A Bumpy Uber Ride

It was another rough day for global markets yesterday. Locally our market is still coming to grips with the potential of NHI. Discovery (JO:DSBPp) was down another 8.4%, Aspen (JO:APNJ) was down 10%, and other medical related companies were mostly down around 2%. The list of local companies sitting at 12-month lows seems to be growing by the day. Unfortunately, there are very few companies at the other end of the spectrum; it is only the gold miners and AB Inbev sitting at 12-month highs.

Here is one more thing to worry about, given the nightmare that could follow the implementation of the NHI (if it happens).

The Hospital Association of South Africa has noted that close to R180 billion is spent on private healthcare in South Africa each year, and a third of that is spent on private hospitals.

The three JSE-listed hospital groups ? Netcare, Mediclinic and Life Healthcare, which make up about two-thirds of the sector ? contribute about R55.5 billion to GDP a year.

The HASA warned that if the state did not purchase any private hospital services under the NHI, 99,600 jobs may be lost in the private sector, and R31 billion could be shed from the GDP. In a situation where the prices are capped at 23% lower than they are at present, 132,000 jobs may be lost, it said.

Looking to international markets, it was not much better. There is still a hangover from the last weeks US and China trade fallout. Trump is now threatening to call off the next round of talks between the two nations. If you think things are rough in South Africa at the moment, the Argentinian Peso lost 25% of its value yesterday. The current president, who is fighting to push through tough reforms, lost a vote during presidential voting primaries. The vote is just a barometer and holds no weight, but the presidential election is in October and markets are assuming that he won't regain enough ground to win.

Yesterday the JSE All-share closed down 0.29%, the S&P 500 closed down 1.22%, and the Nasdaq closed down 1.20%.

Michael's Musings

Last week Uber reported its second quarter numbers, which disappointed traders. The stock is down around 14% since reporting after the market closed on Thursday. The drop is mostly driven by slower revenue growth than expected and losses being bigger than expected. For the quarter the company posted a loss of $5.2 billion, of which $3.9 billion came from stock options. Wow, that is a big number! Stock options might not be a cash expense for the company, but it does mean that you, as a shareholder, have been diluted. On the revenue side, Uber showed growth of 14% to post $3.2 billion for the quarter.

When evaluating Uber, it is essential to remember that you are investing in it for the very long term. It is similar to Amazon (NASDAQ:AMZN) in the early days, where their focus was not on making profits but on growing their market. This is what the Uber CEO, Dara Khosrowshahi, had to say when asked about profitability of the company: "I think we are very very early in this incredible journey." He had to throw in an extra 'very' there to emphasis how far Uber is from making consistent profits.

The numbers that matter when looking at Uber are more around their growth, and how they are doing in terms of size and scale. Gross bookings for the quarter were up 37% to $15.8 billion, with the full-year forecast for $65 to $67 billion.That is incredible growth for a company that is only ten years old. Uber Eats grew revenue by 72% to $595 million, and should continue to show spectacular growth. In terms of usage statistics for the group, they now have 99 million Monthly Active Customers and completed 1.67 billion trips over the last three months. The income statement shows that they spent $3 billion on research and development in the quarter too; it is important to stay ahead of the competition.

Overall, the company looks to be growing well and investing in its future. As a shareholder expect the ride to be very bumpy as they continue to add scale. When it all settles in many years from now, it should be a highly cash flush business, running a product whose name is ubiquitous with all ride hailing.

One thing, from Paul

Markets are always evolving, because they reflect the economy, which morphs over time. The chart below shows how different sectors of the market have changed in relative importance over the last 200 years.

Let's review the findings. For starters, banks (finance) were the dominant listed entities in the 1800s, accounting for almost the entire market. After a long decline until the 1970s, the increasing sophistication of the finance and insurance sectors has resulted in them rising again.

The railroad companies (transport) boomed in the late 1800s, but have since declined into insignificance.

Consumer stocks (discretionary and staples) have been relevant and stayed that way throughout history. I guess that people need to eat, cloth themselves and kit out their houses, and that is not going to change? Industrial stocks have also held their own, but are not setting the world on fire.

Oil companies (energy) rose to promise with the invention of the internal combustion engine, but are now less significant than before. The same has happened with commodity stocks (materials).

The communications and information technology are the biggest success story of the last 50 years. They really exploded in the 1990s, and have continued to prosper, despite a near flameout in the dot.com era. Healthcare is on the rise, growing steadily in the last 30 years. These last two sectors are the most promising for investment in the next 20 years.

Signing off

Key economic data out today is US CPI. If the number remains low, it means that the Fed has room to cut rates further in the US. The JSE All-share is lower this morning and the Rand is rather volatile currently at $/R15.35.

Sent to you by Team Vestact.