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Uber’s IPO, is the timing right?


  • Uber facing mounting losses and disgruntled drivers
  • Suffering from bad IPO timing, which costed billions
  • Unable to achieve operating leverage due to subsidies to drivers and users
  • Nil visibility on the profitability front
  • Uber striving to become the Amazon of transportation

 

2019 is the year for tech unicorns, with a host of tech companies (Lyft, Pinterest, WeWork, etc.) rushing to go public before a speculated economic slowdown in 2020. The ride-hailing giant Uber is no exception and after a decade of establishing its business, the company decided to enter the public realm. This is due to its noble idea that has transformed asset sharing concept, Uber’s journey so far has been spectacular with impressive growth achieved since its inception making it one of the most valuable companies globally. According to investment bankers, the company’s worth was ~$120 billion in 2018 and in 2019 the company expected over $100 billion in valuation ($48 to $55 per share price range). However, in recent times the company has been marred with several external factors (enlisted below) limiting its growth in the public domain, this led to revising of the price range downwards as per the amended filing ($44 to $50 per share). Furthermore, the stock was priced at $45 per share (Thursday, 9th of May 2019), which was at the lower end of the range and valued the company at $82.35 billion (significantly below the $100 billion mark), raising ~$8.1 billion in the process. The stock had the worst run on the opening day at NYSE market (Friday) and closed at 7.6% below the list price and it could not beat this price even once.

Uber faced a worst timing issue for the launch of its IPO. First of all, due to a partial government shutdown at the start of the year, all IPO activity was halted in the first quarter. Secondly, it lost to Lyft (which came out with its IPO over a month in advance). The lacklustre performance by Lyft in the past month (trading at over 20% below the list price) has been the chief contributor for bringing the morale of investors down and costed billions in valuation for Uber. Thirdly, the major stock markets plunged over the entire week (before the IPO on Friday, 10th of May 2019) amid the uncertainty ensuing over the US trade war with China, after President Trump proposed additional tariffs on Chinese goods.

Moreover, investors have been jittery of the fact that the company might not achieve profitability in the foreseeable future, with a lifetime loss of $8 billion since its inception. Uber’s high sales and marketing expenses are in stark contrast to other comparable tech giants and so far, it has not been able to use economies of scale to drive operating leverage.

Further, an entire generation of the tech unicorns (including Uber) exists on the premise that work is transient, hence, they hire gig workers (contract workers) rather than full-time employees saving the company from paying employee benefit expenses. This has led many ride-hailing drivers (Uber and Lyft) to protest on low wages days before Uber IPO. Uber employs around 3.9 million such drivers. It is imperative that the strikes and protests by these drivers and other gig workers employed by tech unicorns might lead governments/labour departments to heed in favour of these gig workers and implement laws to treat these workers as full-time employees rather than contractual workers in the foreseeable future, which shall significantly increase the employee cost for these companies.

Lastly, platform issues like fare wars with rivals offering higher incentives to drivers to prevent them from switching platforms or an inability to maintain a critical mass of drivers coupled with the lack of a recurring subscription model might make the Uber platform less attractive for users.

Still, with ride-hailing poised to become the dominant force in the ground transportation industry (it has already beaten taxis and car rentals), everything is not grim for the ride-hailing giant Uber.

The ride-hailing giant has diversified into bike and scooter rentals, mass transit, food delivery, logistics, air taxis (Uber chopper), etc. to capture the entire transportation ecosystem (including both passengers and goods [freight, food, etc.] movements) and is striving to become the ‘Amazon of transportation’ with one stop shop for all the consumer needs. In this scenario, Televisory believe that Uber will have more pricing power and can use economies of scale to bring down costs, thus, marching towards the elusive light of profitability. Further, advancements in technology like the use of driverless vehicles can help it achieve operational efficiency, though this is expected to take time as far as implementation is concerned.

Additionally, the company has been suffering from negative sentiments of investors owing to Lyft IPO, which is a little unfair on the part of Uber since it is in a different league. Comparing Lyft, a ‘one-trick pony’ having a mere presence in the domestic US market, with Uber, a ‘three-headed value monster’ with geographical diversity and presence in over 66 countries and 600 cities is not right. Uber’s exposure to a large potential transport market globally gives it an edge to drive its growth, which is similar to geographically diverse e-commerce peers such as Alibaba and Amazon (which maintained a 30% CAGR sales growth after reaching $10 billion sales in a year).

Addedly, the company is focusing on acquisitions as a means to achieve inorganic growth. Recently, it bought Careem to expand in the Middle East and is looking for other acquisition opportunities in Germany, Italy, Argentina, Japan, Spain, South Korea, etc. in order to expand its rider base.

In conclusion, although Uber has not had the best of start in the public sphere, however, it is still immature to judge an IPO by how it does in its first few months. For instance, take the case of Facebook, its shares plunged by over 50% in the first few months of its IPO, however, the company has recovered from the pain and is now one of the most valuable companies on the planet. Further, Uber is looking to capture the entire transportation ecosystem and could wind up in the ranks of the tech stalwarts FAANG’s (Facebook, Amazon, Apple, Netflix, Google) stocks. The road ahead is a bit difficult as the freedom to play a long game significantly reduces when a company goes public (while the resource availability to achieve the same increases).

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