9% YoY growth is already on top of the 54% growth last year. To put it a bit more in perspective, only 26 companies in the S&P 500 had more revenue in the whole year of 2021 than what Apple made in this quarter. It’s also worth noting that these numbers were affected by the supply chain constraints. Just really spectacular! While YoY growth rates have been declining, it’s not a surprise given the rule of big numbers. Plus, this year will see some hardware upgrades that can catapult Apple’s revenue to new heights.

Product, Service and Overall Margin
Figure 2 – Product, Service and Overall Margin
Apple 4-quarter rolling average revenue
Figure 1 – Apple’s YoY Revenue Growth & Rolling Average Revenue

While Services still only makes up 20% of the company’s revenue, its gross margin is a spectacular 73% due to higher sales from advertising, the App Store and cloud services. I suspect this trend will continue in the future. It costs Apple little to offer cloud storage and how many Apple device owners who love taking photos and videos yet are limited by the free storage don’t have an iCloud subscription? Apple Care is a warranty program that gives a bit more assurances to device owners. Given that Apple products last a very long time and most customers are careful with their devices, Apple Care is a very profitable service for the company. The iconic tech giant recently launched Apple Business Essentials, which is similar to Apple Care, but for small businesses. The new service has a lot of potential and will be a great contributor to the company’s margin. Last but not least, advertising. It’s not a coincidence that every popular platform wants to have an ads solution. The demand is always there and the margin is high. Apple is still in the early stage of monetizing traffic to the App Store; therefore, will undoubtedly fine-tune its ads operations so that it will keep raking in profitable dollars.

Apple Paid Subscriptions
Figure 3 – Apple Paid Subscriptions

In the last quarter, supply chain constraints still badly affected iPad, making it the only major business segment of Apple without a YoY growth. Wearables and Services haven’t had a down quarter in the last three years. In fact, growth has been in double digits. Mac showed an impressive 15% growth on top of a 70% increase last year. According to Apple’s CFO, “we had a March quarter record for upgraders, while at the same time, nearly half of the customers purchasing a Mac were new to the product”. iPhone, led by the iPhone 13 line-up, grew by 5% after recording 66% increase last year. The company estimated that the lockdown in Shanghai will impact revenue by $4-8 billion in Q3. Hence, the winning streaks of some segments may likely come to a halt in 90 days, but since demand is very strong for Apple products, the company has reasons to be confident in the long-term health.

Apple's Business Segments' YoY Revenue Growth
Figure 4 – Apple’s Business Segments’ YoY Revenue Growth

Regarding geographic segments, Americas is a bright spot with YoY growth of 19%, better than management’s expectations. Europe was adversely impacted by the pause in Russia for a month. China is still Apple’s 3rd biggest segment, but the company warned that Covid-related restrictions would affect demand, at least for Q3 FY2022. Japan and Rest of Asia Pacific felt the impact of unfavorable foreign exchange rates.

Apple Geographic Segments' 4-Quarter Rolling Average Revenue
Figure 5 – Apple Geographic Segments’ 4-Quarter Rolling Average Revenue

Overall, it is another great quarter from Apple despite all the macro challenges. It is proof that the underlying strengths of the business are still intact and goes to show the calm and competent leadership of the management. Zoom out and you will see that there is no other company that can rival Apple in terms of product and service portfolio, the global scale and the customer loyalty. There are challenges and uncertainty ahead, including the war between Russia and Ukraine, Covid-related restrictions in China, the supply constraints, especially silicon shortages, and unfavorable exchange rates. Nonetheless, I am confident Apple will navigate through such challenges deftly and come out stronger.

Disclaimer: I own Apple stocks in my portfolio

Thoughts on Buy With Prime

A few days ago, Amazon made a big announcement on Buy With Prime (BWP). Prime benefits loved by thousands of shoppers, including free & fast delivery, easy return and quick checkout, have been restricted to Amazon.com. That’s how Amazon persuades millions of shoppers to pay $10/month for the privileges. Now, imagine you can enjoy all of those benefits on other websites, not just Amazon. That’s what the new service is all about.

