One of the upsides of being in the capital markets business for 20 years is that I’ve seen, heard, and done it all … most of it twice. I saw the rise and fall of the dot-coms. I saw the ripple effect of the subprime mortgage meltdown. I saw gold soar in 2010 and 2011 for no real reason, and I saw crude oil prices surge in 2007 for all the wrong reasons. Nothing surprises me anymore.
That includes the tumble Uber Technologies (NYSE:UBER) shares have suffered since the Uber IPO on Friday of last week, by the way. The current Uber stock price near $37.10 is more than 16% below its initial offering price of $45. On a total-dollars-lost basis, Uber ranks as one of the worst-ever-performing IPOs.
The company’s fans before the public offering are, of course, still fans.
Wedbush Securities analysts Ygal Arounian and Dan Ives told clients last week when they initiated coverage of Uber stock: “We expect Uber to be operating at a loss for at least the next few years, but believe investors should be more patient with Uber’s investments as its leadership position will help lead to better long-term competitive positioning.” Arounian went on to say: “While it will take time for the stock to settle and Uber must execute flawlessly over the coming 12 to 18 months, we believe a $100 billion+ market cap is warranted.”
That’s fine. Analysts get paid to serve up their best opinions.
The whole thing, though — the market environment even more so than Uber stock itself — feels eerily similar to the attitudes I saw analysts demonstrate in 2007 (pre-subprime). There’s even a pinch of 1999 (pre-dot-com) in the mix. Uber may not be anything close to what most everyone is desperately trying to talk themselves into believing it is.
The Crowd Has Spoken
Uber isn’t a name that needs an introduction. Along with rival Lyft (NASDAQ:LYFT), the two firms have largely created and now dominate the U.S. ride-hailing market, displacing traditional taxi companies by leveraging technology.
Both companies have been willing to book persistent losses in the name of winning market share, too. Uber controls somewhere around two-thirds of the domestic market. Those losses are largely the result of undercharging riders and overstaffing its operations.
Now, with the ride-hailing market gelled, expect both Lyft and Uber hike prices and cull contracted driver counts as a means of moving toward profitability.
There’s the rub. Both companies were built on supply/demand models that don’t reflect sustainable supply and demand.
That’s a critical detail that so far many professional observers have been content to ignore. I’ve seen it before. Most retail investors, however, aren’t taking the bait. And that’s something I don’t see often enough.
The crowd, which speaks with dollars more than with voices, has made it clear it just doesn’t expect much in the way of progress toward profitability in the foreseeable future. Those investors just can’t say it because doing so is socially and professionally uncomfortable. Toeing the line is, for better or worse, the norm when the fundamental case is wobbly. While there are more bears than bulls here, the bulls are still shouting their bullish case at the top of their lungs, and are more than willing to silence differing opinions.
Two Flies in the Ointment
It’s an uncomfortable premise … believing that while nobody was paying attention, the quality of IPOs has shifted from “solid ideas” to “wishful thinking.” But, that’s exactly how things have gone down. Last year, a modern-era record-breaking 83% of public offerings were of companies that weren’t profitable at the time of their IPO.
It’s not a matter of youth either. The recent round of IPOs are of companies that, in general, are older and more established than those that debuted in the dot-com craze of the late-90’s. They should collectively be more profitable, not less.
What gives? The average investor’s intuition isn’t wrong. What started out on the right foot just a few years ago has devolved into a mechanism that allows founders to cash out of well-touted startups that weren’t actually built to last. Uber is no exception.
Two flaws stand out, but they stand out so prominently that they’re difficult to see. (You really can’t see for the forest for the trees when you don’t want to.)
One of them has already reared its ugly head, though not completely. Drivers are dissatisfied with their pay. And they should be. Their hourly pay, as contractors, is in the lowest percentile in the nation, and the wear-and-tear on their vehicles only adds a financial burden. A short-lived Uber IPO-day strike for better pay, born out of frustration over the millions (if not billions) of dollars the company’s top brass would be walking away with, was the prod. It’s abated for now, but it’s unlikely to ever truly go away.
Sure, a slow-but-inevitable shift toward self-driving vehicles will combat that challenge, but perhaps not effectively. A fleet of autonomous cars would be capital intensive for Uber, and self-driving technologies only make the cost of such a fleet even greater.
The math may never make good sense. “The race is on between global automakers and technology upstarts as to who deploys robotic taxi fleets providing mobility to consumers,” said Maniv Mobility founder Michael Granoff. “But none of them are capable of solving the multitude of challenges associated with a disruption of this magnitude.”
The second fatal flaw in Uber’s business model? The aforementioned requisite increase in prices. Higher market prices will allow more, smaller rivals back into the market, and let existing ones thrive again. Those smaller players have less corporate-office overhead to chip in for, however.
As it turns out, not only is there little benefit to scaling up a service-intensive business, a scale-up from Uber may actually be a liability.
As Larry Mishel, distinguished fellow at the Economic Policy Institute in Washington, put it: “There are huge contradictions at the heart of their business model.” Last year, Mishel researched Uber drivers and concluded that their W-2 equivalent hourly wage is less than the take-home pay of 90% of U.S. workers.
Most investors have turned savvy enough to at least sense these big problems, too, and steer clear.
Bottom Line for Uber Stock
Is it possible that retail investors have spotted something the pros are missing? It happens, and more often than one might suspect.
Having been in this game in one capacity or another for a couple of decades now, I’ve learned that the only thing that really changes is the tech. The people aspect of it — the big driver of trends — never really changes. Just as they were inadvertently lulled into the prospect of creating more opportunities for gains beyond what they should have expected in 2000 and 2007, the industry’s gatekeepers are encouraging more IPOs going forward by making current ones as successful as possible. They may not even realize the effort is a self-serving one.
None of this is to say Uber will never be profitable. Many of the most-plausible outlooks suggest the company won’t be profitable for at least three to four more years, however, and that assumes the company will be able to raise prices and lower expenses. Both are huge assumptions rooted heavily in hope, which isn’t any kind of strategy.
What most investors are thinking about Uber stock isn’t something a large handful of pros can actually say out loud, but that doesn’t mean they’re not thinking it.
In this business, everybody’s selling something.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.