At a market capitalization of $72 billion, Uber Technologies (NYSE:UBER) is defying all odds of valuation. The company loses billions annually. The negative post-IPO trading action could limit the upside potential for investors looking to trade the stock for a quick buck.
Uber lost $3.2 billion in 2017. Fast-forward to 2019 and the company expects a peak year of losses. Investors may infer why Uber IPO’d when losses continue to mount. Insiders want to cash out of the company by converting its share ownership to cash. Earlier this month, markets did not face much in the way of trade war tensions between the U.S. and China. Markets traded at close to all-time highs, making the public offering almost perfectly timed.
At an IPO price of $45, Uber entered the public markets at the low end of the expected $44 – $50 range. Since then, shares followed Lyft, Inc. (NASDAQ:LYFT) by falling further. UBER stock closed recently at $41.59.
Short Uber Stock
Uber has all the characteristics of a short-sell trade. Fundamentally, Tesla (NASDAQ:TSLA) is introducing robo-taxis that would put much of Uber’s 2 million drivers out of a job in a few years time. In the short-term, Lyft, with its $16 billion market cap, is still a competitive threat.
Lyft shares are also a compelling short idea, because it also loses money. Investors who bought the stock at the time of the IPO are suing Lyft, claiming the firm misled investors. The negativity for Lyft may spread to Uber stock — just as Uber underpricing its IPO hurt Lyft shares.
Uber Expects Weak Stock Performance
On May 13, just days after its IPO, Uber’s CEO sent an email to employees warning about the stock’s weak performance ahead. That the CEO watches the stock price instead of communicating business objectives to the staff is a deep concern. Understandably, any staff owning Uber stock may become demotivated as shares wilt. Yet, if the public knows a falling stock price will hurt company morale and potentially the CEO’s performance, that would help bearish investors.
To counter the bears, Uber needs operating margins improving as a first step towards profitability. This is a difficult, but not impossible, task. The company needs to cut costs while increasing profits per completed ride. This may require Uber slowing its global growth expansion plans while strengthening its home markets. The downside with this plan is that the stock market may punish shares for reporting slower market share growth.
Uber Could Raise Prices
Uber could raise fare prices to shrink losses, but demand would likely plunge. At current low rates, Uber created phenomenal growth for its service, gained market share by taking away the business from taxi companies. Although it won in the short-term, it may lose in the long-term. So long as losses keep mounting as the company offers unsustainable low prices, the stock price should also fall.
If fare prices do increase, Uber’s app may still give customers a reason to choose its services over the use of a taxi. But with higher fares driving demand lower, it will also lead to Uber cutting back on offering rides in already low-demand and unprofitable areas.
Winners and Losers
After just a few weeks as a public company, investors should realize that the real winners are the underwriters, the insiders and the executives. Shareholders are the losers because they only participate in holding on the profits the company generates. But if Uber does not expect profits any time soon, shareholders could end up waiting for years before shares represent any profits. By then, the stock will continue to reflect a lower, more rational valuation.
Not all hope is lost just yet. Snap (NYSE:SNAP) eventually figured out how to grow its user base without losing even more money. Tesla still losses money but its market cap is still $39 billion. Uber is still in the early innings as a public company. It has time to win back shareholder confidence. If it does so, the stock may stop falling.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