For Prime shoppers, there is virtually nothing that needs to be done beforehand. Once you come across eligible products from merchants that participate in BWP, you just need to repeat the usual checkout process on Amazon.com. There is no additional sign-up. At first glance, everything about BWP looks good, except that here are two things that concern me. The first is return. The language from Amazon reads that only some BWP orders, not all, are eligible for return. To me, the name Buy With Prime insinuates that all products enlisted in the program can be returned hassle-free. As a result, what does it mean that only some are qualified? What about the rest? How do I know which products are returnable and which aren’t? The other thing that gives me pause is that if there is an issue with my BWP orders, I have to contact the sellers. My experience with Amazon Prime so far has been great. I don’t have much to complain about. On one or two occasions when I needed to inquire about my orders, the Customer Service from Amazon was helpful and great. However, I wonder if the same level of excellence can be expected from BWP merchants. In case there are unresolved issues, will Amazon help me? What kind of purchase protection can I expect?

Buy With Prime. Source: Amazon

For Amazon, this is a hit-multiple-birds-with-one-stone move. First, expanding Prime to other online stores brings more selection to shoppers, enhancing the value of Prime. The more valuable shoppers find Prime, the stickier the membership will be and the more grip Amazon has on these coveted shoppers. Such influence will translate into bargaining power in negotiations with merchants and suppliers. Second, this service will help Amazon get the most out of their fulfillment capability. Any merchant wishing to participate in BWP does not need to sell on Amazon.com but must have their orders fulfilled by Amazon. The giant retailer has spent a fortune on building out their fulfillment capacity. In the 2021 shareholder letter, the CEO Andy Jassy wrote:

We spent Amazon’s first 25 years building a very large fulfillment network, and then had to double it in the last 24 months to meet customer demand. We’d been innovating in our fulfillment network for 20 years, constantly trying to shorten the time to get items to customers. In the early 2000s, it took us an average of 18 hours to get an item through our fulfillment centers and on the right truck for shipment. Now, it takes us two. 

Given the level of investments, it’s understandable that Amazon wants to maximize the utility of these fulfillment centers. The more orders the centers process, the higher their utilization and the higher the ROI. If you were Amazon, would you want the same thing? Third, off-Amazon purchase data! Amazon knows the behavior of Prime customers, based on their purchase history on Amazon.com. Nonetheless, they don’t know what these customers buy outside of its online store. The company tried to remedy this issue through initiatives such as Amazon Shopper Panel. With BWP, they can capture purchase data on other online stores and use it for their benefits such as private label launches, targeted ads or fine-tuning product recommendation.

For merchants, there are pros and cons from using BWP. Obviously, the Amazon Pay checkout option can help reduce cart abandonment. That’s the sales pitch that we often see the likes of PayPal or Apple Pay sing. Having Amazon take care of fulfillment is attractive to merchants that do not have the means to set up their own logistics. It’s also great for merchants to own the relationship with shoppers, instead of relinquishing it to Amazon entirely like before. While such benefits carry a great deal of appeal, merchants need to be aware of the risks related to BWP. Firstly, the fees paid to Amazon will cut deep into the margin of these merchants. Secondly, they may open the gate to the henhouse for the fox by letting Amazon know what Prime shoppers order on their website. It’s widely reported that some sellers thrived at first on Amazon.com, only to falter and disappear later when Amazon introduced similar products. Who is to say that it’s not a possibility in this case? In addition, BWP merchants have to be responsible for marketing. The greatest perk of being on Amazon.com is that sellers are almost guaranteed traffic. BWP just takes care of checkout and fulfillment. It doesn’t bring valuable traffic. With the reduced margin, due to Fulfillment by Amazon fees, can merchants afford the marketing expenses too?

The introduction of BWP can be a threat for the likes of PayPal, Shop Pay or Apple Pay. Apple Pay and Shop Pay don’t have a fulfillment solution attached to the checkout button. PayPal does with Happy Returns, even though its scale can’t be compared to Amazon’s. Merchants, especially small ones, will consider BWP because they don’t want to be distracted by all the shipping headaches. The adoption of BWP will certainly decrease the amount of transaction volume processed by PayPal, whose revenue is transaction-based. As a consequence, BWP is not welcoming news for PayPal. To remain competitive, PayPal needs to continue offering more values to merchants and simplify the checkout process as much as possible. In this game, having one more click than your rivals is like being slower by one second in F1. Moreover, they should be wise to point out the threats that Amazon can pose with BWP and hope that they can scare merchants into avoiding BWP. After all, few things are as persuasive as fear.

