Uber’s (NYSE:UBER) IPO was not greeted with the type of optimism that investors were hoping for. Even after seeing the decimation that Lyft (NASDAQ:LYFT) has gone through since its IPO, many were assuming the underwriters would have learned their lesson. It didn’t help that Uber stock came to market amid a tough week (and tough trading session) as trade-war worries intensified.
That said, Uber only briefly traded at its $45 IPO price on its first day of trading. It tagged this level and reversed lower. On the second day of trading, shares closed just over $37, down over 17% from its IPO price in two days. What’s going on?
There were reports about a $120 billion valuation for Uber before its IPO. Even though that seemed rich, many assumed $100 billion was attainable for Uber stock. After Lyft’s flop (shares are still down ~36% from its opening price) the Uber IPO was being priced “conservatively,” between $44 and $50 per share. Shares ultimately priced at the lower end of the range and have traded lower since. Right now, Pinterest (NYSE:PINS) might be a better pick than either of them.
Absent of day one, Uber stock price has not hit its IPO price. Near $41.50 now, shares command a market cap of about $70 billion. You know what this reminds me of? Facebook (NASDAQ:FB).
Facebook went public at $38 per share. That’s where the stock closed on its first day of trading and it proceeded to trade lower over its first year as a public company. I don’t know if Uber will do the same thing, but I could certainly see a scenario in which that’s the case.
There’s two sides to that coin though. On the bearish side, Facebook stock was cut in half in its first three months of trading and continued to probe those 50% losses for another three months after that. On the flip side though, FB is now up 10-fold from its post-IPO lows.
For Uber], that would mean falling from its $45 IPO price to about $20 to $22. That would create quite a few headlines, but it would also create quite the potential opportunity.
Is Uber Stock the Next Facebook Stock?
However, there’s a big difference between Uber stock and Facebook: The latter was actually profitable.
In 2011 the year leading up to Facebook’s May 2012 IPO the company churned out net income of $668 million. In the two years after its IPO, it generated $1.49 billion and $2.9 billion in net income, respectively. Essentially Facebook was (and still is) a profit machine. It generates immense cash flow on mind-boggling margins. That’s led to a fat bottom line and one of the healthiest balance sheets in public markets.
Uber stock had an operating loss of $3.85 billion in fiscal 2017. That figure shrank to “just” $2.83 billion in 2018, but still presents an issue. How do we assign a $70 billion valuation to Uber when its losing several billion dollars per year?
When Facebook hit the $70 billion mark on its upswing in 2013, the company was on its way to a ten-figure bottom line. Worth noting is that analysts expect Uber’s losses to persist both this year and in 2020. That said, revenue growth is impressive. Revenue of $11.27 billion in 2018 grew 42.1% from the $7.93 billion in sales in 2017. Estimates call for $13.95 billion in sales this year (+23.7%) and for $17.73 billion in 2020 (+27%).
The Bottom Line on Uber
I’m struggling to get behind Uber stock right now. The explanations are pretty simple. First, I don’t have a reasonable comparison to Uber. Well, besides Lyft. You see, Facebook isn’t a very good comparison because the businesses are completely different. I compared the two because they are both well-known, high-profile tech companies and the disappointing reaction to the IPOs are quite similar.
That said, if the only comparison to Uber is Lyft, which went public about a month earlier, we don’t have a very good profile of public companies to compare Uber to. This ties into my other reason I struggle with Uber: Valuing it. Essentially, Uber is burning a hole in its bank account with its current business model.
It’s in a price war with Lyft and other ride-hailing businesses and until we get some clarity around how it will become profitable, I just don’t know how to value it.
At the end of the day, Uber has changed the transportation game. It’s created a mobility-as-a-service platform that’s disrupting everything from Hertz (NYSE:HTZ) to General Motors (NYSE:GM) to traditional taxi services. For some, maybe they can buy Uber with a 10+ year outlook and say they don’t care about today’s prices. That’s fine. But for me, the story isn’t clear enough and I’d rather wait.