An uber-sensible approach
The fact that one of the world’s most well-known companies has turned a profit shouldn’t be remarkable. But it sums up the era of cheap capital we’ve lived through when an investor’s want for profit was replaced by a yearning for growth.
Uber posting a profit, however, feels like an inflection point that highlights how finance and strategy in tech and financial services are changing and moving back towards more traditional methods. That’s a positive, it’s sensible and, in the long run, it should be good for all involved.
Uber buy back
Earlier this month, Uber reported its first-ever annual operating profit. The company made $1.1bn in 2023, in contrast to the $1.8bn loss posted in 2022. It also stands contrary to how it has run its finances throughout its history. Its strategy to date had been based on enormous spending to create and test new product lines and double down on growth at any cost.
Under CEO Dara Khosrowshahi, Uber has cut costs, driven efficiencies and bolstered margins. It wanted to reassure investors that it was a well-run financial entity, not just another bubbly tech company; the type that has become much less attractive with inflation and rates high.
Last week, Uber also unveiled a $7bn buy back as part of an update that detailed its strategy for the next 3 years. This stated its plan to focus on existing core product lines (rides and food) but push them into new geographies. The news sent Uber shares up 12% to record highs.
Tech common sense
Uber is not alone. Like other technology companies, such as Apple and Microsoft, Meta recently announced that it will be paying out its first ever dividend. It is also putting $50bn aside for buybacks over the coming months. Its shares jumped 20% on the news.
Of course, Meta’s finances are built upon a larger and higher growth business than almost every other company. But their financial activities of late appear to be pivoting away from moonshot bets on the “metaverse” (its corporate name-change notwithstanding!) towards building a business that will consistently make returns over time.
A few weeks back, we discussed the trend for old-fashioned values in alternative assets, with the likes of PE and VC going ‘back to the old school’ in their approach. It seems that finance and strategy, even in the wild world of tech, are shifting towards prudence and common sense.
Financial prudence
And it’s not just technology. Other sectors also seem to be changing their financial tack, too.
This week, in the UK, Barclays unveiled its first major strategy update for a decade. The bank has chosen to now focus on returning to profit and returning cash to investors. As it posted its financials, the bank revealed restructuring plans that would involve growing its high-growth consumer and corporate businesses while cutting costs and the size of its investment bank.
To me, the most telling part was the £10bn that will be returned to shareholders via dividends and buybacks. This was a clear statement that the era of growth at all costs in financial services is over. Like Uber, this plan was well received by the market and Barclays stock climbed 15%.
An old fashioned arrangement
Of course, business leaders should tread carefully. Too much focus on short-term returns can inhibit innovation and long-term growth, especially for young, agile companies that must have the courage to test, iterate and (dare I say it) fail investors.
As inflation drops and rates fall, return-hungry investors will seek growth again. History rhymes, and the blip encountered over the last few years, especially in tech, will soon merely be a part of it. Some lessons will be learned, but investor appetites and behaviours won’t be interminably altered by one interest rate cycle and a couple of soft years.
But, in the short term, investors will be shrewder when they listen to founders and leaders. The growth at all costs era is over, as is the time when investors gave up any form of return in exchange for an outside shot at outsize growth. It may sound like an alien idea, but when investors hand over cash, they now want long-term upside and short-term return on capital.
Hype and hyperbole
This arrangement was lost in the hype and hyperbole of the 2010s. Investors parked demands for returns, such as dividends, because Zuckerberg bet on the metaverse, Kalanick promised self-driving cars, and Barclays strove to conquer US investment banking. They haven’t all failed in these pursuits, but there has been a change in the end goal. With the macro picture in flux, companies know that a tall story about tomorrow won’t pay investors enough of a return today.
By refocusing on core business – whether that be ads at Meta, rides at Uber, or consumer and retail banking at Barclays – and instituting old-fashioned financial strategies, a half-decent dividend yield will start to look mighty attractive to investors when rates fall. The potential for astronomic upside remains, but that should only ever be the cherry on top, not the cake.
This approach is likely to be adopted by more corporate boards as we move through the cycle. Yes, there will be one day soon when dividends, buybacks and profit drop back down the priority list. Wide-eyed, uber-ambitious founders will, once again, promise the earth to growth-focused investors. But that day looks a little way off, and that feels reassuringly sensible.