QR Codes’ popularity in Vietnam

The perks of living in the States as a Vietnam is that I get to see the differences between the two countries in several aspects. One of them is payments. If contactless and tap-to-pay is more common and popular in the US, QR Codes are much more ubiquitous in Vietnam, at least in the big cities. What you see below is in Ho Chi Minh City, the biggest economic hub in Vietnam. When you venture out to smaller and poorer provinces, things may change significantly.

This is how we paid at a convenience store. The cashier scanned the QR code on a phone to process payments.

In the below clip, we were at a local bakery named Tous Les Jours. You can see different QR Codes for different mobile wallets. Consumers can just scan one and make payments. The nature of the transaction requires immediate confirmation since nobody is going to wait 5′ for a payment to go through.

Even mom-and-pop stores like a sugar cane shop and a photocopy shop below allow payments via QR Codes

A sugar cane shop in Ho Chi Minh City (Saigon) accepts payments via QR Codes
A local photocopy shop in Ho Chi Minh City (Saigon) accepts payments via QR Codes

Mobile wallets like Momo strive to acquire and retain users. When we paid for our drinks at the sugar cane shop, we got 50% discount out of nowhere even though the transaction amount was only $1.2.

Momo gives users 50% discount on transactions out of nowhere

Apple’s next growth opportunity. Disney+ added more subscribers while raising prices. ESPN+ achieved its FY2024 target

Corporate & Commercial – Apple’s next growth opportunity

Apple has always been a household consumer brand. There are still areas that the company can explore in the consumer space to fuel growth such as the global availability of their services, next generation chips, the AR glass or the long waited yet mysterious Apple Car. I remain excited about Apple’s growth prospect as a consumer staple, but Apple may be more than that in the future. There are signs lately that Apple may make a push into the corporate segment. First, it launched Apple Business Essentials, a device management service for small businesses with fewer than 500 employees. The program is still in early days, but the company already said that thousands of small businesses already participated in the program. That’s Apple’s style: choose to come to the market when a service or product is ready and deploy consistent incrementalism over time. Remember how some ridiculed their introduction of Wearables, which is now their 3rd largest business? And if they manage to build that muscle and processes to deal with small businesses, there is no reason not to think that they can expand their market and go further upstream.

Then on the earnings call, Luca Maestri (Apple’s CFO) revealed this anecdote:

Shopify, for example, is upgrading its entire global workforce to M1-powered MacBook Pro and MacBook Air. By standardizing on M1 Max, Shopify continues its commitment to providing the best tools to help its employees work productively and securely from anywhere. And Deloitte Consulting is expanding the deployment of the Mac Employee Choice program, including offering the new M1 MacBook Pro to empower their professionals to choose devices that work best for them in delivering consulting services.

Source: fool.com

I feel that M1 is the last puzzle piece that Apple needed to start making moves in the corporate market. The chip makes Apple devices more powerful and efficient, exactly what the white-collar folks like myself want and opposite of what we are used to (like all those bulky and burning Dell computers). As employees like Apple’s products, companies are more incentivized to offer such products as perks to retain talent; which plays into Apple’s hands. In the past, whether Apple’s products were the clear winners might be up for debate, but the introduction of their in-house chip put the question to rest.

This week, Apple revealed that future iOS updates would let merchants accept transactions with just a tap on their iPhones. The value chain analysis or how exactly this would benefit Apple are still question marks. I suspect Apple will take a small cut on every transaction like they do with Apple Pay transactions. Also, if merchants rely on an iPhone as a card reader, Apple Business Essentials will suddenly become an appeal so that they can manage their devices properly. These are just two early signs of what Apple can put together for businesses. I am eager to learn what they have in store because I am almost confident that they have a roadmap in mind already.

