For years, companies in the construction industry have grown at breakneck pace, deepening losses in the hope that profits will one day come.
But now, those companies are emphasizing profitability over growth, said Michael Morton, senior research analyst for Internet stocks at MoffettNathanson.
“These companies are maturing. Not where they don’t have growth in their future, but maturing beyond growth at any cost and now showing increased profitability for shareholders,” Morton recently told Yahoo Finance. (See video above)
Over the past decade, companies in the gig economy have boomed. For example, Uber recently announced $116 billion in gross bookings. That compares with $19.23 billion the company disclosed in the year it went public.
“It’s been a pace where you’re growing as fast as you can and you’re hiring people as fast as you can, and at some point when the growth rate starts to slow, you see a lot of focus on profitability,” Morton said. “The market has really rewarded companies like this for a long time, especially the private markets, to just grow. Don’t worry about profit.”
Morton says there are many signs that companies in the gig economy are tipping toward profitability. In particular, he pointed to a letter from DoorDash ( Dash ) CEO Tony Sue to employees in November announcing the layoffs and stating that the company would reduce revenue;
“While our business continues to grow rapidly, given how quickly we’ve been hiring, our operating expenses, if not reduced, will continue to exceed our revenue,” Sue wrote.
Morton also cited several tweets from Uber’s CTO, co-founder and CEO. For example, in a letter to employees last year, Uber CEO Dara Khosrowshahi wrote: “Now it’s about free cash flow. We can and must get there quickly,” according to a CNBC report.
However, neither company has achieved profitability to date. Uber, for example, reported a loss of about $270 on an EBITDA basis in the quarter ended Sept. 30. DoorDash: $190 million in losses over the same period, according to Bloomberg.
Worse yet, with the recent labor shortage, such companies are struggling to find workers. For example, Uber and Lyft ( LYFT ) lost more than 60 percent of their drivers during the pandemic and remain below pre-pandemic levels today, according to a Business Insider report. Meanwhile, with the pandemic, Doordash has also reported that it’s hard to find “dashies” to deliver food.
“DoorDash has done a little better because it’s less intimidating to pick up a bag of groceries than it is to let a stranger get into your car,” Morton said.
During an economic slowdown, Morton said companies in the big economy could see an increase in workers looking to supplement their incomes.
On the other hand, Morton noted, if the economy slows down, that could skew construction companies toward profits. That’s because during tough times, consumers may be less likely to use services like Uber or DoorDash.
“It’s no secret that it’s more expensive to take an Uber across town from the East Village (in New York) to the West Village instead of taking the $3L train,” Morton said. “Or how about getting food and having it delivered? If you’re talking about McDonald’s, our report shows an 80% price increase between getting it in real life or ordering from Uber or DoorDash.”
However, Morton notes that in the past, similar services have been resilient in economic downturns. For example, taxi costs declined slightly between 2008 and 2009, according to a recent report by MoffettNathanson.
Simply put, gig-era companies can still succeed in their quest to become profitable, even amid an uncertain economic outlook.
Dylan Kroll is a reporter and researcher at Yahoo Finance. Follow him on Twitter at @CrollonPatrol:.
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