Uber (NYSE:UBER) stock already looks disappointing. Even with its recent bounce, Uber stock sits below the Uber IPO price of $45. That’s not how new IPOs are “supposed” to trade, so observers are saying that the Uber IPO was something close to a flop.
All that said, it’s worth taking a step back. Uber’s supposed misstep has generated substantial additional capital for its operations going forward. The declines from a reputed $120 billion valuation last year make Uber stock price cheaper and reasonably valued, at least by the guidepost of its ride-sharing peer, Lyft (NASDAQ:LYFT). And a big regulatory decision should help the company as it embarks on the next phase of its growth.
I’m not recommending buying Uber stock at this point. Uber stock will be one of the first to fall if a suddenly jittery market starts to turn south. It’s far from certain that the ride-sharing model can ever work.
But dismissing Uber stock simply because of trading in the week after the Uber IPO is foolish. There’s a rationale for buying Uber stock at this point, and it’s at least worth keeping an eye on.
The Uber IPO “Flop”
A company like Uber can’t win when it goes public. If the stock gains too much – like Beyond Meat (NASDAQ:BYND) earlier this month – then the company left too many dollars on the table. If it drops, the underwriters – in the case of the Uber IPO, a group led by Morgan Stanley (NYSE:MS) – are criticized for starting off trading on the wrong foot.
Given that Uber is losing money, Uber was better off selling shares at $45 and having the Uber stock price move to $40, rather than issuing at $35 and seeing it move up. The short-term narrative might have been different. But by issuing shares at $45 instead of $35, Uber gained an extra $2 billion.
And the short-term outlook really doesn’t matter all that much. The Facebook (NASDAQ:FB) IPO looked like a flop at one point, too. That stock would rise over 1,000 percent from its lows. Snap (NYSE:SNAP) had an ugly start and stayed ugly. Big IPOs’ starts don’t necessarily define how those stocks will trade over the longer term.
Facebook was profitable, while Snap was not (and still isn’t). Uber itself is several years from driving positive earnings or positive cash flow. But those earnings could be huge if the company’a business grows the way it’s supposed to. Meanwhile, it appears that one key risk has been dodged, at least for now.
Are Uber Drivers Employees?
Uber’s business model, as presently constructed, essentially requires that its drivers be independent contractors instead of employees. Uber itself noted in its registration statement that a change in classification would “require us to fundamentally change our business model, and consequently have an adverse effect on our business and financial condition”. Drivers would be subject to minimum wage laws, overtime, meal breaks, and other benefits that would significantly impact Uber’s margins.
It does appear that the federal government, at least, is taking Uber’s side. The National Labor Relations Board reportedly has backed the Department of Labor’s opinion that ride-share operators are contractors, not employees.
That decision isn’t necessarily binding in terms of federal law, though the NLRB memo does suggest that any unionization of Uber drivers will be difficult. Nor does it mean myriad lawsuits against Uber will be tossed, though several have been already). But it does at least provide Uber with some cover against a risk that could have a huge impact on Uber stock, even though it had little chance of materializing.
Uber Stock Price vs LYFT Stock Price
A week after the Uber IPO, then, not all that much has changed. Uber’s business model should be able to go forward roughly as is. Uber stock perhaps is less valuable than many thought, with a market cap around $70 billion, but that’s not necessarily a bad thing. Nor is $70 billion disappointing for a company that’s only a decade old.
The question is whether Uber stock is worth buying. And it still seems like there’s not a compelling reason to buy the shares. The current valuation is based on the company eventually moving to an autonomous-driving model.
But a win there isn’t guaranteed: Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) unit Waymo appears to have a big lead on that front, with Tesla (NASDAQ:TSLA) and myriad other automobile manufacturers launching their own efforts. Meanwhile, I remain skeptical that autonomous driving will be introduced on a massive level any time soon.
But reasonable investors can see Uber stock differently. And there is a strong case that Uber should at least outperform Lyft. Uber clearly is the leader in the space, with more than five times as much revenue in 2018 (though Lyft grew faster last year). Yet Uber stock is only valued at roughly four times Lyft stock, which makes little sense.
This, after all, is a business where size is of huge importance. And Lyft does not have a model like UberEats, which is taking market share from privately held DoorDash and GrubHub (NYSE:GRUB). (Lyft’s scooter business is unique, perhaps, but that entire model is under pressure, as seen in the results of Bird and Lime.)
Despite the early stumbles of the Uber IPO, Uber stock is the clear choice in ride-sharing. The more difficult question to answer is whether it’s an industry worth investing in at all. That depends on each investor’s belief about how the future will play out; personally, I’ll be on the sidelines until more clarity arrives.
As of this writing, Vince Martin has a bearish options position in Tesla. He has no positions in any other securities mentioned.