Disney+ and ESPN+ added more subscribers while raising prices. ESPN+ achieved its FY2024 target

The first quarter of FY2022 was a good one for Disney as the company continued to add more subscribers to its flagship streamer Disney+ outside of India and ESPN+ while increasing Average Revenue Per User (ARPU). The testament to the strength of a product or service lies in the ability to retain customers while raising prices. In that sense, Disney+ has so far defied critics and proven its mettle, showing that its streaming services are capable of challenging anyone else in this highly competitive market. The iconic company set the long term target of 230-260 million Disney+ subscribers by the end of FY2024. There are 8 more quarters to go. To attain that target, Disney needs to deliver a quarterly net add of at least 13 million subscribers. The company is on the right track to do so. In fact, the management said that even without the rights to Indian Premier League, the nation’s cricket competition that is arguably the biggest acquisition tool in the Indian market, it is still confident of meeting the FY2024 guide.

If you look at India, we’re certainly going to try to extend our rights on the IPL. But we’revery confident that even if we were not to go ahead and win that auction that we would still be able to achieve our 230 million to260 million. So it’s an important component for us around the world. Obviously, really important in India, but not critical to us achieving the 230 million to 260 million number that we’ve guided to.

Source: Walt Disney Q1 FY2022 Earnings Call

While Disney+ added more subscribers in the US and Canada than Netflix in the last few quarters, I don’t think that any comparison can be fair. The two streamers are operating at a different scale and life stages. Netflix is much more established and has a much bigger subscriber base. Hence, even though it added fewer customers, we shouldn’t draw any conclusion yet on either.

ESPN+ already achieved the FY2024 guide of 20-30 million subscribers. Its tally at the end of Q1 FY2022 is already 21.4 million. I am sure with an imminent international expansion and addition of rights to more sports, ESPN+ will attain the higher end of the guide range, if not exceed it.

Disney+ North America net add subscribers and ARPU
Disney+ excluding Hotstar net add subscribers and ARPU
ESPN+ net add subscribers and ARPU

Amazon’s financials through charts

Amazon is the last of the big techs to report earnings. You can find its press release here. I’ll show my notes through the charts below. In short, AWS, advertising and Prime’s price hike are the only bright spots while the rest could be best characterized as concerning, if not downright disappointing. Of course, Amazon is famously playing the long game, but as FCF is significantly down while ex-AWS revenue is tremendously down, management needs to send some positive signals soon.

Revenue’s growth decelerated significantly after being boosted by Covid

Amazon's revenue and growth

International sales dipped for the first time while AWS continues its hot streak, recording more than $62 billion in revenue in 2021

North America, International and AWS revenue

Both North America and International were in the red in Q4 FY2021. AWS is the sole reason why Amazon has a positive operating margin

Amazon's operating income

North America and International have seen decreasing growth for the last three quarters. International even contracted in Q4 FY2021. AWS is impressive

North America, International and AWS's YoY revenue growth

Online Stores contracted modestly in Q4 FY2021

Amazon's business segments YoY growth

Negative TTM Free Cash Flow

Amazon Trailing Twelve Month FCF

Amazon spent $72 billion in shipping costs in 2021. It crossed $20 billion a quarter mark in Q4 2021

Amazon's shipping costs

Amazon spent more than $13 billion in Video and Music expenses

Amazon's video & music expense

Apple’s financials through charts

Apple revealed a stunning quarter last Thursday, surprising analysts and, in my opinion, even themselves. You can listen to the earnings call and read the 10Q here. I am putting the numbers in perspective through the charts below. If you find my work useful and informative, I’ll appreciate a thumb up or a follow. Have a nice weekend!

Apple had about $124 billion in Q1 FY2022. If we look at the last four quarters, it generated $94 billion a quarter, higher than most Fortune 500 companies did in 2021

Services has got a lot of attention due to its explosive growth, but Product and iPhone in particular are still the main revenue drivers

Both Product and Services’ gross margins have been increasing in the last 2 years. Services’ margin is an astonishing 72%

Wearables is now Apple’s 3rd biggest business

Wearables and Services have grown every quarter YoY since 2018

Apple is back in China

Japan, Apple’s smallest geographic segment, has an astounding operating margin of 47%

Apple’s users are increasingly engaged within the ecosystem

Direct channels have made up 1/3 of Apple’s business in the last three years

Disclaimer: I own Apple stocks in my portfolio

Microsoft through charts

On Tuesday, Microsoft was the first big tech giant to report financial performance and they didn’t disappoint. They surpassed the market estimates on both top and bottom lines, as well as provided strong guidance. You can read an overview of the earnings call here. In this post, I’ll look at Microsoft the business through some charts that I hope will be helpful and informative to you.

