What a difference a pandemic makes.
If we could boil the connected economy to one word that encapsulates the past two years, it would be: growth.
The great digital shift has been one that spurred hypergrowth across all manner of platforms — not just in terms of users and subscribers but in revenues as well.
Depending on where you look, too, profits have been elusive. Cash burn has been another hallmark of the connected economy as companies invest in building for the future and in gaining scale.
And now comes the slowdown — not a decline. But a slowdown, enough so that at least some companies are signaling a shift in strategy. And those strategic shifts are at least a partial nod to the fact that investors want to see changes in how connected economy companies approach their chosen markets and verticals.
Free Cash in Focus
The days of cash burn (negative or lumpy EBITDA, which is a rough measure of cash flow) being rewarded by buoyant stock prices or relatively easy investment rounds will be increasingly harder to come by.
Uber stands out here, as news from Monday (May 9) shows. Interestingly, the company is now focusing on free cash flow, which is a more stringent measure of operating efficiency (and what’s left “over” after the real cash costs of running the business are spent each day).
An internal email from CEO Dara Khosrowshahi, as relayed by CNBC, noted that, “After earnings, I spent several days meeting investors in New York and Boston. It’s clear that the market is experiencing a seismic shift and we need to react accordingly.”
We need not remind you that fickleness has come to Wall Street. Certainly, for the CE100. The group, as whole is down year to date a staggering 29.5%.
Read more: Banks Sidestep CE100’s Slide, Investors Seek Defensive Names in Healthcare
That’s significantly worse than the Nasdaq’s roughly 23% slide through the same period, and it shows the level of doubt that some of these business models are sustainable as is. The great digital shift may be firmly entrenched, but the business models are still in flux.
To that end, Uber will throttle back on marketing and incentives, which we contend to be easier levers of operational spend that can be recalibrated quickly. Hiring? Well, it makes sense that companies like Uber, Meta and others would slow down those efforts too. Wages are a key input to those operating costs, and wages are going up, in at least a partial bid to keep pace with inflation.
By focusing on free cash flow, Uber may be setting a bar, of sorts, for the platform firms. The Lyfts, the Netflixes, the aggregators are going to have to do more than simply report positive earnings. Earnings are a bit of an accounting construct. Cash is king, as the saying goes, and investors, along with company managements, will be focusing more on operating cash flow and free cash flow, where once triple-digit top-line growth was cheered and revered.
The times — at least for the connected economy — they are a changin’.
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