Uber is showing impressive maturity, but it may be growing up too fast

By Therese Poletti

Ride-hailing company teases capital-return program, but there may be better internal uses for that cash

Uber Technologies Inc. took another step Tuesday in its evolution from a scrappy startup into a mature, profit-generating company, but it may be growing up too quickly.

After posting positive GAAP earnings on a trailing-12-month basis and in its latest quarter, Uber (UBER) is now eligible for inclusion in the S&P 500 SPX, and the ride-hailing giant plans to take the next step toward being a grown-up company next quarter, when outgoing Chief Financial Officer Nelson Chai says his successor will address capital returns.

Investors, especially institutional ones, typically prefer companies that pay dividends or buy back shares. But both options come with costs and risks. A commitment to paying a dividend is also a quarterly drain on a company's cash, and buyback programs take cash away from internal initiatives.

Companies that pay dividends or otherwise return capital to shareholders risk losing their image as growth-oriented innovators, as investors may come to question why there aren't better internal business purposes for a company's cash. Even Apple Inc. (AAPL) staved off paying dividends for much of its history, despite growing pressure from Wall Street and a swelling cash pile. It ultimately succumbed in 2012, after the death of co-founder Steve Jobs, with a dividend and buyback program.

Uber's cash pile is considerably smaller than Apple's, at $4.4 billion in the latest quarter, up from $4.2 billion a year ago. The company has yet to record more than two quarters of GAAP profitability in a row, and until recently it had been notching steep losses. At the same time, Uber has big initiatives up its sleeve, from a deeper push into food delivery to freight to a burgeoning advertising business, all areas that require investment.

Also read: How Uber pulled off its stunning turnaround from money pit to cash machine

"We believe right now buybacks or dividends would be the wrong move for Uber given its current capital situation," Wedbush analyst Dan Ives said in an email. "Down the road that can happen, but right now, building its cash position and plugging back into its business model is the right course of action we see for Uber."

Uber's next CFO, Analog Devices Inc. (ADI) veteran Prashanth Mahendra-Rajah, who takes over next week, has a history of overseeing buybacks and dividends. While Uber's commentary thus far suggests Mahendra-Rajah will take a similar approach at Uber, Chai left the topic a bit open-ended, saying that his successor "will be ready to at least give a perspective on that for investors."

Uber Chief Executive Dara Khosrowshahi has made massive progress on ridding the company of its frat-boy past and toxic culture, and he's steered it down an impressive path of financial stability. But the company should think twice before embarking on the huge commitment of a capital-return program, because it would be very difficult to backtrack.

-Therese Poletti

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11-11-23 0939ET

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