Gig companies are now obsessed with profits, not just revenue growth, analyst says.
For years, businesses in the informal economy grew at a breakneck pace, racking up losses in the hope that one day the profits would follow.
But now, those companies are emphasizing profitability over growth, says Michael Morton, a senior research analyst for Internet equities at MoffettNathanson.
“These companies are maturing. Not where they have no growth in their future, but maturing beyond growth at all costs and now showing shareholder return growth,” Morton recently told Yahoo Finance. (See video above)
In the last decade, companies in the sharing economy have experienced a boom. For example, Uber (Uber) recently announced $116 billion in gross reserves. That compares with the $19.23 billion the company disclosed. the year it went public.
“This was a pace where you’re growing as fast as you can and hiring people as fast as humanly possible, and at some point when the growth rate starts to slow, you see an increased focus on profitability,” Morton said. “The market has been rewarding companies like this for a long time, especially private markets, just to grow. Don’t worry about profits.”
Morton says there are multiple signs that companies in the informal economy are turning towards profitability. In particular, he pointed to DoorDash (Crash) CEO Tony Xu’s letter to employees in November, which worker layoffs announced and indicated that the company would deemphasize revenue:
“While our business continues to grow rapidly, given how quickly we hire, our operating expenses, if not reduced, would continue to outpace our revenue,” Xu wrote.
Morton also cited several tweets from the CTO, co-founder and CEO of Uber. For example, in a letter to employees last year, Uber CEO Dara Khosrowshahi wrote: “Now it’s all about free cash flow. We can and must get there fast,” according to reporting on CNBC.
Still, neither company has achieved profitability to date. For example: Uber reported a loss of about $270 based on EBITDA for the quarter ending September 30. DoorDash: A loss of $190 million, according to Bloomberg, for the same time period.
Worse yet, amid recent labor shortages, these companies have had a hard time finding workers. For example, during the pandemic, Uber and Lyft (LYFT) lost more than 60 percent of its drivers and today they remain below pre-pandemic levels, according to to Business Insider reports. Meanwhile, post-pandemic, Doordash has also reported difficulty finding “runners” to deliver food
“DoorDash has done a little better due to the fact that it’s less intimidating to pick up a bag of groceries than it is to let a stranger get into your car,” Morton said.
During an economic slowdown, Morton said gig economy companies could see an increase in workers looking to supplement their income.
On the other hand, Morton noted that if the economy slows, it could derail concert companies’ drive toward profits. That’s because consumers may be less likely to use services like Uber or DoorDash in tough times.
“It’s no secret that it’s more expensive to take an Uber across town from the East Village (in New York City) to the West Village compared to a $3L train,” Morton said. “Or what about picking up food instead of having it delivered? If you’re talking about McDonald’s, our report shows an 80% price increase between picking it up in real life or ordering it from Uber or DoorDash.”
Still, Morton notes that in the past, similar services have proven resilient in the face of economic downturns. For example, spending on taxis in 2008-2009 fell only slightly, according to a recent report by MoffettNathanson.
Simply put, gig-era companies could still succeed in their quest to be profitable, even in the face of an uncertain economic landscape.
Dylan Croll is a reporter and researcher for Yahoo Finance. Follow him on Twitter at @CrollonPatrol.
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