Uber goes public on Friday at a valuation expected to be somewhere between $80 billion and $90 billion. Given that the ride-hailing company is said to have tempered its valuation to ensure a strong buy-in from investors, some people might be tempted to buy Uber stock on the first day of trading.
Here are my two cents on the subject: Don’t.
Let me tell you why.
Uber Stock Is a Disruptor Alright
In Toronto, Canada, I know do-it-yourself investor and author Robin Speziale. He built a $300,000 portfolio before he was 30. He has also managed to publish several investment-related books while working a very demanding full-time job.
He’s an impressive person who’s passionate about investing. I recommend you check out his work.
Anyway, his latest blog post arrived in my email this morning, and it just happened to focus on disruptor stocks, those companies that are turning entire industries upside down for the better.
“In 2019, a group of five big disruptive companies will IPO (some already have) on the stock market. This is probably a good opportunity to add new disruptors to ones portfolio; companies that are gobbling up their respective competition, and entire industries,” Speziale wrote.
Robin’s believes DIY investors should own companies that are disrupting and selling those that are getting disrupted.
He’s not wrong. One only needs to look at the performance of Amazon (NASDAQ:AMZN) since going public in May 1997 to understand the power of disruption.
There’s no question that Uber belongs on this list of disruptors. It has built a tremendous service business using technology as the sparkplug.
However, just because Uber is a disruptor, it does not mean you should buy its stock on the first day of trading. I know Robin well enough to know he would say the same.
The Uber IPO Will Open Higher
There have been 49 IPOs so far this year through May 8, 26% fewer than at this time last year. The performance of the Renaissance IPO Index has done well, up 33% year to date.
Of the 49 IPOs, Beyond Meat’s first-day return of 163% will almost certainly stand for the remainder of the year as the best first-day return for U.S. IPOs in 2019. In fact, it was the best first-day return in almost 20 years.
But I would be shocked if Uber didn’t open higher given the excitement surrounding the Unicorn Class of 2019. If you were able to get some Uber stock in the IPO offering, I’d consider selling if it opens up 25% or higher.
That’s because the warm fuzzy feeling that investors have on the first day often fades. That’s especially true when talking about money-losing businesses such as Uber.
“First-day returns aren’t predictive for subsequent returns,” UBS’ head of asset allocation Jason Draho said in a note May 7. “IPOs can be attractive investments if you can get an allocation, but much less so if you’re buying in the secondary market.”
Just look at Levi Strauss (NYSE:LEVI). It went public March 30 at $17 a share. It gained 31.8% on its first day of trading. Since then, it has gained an additional 1.1%. Should Levi’s deliver a weak earnings report — its first as a public company in early April was a good one — you can be sure LEVI will lose some or all of those gains.
Canadian billionaire money manager Stephen Jarislowsky wrote about IPOs in his 2005 book The Investment Zoo
“New issues are typically well promoted,” Jarislowsky wrote in his 2005 book, The Investment Zoo. “My experience is that you can buy nine out of 10 new issues at a lower price a year or two later … I generally avoid new issues.”
Between 1980 and 2016, the average six-month return of IPOs was 6%, 200 basis points higher than the market over that period. The first-day return of IPOs over the past 40 years is 18%, which suggests that stocks tend to lose their first-day gains and then some over the next six to 12 months, playing right into Jarislowsky’s hand.
The Bottom Line on Uber Stock
Ultimately, Uber might become the next Amazon. Nobody knows what will happen.
What I do know is that if Uber is up significantly in its first day of trading and you want to buy its stock, I would wait for six months to see how it trades. History suggests you’ll be able to get it at a better price by waiting for a correction.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.