In investing, in valuation, on Wall Street in general, assets can become liabilities (and vice versa) in a moment.
That’s especially true when one firm owns a stake in another, and where, by the laws of corporate structure, is entitled to share in the profits, the fortunes … or, in some cases, the misfortunes of their strategic or financial holdings.
Consider the case of Uber, which in 2016 sold its China operations to Didi. Back when the deal was announced, Uber got a 20 percent stake in Uber, Uber got $1 billion from Didi. As reported by The Wall Street Journal back then, the swap came after Uber had put billions of dollars into its Chinese operations and opted instead to become one of the largest shareholders in Didi.
The old saying might apply here that if you cannot beat ‘em, then join ‘em — or at least buy a piece of them.
Back then Uber Chief Executive Travis Kalanick said that buying a bit of Didi “frees up a substantial resources for bold initiatives focused on the future of cities — from self-driving technology to the future of food and logistics. Operating in China “is only possible with profitability. We were a young American business entering a country where most U.S. internet companies had failed to crack the code and with the product that needed rebuilding,” he said in that statement. More recently the stake has been reduced to 12 percent as Uber sold down some of its holdings.
Sharing In Didi’s Fortunes
We note that owning 12 percent of a company beset by regulatory woes and other pressures means you get 12 percent of those pressures. You share in the losses, as they accrue and as you maintain the stake. We noted in this space previously that Didi gets only a sliver of its sales (roughly 2 percent) from locations outside China. So that means there is very little diversification away from the headwinds of, say, being dropped from a WeChat or Alipay.
Uber, for its own part, is grappling with its own issues. In the latest earnings presentation in May, the company said that its carrying value in Didi was worth $5.9 billion; it remains to be seen if there will be any writedowns in the next few quarters given the tumult surrounding Didi, which has seen its stock decline since its initial public offering (IPO) and which has been disappearing from app stores in China.
As we noted in that earnings report, there are least some green shoots in the core mobility business, even as the company continues to pivot toward delivery. Delivery gross bookings were up about 166 percent in the most recent quarter, and total trips taken over the company’s platform were flat year over year. Uber continues to post net losses, at $108 million in the latest quarter, but the operating loss was $1.5 billion in that same quarter.
Bumpy roads lie ahead, at least for Uber’s exposure, by proxy, of sorts, to China.