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Another Reason to Avoid the Uber IPO

There are too many risks in Uber's model to want in on the IPO

Last week, I told you that trying to get in on the IPO of Uber Technologies was a terrible idea, due to Uber’s valuation. Now, however, I’ve come across several other reasons you want nothing to do with this stock when it goes public.

uber-185The thing about Uber is that its strategy is to just enter markets and utterly scoff at regulations. The company just powers on through until it is challenged or gets thrown out of the market.

The problem is that, while the strategy has worked for the company so far, it isn’t a recipe for success for investors. Why should you take on all this risk? And yes, regulatory risk is substantial. Here’s how it lays out, along with other major problems for the Uber IPO.

Uber IPO: A Race to the Bottom

Whenever unlimited competition enters a market, prices collapse. We see it in every market. Have you noticed how cheap big-screen TVs are these days? Remember when a 73” TV cost thousands? You can get a flat-screen 40-inch TV for $280 and a 73” screen for $1,500.

Prices collapsed because of unlimited competition and no barriers to entry. The same thing is true for taxicabs and, by extension, UberX — the direct competitor to cabs. We’ve already seen how de-regulation causes this race to the bottom, and it has been studied in great detail.

Every time Uber drops prices, Uber drivers have to fight for those fares, and their profit margins get squeezed. Inevitably, this will result in drivers spending less money on car repairs and maintenance, meaning the drive will be less safe for passengers. The cars will get dirtier and more unkempt. The very things that distinguishes Uber from taxis will dissipate.

We’ve seen Uber fare cuts in many cities, such as Pittsburgh. Now the race to the bottom appears to be affecting Philadelphia’s UberX service. This trend isn’t going to stop, and it will dilute Uber’s value. In addition, the lower the fares go, the less revenue Uber gets and the Uber IPO becomes worth less and less.

As if the fare cuts aren’t bad enough for drivers, many of them aren’t even aware of how much it actually costs them to drive for UberX. That’s why I researched that information and published a white paper in June entitled “Towards A Cost Estimate of A NYC UberX Driver”.

What I found was astonishing. Drivers lose 68% of pre-tax revenue of the first $1 per mile of revenue, 55% of the first $1.50, and 49% of the first $2 in revenue per mile. And all of that is pre-tax!

The bottom line is that, for UberX drivers in most cities, they are taking home between $9 and $14 per hour. As the race to the bottom worsens, take-home pay will get worse and drivers will simply abandon this terrible “partnership.” When the economy improves and the Labor Force Participation Rate, now at a 40-year-low, finally improves, they will leave in greater numbers.

Don’t even get me started on the insurance risks that most drivers don’t even realize they are taking. As I also found in my research, carriers can cancel policies if they discover a driver has ever driven commercially, even if they have an accident unrelated to rideshare.

Bottom line: These are but a few issues that affect Uber and the Uber IPO in a holistic sense. It doesn’t even really address how regulators are eventually going to crack down on Uber once enough bad things happen — crimes by drivers, accidents lacking insurance coverage, carjackings. The free-for-all will come to an end, and the $50 billion valuation will come crashing down.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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