Uber (NYSE:UBER) has suffered a rather underwhelming debut on the public markets. Its IPO priced at the low end of expectations. Even that wasn’t enough. UBER stock started dropping from the moment it commenced trading. Shares slid to as low as $36 after hitting $45 on their first day. It had appeared that Uber was starting to recover. However, the recent market swoon has UBER stock stumbling under $40 again.
Observers have blamed various factors for Uber’s failure to launch following its IPO. For one, the dismal post-IPO trading at rival Lyft (NASDAQ:LYFT) surely weighed on sentiment. The market in general and tech stocks, in particular, have struggled.
There’s also the growing sense that there are too many tech companies trying to cash in on IPOs right now, diluting the overall field. Still, for long-term investors, these are more minor concerns. There’s one much bigger one that will determine where UBER stock goes in the coming years.
When Can Uber Start Earnings Profits?
UBER bears suggest the company will lose money indefinitely, causing the stock to plummet. Bulls say that the company will achieve mass scale and disrupt transportation, eventually leading to profits. Both sides can make a compelling argument.
However, the central debate around Uber comes down to one key question. Will the company be able to raise prices on its main service offerings anytime soon? Right now, Uber is a lot like the early internet companies. No one in its space is making much in the way of profits, everyone is competing to build their brand and gain market share.
I’d argue that the bears are being too simplistic in saying that UBER stock is terrible simply because the company is losing tons of money. That’d be true if Uber were a mature business, or if there were some fundamental roadblock that would keep them from ever reaching profitability. But it’s unclear that this is the case for Uber.
Uber started by disrupting an industry, taxis, where prices were arguably artificially high due to taxi medallions, excessive government regulation and other anti-market behavior. In theory, there’s no reason why Uber can’t undercut traditional taxi pricing and still make a profit. And its method of getting paid, taking a cut of every transaction on an app, is robust and proven to work elsewhere.
Uber’s Losses Make Strategic Sense
Right now, Uber is losing gobs of money for a few reasons. For one, it is expanding aggressively overseas. In markets where it hasn’t yet reached scale, it is suffering worse profit margins, but that doesn’t mean Uber can’t make money in those markets eventually.
Uber is also spending heavily on R&D. This is likely necessary at this stage of the business, and from what I can tell, it appears Uber has a more robust engineering team/data-processing capabilities than Lyft or, in food delivery, Grubhub (NYSE:GRUB). It costs money to build that superior functionality, but it should pay off over the years as Uber’s technology builds a wider and wider lead over its peers.
In the U.S., Lyft has proven to be a formidable competitor. But there are likely to be two ways the U.S. Uber/Lyft battle plays out. One likely scenario is that both parties raise prices, particularly as taxi competition continues to lessen.
If they maintain a cutthroat pricing battle, Uber should ultimately win, as it has far more resources to ride out a period of extended losses in the U.S. Lyft has far less going on, either in food delivery or in international markets – its investors will pressure it to stop losing money in the United States far more quickly than Uber’s stock owners.
UBER Stock Verdict
Anyone who tells you with certainty how Uber will play out is way too confident. We can make reasonable projections, but there are so many things we don’t know here that it’s impossible to be highly sure of how UBER stock will go. UBER stock could easily triple over the next five or ten years. Or it could go to zero. A lot will depend on how competition like Lyft reacts, how long technologies such as driverless cars take to come online, and how regulators manage and tax the ride-sharing industry. That’s a lot of variables that could go any which way for Uber.
Uber’s CEO put it well in a letter to employees after the underwhelming stock debut earlier this month.
Every stock is valued based on the projected future cash flows/profits that the company is expected to generate over its lifetime. There are many versions of our future that are highly profitable and valuable, and there are of course some that are less so. During times of negative market sentiment, the pessimistic voices get louder, and the optimistic voices pull back.
I’d suggest that some folks are reading too much into the company’s IPO performance and one quarter of earnings results. The Uber story will take years to play out. And as long as the company maintains rapid growth, it will have plenty of people willing to bankroll the company’s operating losses in the interim.
Uber is undeniably the global leader in ride-sharing, and it’s making big waves in adjacent markets such as food delivery. If you want exposure to that space, UBER is the stock to own. The price is fair for the sort of high risk/high reward play that it is. The stock will be volatile, sure, but over time, it could make some huge gains.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