Microsoft’s annualized revenue is now $185 billion at 20% growth!

Microsoft revenue

It’s highly profitable at 43% operating margin. Its annualized operating income stands at $80 billion

Microsoft's operating income and margin

All three primary business segments have 2-digit YoY revenue growth

Microsoft's main businesses growth

Azure and Cloud attract a lot of attention, but it’s Office and other productivity products that top operating margin

Microsoft's main businesses margin

Cloud is on fire. LinkedIn & Search surpassed the $10 billion mark in annualized revenue. Gaming, the 4th largest business, now has a $20 billion run rate

Microsoft's business lines revenue

Microsoft 365 has 57 million active users though growth is slowing due to the law of big numbers

Microsoft 365 subscriber

Azure’s growth is declining due to its size

Azure YoY revenue growth

LinkedIn quietly increases its active user base every quarter. Enterprise Mobility, Microsoft’s security package, also sees consistent growth

LinkedIn active users and Enterprise Mobility seats

Microsoft Teams sees an increasing adoption among corporations

Microsoft Teams sees an increasing adoption among corporations

Disclaimer: I own Microsoft stocks in my personal portfolio

Uber lags behind DoorDash in the U.S. Uber advertisers made up 18% of its merchants

Uber Eats in the U.S accounts for 23% of its total Gross Bookings. Still far behind DoorDash

To prove that it’s a valuable partner for merchants, Uber commissioned what they call Uber Merchant Impact Report. This report is based on internal data between October 2020 and September 2021, as well as an online survey of 727 U.S merchants whose response is anonymous. According to Uber, there are 400,000 active Eats merchants in the U.S alone. Hence, the number of surveyed responders (727) doesn’t seem very representative to me. Nonetheless, the report does have some useful nuggets.

In the last twelve months, Uber Eats facilitated $11 billion in “sales” for merchants in the U.S. The word “sales” here is tricky as I don’t know for sure whether it is Gross Bookings or what merchants actually receive after Uber gets its cut. The difference can be in the region of 25%. In this case, if we assume that the figure is Gross Bookings, it means that Uber Eats in the U.S was responsible for 23% of the company’s total Delivery Gross Bookings (approximately $48 billion) in the last year. Quite a significant piece of the business. However, it still lags quite far behind almost $40 billion in Gross Bookings that DoorDash recorded in the U.S in the same time frame.

Additionally, Delivery has 400,000 active merchants and 2 million active drivers in the U.S at the end of September 2021. In the past year, these merchants and drivers helped facilitate more than 500 million Eats orders. In contrast, DoorDash, if we assume all their Operating metrics are U.S alone, has 500,00 active merchants, 3 million active riders and almost 1.3 billion orders.

Uber Eats/DeliveryDoorDash
Gross Bookings between Oct 2020 and Sep 2021 (in $ billion)11 – 13.7540
Orders between Oct 2020 and Sep 2021 (in millions)5001,300
Active merchants as of end of Sep 2021 (in thousands)400500
Active drivers as of end of Sep 2021 (in thousands)2,0003,000
Comparison of operating metrics for the U.S market

Uber advertising is growing

Uber advertising was first launched in the U.S in Q3 2020, has since expanded to all Eats markets, exceptGermany, and has been seemingly well-received by merchants. The number of active advertising merchants grew from 30,000 in Q3 2020 to 140,000 a year later. As share of total active merchants, advertisers made up 5% and 18% in Q3 2020 and Q3 2021 respectively.

While the growth figures look good, I have a couple of concerns over this advertising business. The first is its outlook. We obviously can’t expect 100% of merchants to become advertisers. If 18% is the adoption rate right now, how much higher can it go? 25% or 50%? In that case, what would be the ramifications of having too many advertisers and too many sponsored listings on an app? We all feel annoyed with Google searched result pages littered with ads. If Uber is not careful, it will risk losing valuable consumers because of inferior customer experience. That’d be too high a price to pay, I’d say.

