Uber is losing billions: Here's why investors don't care

Chris Sacca: Uber is 'redeemable'
Chris Sacca: Uber is 'redeemable'

Uber's got 99 problems, but its steep losses aren't one -- at least in the eyes of investors.

The ride-hailing startup said Wednesday it lost $708 million in the first three months of the year. The financial data was paired with Uber announcing its search for a chief financial officer.

To many readers, the loss is nothing short of staggering. But for Uber's investors, it's actually something to be applauded.

Jason Calacanis, an early Uber investor, congratulated the company on Twitter for continuing to grow its sales while cutting its loss from $991 million in the previous quarter.

"The trend is good," says Bradley Tusk, a political consultant and investor in Uber. "Revenue up. Losses down, even though they keep investing heavily around the world."

Call it the current Silicon Valley mindset. Losing billions of dollars each year isn't necessarily a bad thing, if the company is thought to have lots of potential for sales growth and can show some modest progress in curbing its losses over time.

Twitter (TWTR, Tech30) had a strong public market debut in 2013 despite never having turned a profit before. Snap (SNAP), the parent company of Snapchat, is still trading above its IPO price after losing $2.2 billion in its first quarter as a public company. And Tesla (TSLA) recently became the most valuable carmaker in America despite needing to raise more and more capital as it loses money.

The thinking for private and public market investors, according to analyst James Cakmak, is that "the reward is worth the risk."

"In the case of Snap and Twitter, advertising offers very high margin income, once the costs associated with building out the platform and amassing the audience are behind it," says Cakmak, who covers the companies for Monness, Crespi, Hardt & Co.

Of course, it's a risky bet. Twitter, facing sluggish user growth and disappointing ad sales, has tried to boost its bottom line through layoffs and killing products like Vine. Even so, the company lost $457 million in 2016.

Related: Uber's PR crises show no sign of letting up

Uber investors typically prefer to namedrop a different role model with a history of losing money: Amazon. (AMZN, Tech30)

"There are many companies, Amazon as an example, that invest heavily in the early years and hit profitability only after a company IPO," says Mike Walsh, an early Uber investor. "I have no idea if this is Uber's strategy, but it could be."

For its first two decades, Amazon was often unprofitable. Bezos, always focused on the long term, preferred to keep prices low for customers and reinvest any earnings into fulfillment centers, logistics and new product initiatives.

Those investments helped Amazon grow its dominance over the retail world as well as build up businesses in cloud computing, online entertainment and, increasingly, hardware with the Amazon Echo.

In 2015, Amazon's annual sales topped $100 billion for the first time, fueled by those successes. The company has now been profitable for eight consecutive quarters.

"People saw what Bezos did," Tusk says. "Uber's one of the few other companies capable of doing the same thing."

By spending aggressively now, Uber can beat competitors on pricing and invest heavily in the future of self-driving cars. If it dominates key cities and countries, it may eventually be able to spend less competing and charge customers more.

But it's a risky bet -- and so far it's shaping up to be costlier than Amazon.

In the quarter before Amazon filed to go public, it reported losing just $2.3 million. In 2014, Amazon's last unprofitable year, it lost $241 million. Uber, by comparison, lost $2.8 billion in 2016.

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