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Uber Hails a Ride out of China, But That Doesn’t Solve Everything

How does the old saying go? If you can’t beat ’em, join ’em? That’s what Uber has decided of its fledgling operation in China.

Uber Hails a Ride out of China, But That Doesn’t Solve Everything

Source: via Uber

Rather than continue to wage a market share war with much bigger ride-hailing rival Didi Chuxing, Uber CEO Travis Kalanick has opted to sell the company’s Chinese business to Didi, cutting bait rather than burning more cash to fight a battle it may never win.

Interestingly, and not likely coincidentally, the decision to bail out of the Chinese effort to date comes in front of a highly rumored Uber IPO, which may require a great deal of Kalanick’s focus that would have otherwise been devoted to the company’s growth in China.

Uber Sells Chinese Business to Didi

The deal between the rivals values Uber China at $7 billion, which when paired with Didi’s $28 million value will establish a new company worth $35 billion.

Uber will become a 20% stakeholder in the yet-to-be-formed ride-finding organization. Still, it’s not a bad deal. Uber reportedly only invested $2 billion developing its slice of China’s market. The news follows China’s decision to officially legalize ridesharing for a profit in that country.

While the new allowance favors both companies — and others — the state government unofficially favors homegrown businesses while making it difficult for foreign companies to set up shop and thrive there.

Case in point? Apple Inc. (NASDAQ:AAPL), for one. In June, the country banned the sale of the iPhone 6 until a patent matter has been cleared up. A Chinese phone maker claimed that version of the iPhone was too much like its product, as if other iPhones didn’t look about the same. Earlier in the year, Chinese regulators shut down Apple’s iBooks and digital movies business, with little explanation. Three years ago, China’s government reportedly paid its celebrities to slam Apple’s technology and policies.

Perhaps seeing how interested the nation’s government was (and is) in propping up Chinese businesses over foreign ones, in addition to only capturing about a third of that market to date, Kalanick opted to not fight a losing battle.

Still, such a deal was never the original plan. Earlier this year, Kalanick claimed Uber China would be profitable within two years.

Uber IPO

Although opinions are mixed on the matter, most observers think Uber’s abdication of China is a step in the right direction … particularly of the oft-rumored Uber IPO is finally come to fruition as is expected soon.

While the company has had little trouble securing private funding (almost $13 billion to date) from backers that aren’t necessarily interested in near-term results, public funders aren’t quite as patient. With its presence in China costing Uber about $1 billion per year and no solid belief that actual profits were on the horizon, a cash-burning Chinese operation would make for a disappointing initial public offering in the U.S.

Triton Research’s Rett Wallace explained:

“Resolution of the land war in Asia will be a big comfort to all investors, existing and prospective. Eliminating the losses is great for the profit and loss statement, but more importantly there is now certainty about the end of what was shaping up to be an endless and escalating capital need.”

Nevertheless, questions about the viability of Uber’s business model remain.

As of the latest tally based on information about non-publicly-traded stakes, Uber is valued at $68 billion. That’s 45 times 2015’s reported revenue of $1.5 billion. Though profits and losses are tougher to pin down for a privately held company, documentation found in the middle of last year indicated Uber had lost nearly a billion dollars during the first half of 2015, and the loss was getting bigger.

Uber supporters will be quick to point out you buy stocks not for where the company is but where the company is going. It would take a massive amount of sales growth for the company to even have a shot at actually justifying its current valuation to would-be buyers.

That may be why Kalanick is aiming to hold off on any Uber IPO as long as possible — to give the company a chance to create some sort of positive bottom line.

Bottom Line for Uber

In the grand scheme of things, getting out of China by selling to Didi was the right thing for Uber to do, whether an IPO is on the near-term horizon or not. The company was never going to thrive in China, and Kalanick has big things to take care of here at home. At the top of the list? Figuring out how to cost-effectively vet its drivers while at the same time protecting them from violent passengers.

Be that as it may, culling the Chinese operation still doesn’t inherently make Uber a compelling investment for private or public shareholders in the United States. The euphoric buzz can only do so much. At some point, results have to do the heavy lifting.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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