Microsoft-Uber: Easy Money for MSFT, Not For You

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Microsoft (MSFT) recently made headlines by allegedly pumping $100 million into ride-sharing service Uber, pumping Uber’s valuation up to a steep $50 billion.

microsoft stock-msftWhat the heck is happening?

There are four prongs to examine in regards to Microsoft’s alleged investment: Uber’s valuation, the posisble strategic reasons for making the deal, the risk-reward outlook for MSFT, and what the deal means (if anything) for potential Uber investors.

Here’s a closer look at each of those prongs, and the rumored deal in general.

MSFT-Uber: Strategic Investment

Other big companies like Google (GOOG, GOOGL) and Amazon (AMZN) have made strategic investments in Uber. Why not MSFT? My personal take is that it is most likely linked to MSFT and its new direction.

Microsoft is desperately trying to move away from the desktop world and into the cloud. It doesn’t want to remain a moribund relic from the 20th century. I think Microsoft wants to bribe Uber into being a customer for its Azure cloud computing platform. It wants a Microsoft-Uber partnership from the get-go, so the two get tied at the hip. Once a firm chooses its platform, it becomes really difficult to change.

MSFT also desires more synergistic relationships with forward-movers. MSFT wants to be a service business, and if Uber is the service business of the future, then why not align with it? Why not partner up with a company who will desperately need information management which MSFT wants to become a major player in?

Especially since its risk-reward is pretty compelling….

The Risk-Reward for Microsoft

I see this as no-lose for MSFT. Eventually, Uber goes public. No matter how ridiculous the valuation is, we all know the stock will soar simply because of the hype. Once the lock-up period expires, MSFT could sell out $100 million to mach what it put in, and it would still have significant appreciation in its remaining shares.

I believe Uber will rush out its IPO before regulators undercut it, so MSFT will get out unscathed. The average investor, however, may not be so lucky. Why? Well, just look at its valuation

Uber’s Absurd Valuation

The $50 billion valuation for Uber is beyond ridiculous. It achieves levels of psychosis not seen since The Texas Chainsaw Massacre.

Let’s suppose we’re valuing Uber by revenue — just the amount of money makes in one year, which is pretty conservative for most new stocks. Well, Uber keeps 20% of all fares, so, for a $50 billion value, it would have to be servicing $250 billion worth of fares.

From a recent Freedom of Information request I made, New York’s average daily taxi revenue is just about $4.9 million per day, or $1.79 billion per year. I’m supposed to believe that Uber generates the fare equivalent to 29 New Yorks?

Uh-huh.

No, wait, it gets worse. Bloomberg News reported that, in its recent bond offering, Uber allegedly generated $470 million of operating losses on $415 million in revenue. Stop the insanity.

None of this takes into account the threats Uber will face, and does face, from regulatory bodies. The major risk comes from challenges regarding employee status. Are drivers independent contractors or employees of Uber? The pending jury trial in California could cost Uber $1.2 billion or more.

For those who think this case won’t succeed, they had better familiarize themselves with Shannon Liss-Riordan, who already won judgments against Starbucks (SBUX) and FedEx (FDX) on this exact issue.

Nor will this case be limited to California. At some point, there will be 50 cases in 50 states, and some will fall against Uber. The problem is that each loss will cost Uber and its investors hundreds of millions, if not billions.

How long before disability advocates sue under The Americans with Disabilities Act? Since individual drivers aren’t going to retrofit their cars, then this will obviously be a pure-play for a cash payout. How much will that cost Uber?

The list goes on and on. Uber doesn’t deserve anything close to this valuation.

Uber’s IPO and You

I believe that Uber is fool’s gold for the average investor. Unless you get in on a private placement and cash out early, you may find yourself holding the bag.

Big Government will try to undermine Uber. It won’t just be the the obvious ways, eitherThere are great lawsuits lining up, like those challenging that NYC e-hails for Uber violate the exclusive right of yellow cabs to get hails in NYC’s zone between Wall St. and 96th street, because an e-hail fits the definition of “hail”.

Or insurance authorities could demand that drivers have commercial insurance.

Heck, the government doesn’t even have to be involved for this to be a disaster. What happens when the economy improves and all these part-time drivers get real jobs and Uber suddenly has no drivers?

Microsoft has the inside track. You don’t. Stay away.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long AMZN. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/msft-microsoft-uber-easy-money/.

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