Bumpy Ride ahead for Uber as it Faces Negative Returns Post-IPO
On Friday, May 10th, shares of Uber Technologies Inc. were first traded on the New York Stock Exchange, and the debut failed to put the ride-sharing company in the fast lane. As the day drew to a close, “Uber’s market capitalization, accounting for stock options and restricted stock, stood at $76 billion—barely above the $76 billion that private investors pegged it at in August.” Although the transportation titan previously boasted high-profile stock, shares closed at $41.57, a 7.6% fall from the company’s initial public offering price of $45. According to Jay Ritter, a professor at the University of Florida who specializes in IPOs, Uber’s opening-day performance lags behind that of other giant U.S. IPOs over the past two decades. Facebook, General Motors, Kraft Foods, AT&T Wireless Group, and Visa all exhibited closing prices that were higher than their offering prices (Bary 2019). The corporation’s market flop came as a surprise to investors, considering that its IPO was the most anticipated since Facebook in 2012. Moreover, Uber employed a rather conservative pricing strategy to lure prospective shareholders, offering the stock at a price on the lower end of its target range. The company’s attempts at modesty were unfruitful, for the $45 stock price was not conservative enough for investors. In fact, ten minutes before noon, over thirty million shares were traded at $42, confirming that the stock was opening in the red. While Uber’s IPO raised $8.1 billion, executives at the company overestimated stockholder appetite for Uber shares. Last year, bankers projected that upon its IPO, the giant could be valued at $120 billion, which would constitute the largest American company to go public on an American stock exchange.
Uber’s public offering was also dampened by mounting investor uncertainty surrounding trade between China and the United States. Broad stock markets are continuing to fall, and the S&P 500 slid 2.2% the week of Monday, May 6th. The company’s primary competitor, Lyft Inc., has similarly faced an unfavorable outcome following its IPO this past March. Since its public offering, it has lost 29% of its previous value. Even though Lyft shares fell 7.4% the same Friday as Uber’s exchange debut, the corporation experienced a stronger opening when it first started trading. Lyft’s shares climbed to $87.24 upon opening day and closed at $78.29, which was still above the $72 offering price. However, during Lyft’s second day of trading, shares quickly slumped below the IPO price, signaling the gloomy future for the ride-hailing tech company. On Tuesday, May 7th, the company published its first financial results since its IPO, recording a $1.14 billion quarterly loss. Lyft’s chief financial officer, Brian Roberts, maintains that losses, which have widened since last year due to a $894 million charge for stock-based compensation, will bleed into this year. He is convinced that 2019 will be “our peak loss year and then we will move steadily towards profitability,” as fueled by hefty investments in new branches of Lyft’s operations. Despite the C-suite’s reassurances, on Wednesday, May 8th, Lyft’s stocks fell an estimated 11%, marking a record low drop for the public company.
Ironically, 2019 was set to be a “banner year” for IPOs. However, market volatility from the end of 2018, as well as the January government shutdown that stalled the progress of public filings, has soured the climate for IPOs. During the shutdown, the U.S Securities and Exchange Commission was unable to engage in more than minimum emergency functions, thus prohibiting IPO candidates from making F1 filings and registering public offerings (Crabb 2019).
If Uber wishes to stay afloat amidst this turbulent environment and evade similar misfortunes as Lyft, the company must clearly define its competitive advantages. Reuters suggests that the firm emphasize its widely successful Uber Eats food delivery service as well as its international operations. Ultimately, in order to switch lanes and move towards profitability, company leaders will have to raise prices or reduce the number of drivers. Much as Uber is the largest ride-sharing company, exhibiting an internationally diversified organizational structure—while Lyft is primarily domestic—operating losses are just as significant as those of its competitor.
Leading up to the IPO, Uber disclosed that EBITDA losses are projected to grow throughout 2019. Perhaps these substantial losses signify that the operational system of ride-sharing companies cannot sustain profit once public. Lyft, for the past seven years, and Uber, for the past ten, have been heavily subsidized by private investors and other venture capitalists. Steady streams of funding enabled these start-ups to charge riders lower fares while still turning a profit. However, following their IPOs, the businesses can no longer depend upon the pockets of savvy investors. While a focus on capturing revenue and expanding market share may be viable for a private organization, public companies are obligated to disclose quarterly earnings to the SEC. Close monitoring by investors and financial analysts will force Uber and Lyft to shift their gaze from market-share growth to the bottom line, resulting in a hike in fare prices for consumers.
Besides straining Uber’s relationship with consumers, the IPO could further aggravate its relationship with its drivers, who went on a worldwide strike to protest unjust organizational procedure on Wednesday, May 8th. As Uber’s valuation was estimated to reach up to $91.5 billion, approximately 300 people were gathered in front of Uber headquarters in San Francisco. The United Private Hire Drivers Branch (UPHD) of the Independent Workers Union of Great Britain (IWGB) organized the protests in London. In a recent statement, IWGB lamented that “Uber’s business model is unsustainable in its dependence upon large scale worker exploitation, tax avoidance and regulatory arbitrage..Uber is getting the big IPO, leaving the drivers starving.” Uber and Lyft drivers are not afforded particular benefits such as social security, overtime, sick leave, or minimum wage, due to the fact that they are classified as independent contractors, as opposed to employees. Additionally, drivers are not reimbursed for expenses used during their hours of employment, such as fuel. Subsequently, 60,000 U.S. Uber drivers filed arbitration demands regarding their employment status, forcing the company to shell out between $146 million and $170 million to settle the classification dispute.
Equally important, Uber and Lyft are not the only businesses suffering from post-IPO blues. Twitter, Groupon, and Snap are among other large tech companies that have experienced extensive losses following public offerings, which brings to bear uncertainty surrounding investors’ demand for such high-profile tech stock. Lyft’s performance, and Uber’s—depending upon how post-IPO performance pans out for the latter—has the potential to discourage similar companies from going public. Although Uber has revolutionized the transportation industry and epitomizes the sharing economy-based company, investors believe that the titan faces the same dreadful fate as Lyft. Regardless, it is the executives at Uber who are truly the ones in the driver’s seat.
Bary, A. (2019). Uber Starts in Reverse. Barron's (Online), Retrieved from http://ezp.bentley.edu/login?url=https://search-proquest-com.ezp.bentley.edu/docview/2222817790?accountid=8576
Crabb, J. (2019). Damage of US Shutdown on IPO Market will Extend into 2019. International Financial Law Review, Retrieved from http://ezp.bentley.edu/login?url=https://search-proquest-com.ezp.bentley.edu/docview/2182353173?accountid=8576