Why Uber Needs to Eat Postmates

Jon Markman

Stop me if you have heard this before. Chairman of unprofitable tech company says to expect profitability following merger with another unprofitable tech company

Dara Khosrowshahi, chief executive of Uber ((UBER) -Get Report), is making his way around financial news circuit this morning. He’s selling the $2.65 billion, all stock merger with Postmates, the fourth largest food delivery service in United States.

The combined company, according to Khosrowshahi, will be profitable next year.

For what it’s worth, Uber managers said its ride hailing and logistics businesses would be profitable in 2020. The pandemic threw cold water on that idea. Although Uber had $3.5 billion in sales, losses surged to $2.9 billion in the first quarter.

Postmates, founded in 2011, has yet turn a profit. The company reported $400 million in sales during 2018, the last year for which there is public data.

But the combined businesses, with its massive scale, could iron out all of the wrinkles toward profitability. Bigness, in tech, really does have its advantages. Engineering talent and backend software systems can be merged. Also, system development costs slow over time.

It’s part of the promise that made Uber a private investor favorite.

The company is building a reliable software-based dispatch system for the entire world, complete with mapping, logistics and a robust payment infrastructure. A platform of that magnitude could be a launchpad for many other ventures.

This is the pitch Uber product managers made during the Rise technology conference in March 2019. They talked about allowing third-party developers to build applications on top of Uber in much the same way software is written to run atop big cloud platforms like AWS, Azure and Google Cloud.

That transformation would make Uber a best-in-class platform for transportation logistics and payments. Presumably, the business would continue to collect a transaction fee.

In the interim, Khosrowshahi is looking for a way to pay the bills. Teaming up with Postmates didn’t really cost anything. The deal was all stock. And it does build scale, a big advantage in moving Uber toward a true logistics platform.

At 3.8x sales, Uber is a business longer-term investors should find a way to buy. The payoff could be huge.