The second concern I have is whether this segment can actually move the needle. Uber revealed that advertising reached an annualized run-rate of $100 million in Q3 2021. Whether this number was annualized on a weekly or daily basis is unclear; which makes it impossible to really gauge how much revenue Uber actually generated from advertising. Additionally, even the annualized run-rate of $100 million is a drop in a bucket as Uber’s last 12 months’ revenue was almost $15 billion. Is advertising dollars helpful? Yes. Will it be a needle mover soon? I doubt it.

Netflix raised prices – Bullish or bearish?

If you live in the U.S and are planning to subscribe to Netflix, get ready to pay more. The company announced a few days ago that all plans for audience in the U.S would see a price bump with immediate effect. The basic plan will increase from $8 to $9 per month. The standard and the 4K package will cost new subscribers $15.5 and $20 per month respectively. The Verge has a handy table showing all the hike prices that Netflix rolled out so far:

Netflix's price hikes in the past
Figure 1 – Netflix’s price hikes in the past. Source: The Verge

After the news broke, I saw a lot of people on Twitter bullish about Netflix’s outlook. The rationale is simple: if your customers are sticking with you AFTER you raise prices, it means you have a great business. The key underlying assumption is that Netflix viewers won’t churn or, in other words, leave. To back up this assumption, these bulls provided a chart from Antenna which allegedly shows Netflix has the lowest churn among premium streamers.

Netflix's alleged churn rate against competitors'
Figure 2: Netflix’s alleged churn rate against competitors’. Source: Antenna

The problem is that when your entire thesis is based on a chart, you have to make sure the data is trustworthy. Unfortunately, I find Antenna’s data confusing and ambiguous for three reasons. The first reason is that there is no methodology or explanation of how they acquired this data. Take the churn chart above as an example. What does weighted average churn rate mean? What is churn weighted against? What does passive churn mean? Did they survey users or did they base this chart on credit card usage data? If it’s survey-based, how big is the survey pool and is it representative of the U.S? Plenty of questions with zero answer.

Furthermore, Antenna’s charts seem to contradict one another. While they indicate that Netflix has the most loyalty among streamers, somehow Netflix’s market share in terms of subscribers has been declining for the past few quarters. How does that happen? If Netflix’s churn was lower than that of its competitors, the company’s market share should stay the same at the very least or go up. Some may argue that Antenna may favor other streamers in a sense that if one person subscribes to both Netflix and another service, the other service will claim this subscription. Well, this argument brings us back to my first issue mentioned above: no methodology! How do we know if this argument is true?

The last issue I have with Antenna is the inconsistency of the reported data. In Q2 2021, Antenna claimed that Netflix has a market share of 29% (Figure 4). However, in their latest report for Q3 2021, Netflix’s share declined to 30% from 32% in Q2 2021 (Figure 5) . The two reports seemingly have the same methodology and feature the same number of streamers as well as the composition. My question is: what changed? How did Netflix’s Q2 2021 share go to 29% in one report to 32% in another?

These issues really call into question the assumption that Netflix’s churn is lower than its competitors.

But for the sake of argument, let’s assume that Antenna data is correct. That also means Netflix’s market share has been declining gradually. The 4-quarter rolling average net adds for US and Canada has gone down significantly since Q4 2020. Yes, Covid-19 pulled forward subscribers, but that also signals as many in the U.S are vaccinated, the macro environment is no longer favorable to Netflix as it was at the onset of the pandemic. When the number of new adds decreased despite all new releases in 2021, why does management think it’s a good idea to raise prices? Do they have any tricks up their sleeve? Or is the new price hike aimed at increasing revenue with the hope that subscribers will stay regardless?

I don’t know at this point whether this is a good strategic move for Netflix. I guess we’ll have more information this Thursday when they hold their earnings call. What I do know is that I don’t share the bullishness that many fans of Netflix stocks quickly showed after the price hike was announced. We just don’t have enough reliable information.

Netflix's 4-quarter rolling average net subscriber adds for U.S and Canada
Figure 3: Netflix’s 4-quarter rolling average net subscriber adds for U.S and Canada
Figure 4: U.S Premium SVOD Share of Subscriptions. Source: Antenna
Figure 4: U.S Premium SVOD Share of Subscriptions. Source: Antenna