On Dec. 7, two days after its rideshare rival Lyft filed to go public, Uber Technologies Inc. followed suit. Despite raising $2 billion in a bond offering in October, an Uber initial public offering was always expected at some point. The accelerated timetable comes in the wake of broad selloffs in tech stocks - and growing pessimism across capital markets.
So far, it looks like one of the least appealing IPO buying opportunities in some time. Can the company and its underwriters convince the market that it deserves its valuation?
In this research note, we take a look at the forthcoming IPO to see if we can answer that question.
More secrecy on the menu
Uber is certainly no stranger to secretive financial maneuvers. The October bond offering was a case in point. A $2 billion debt debut is sure to make waves, but Uber’s bond offering was notably secretive.
The ridesharing service’s penchant for furtive financial dealings seems to be continuing. When the company filed its IPO papers, it did so confidentially. This is an interesting move for a company seeking to access public markets.
Unicorn squared
Uber is already one of the most valuable private companies in the world, judging from the implied valuation of previous funding rounds.
In its most recent funding round, Uber was valued at a whopping $72 billion. With huge interest in the company among would-be investors, estimates of its IPO valuation have extended to as much as $120 billion.
Finding an underwriter
On Dec. 11, it was announced that Morgan Stanley would be underwriting the offering. While there is little additional information thus far, the choice makes sense given Uber’s expected valuation at the outset.
Expectations will be high. But are they justified?
Financials are not uber-great
In the third quarter, Uber reported a staggering $1.1 billion net loss. That was in spite of $2.95 billion in revenues. And those losses are not going away.
Furthermore, Uber’s growth narrative is looking questionable. Revenues were up just 5% sequentially from the second quarter, while net losses continue to get bigger. That is a huge problem for a company seeking public endorsement.
Public market scrutiny
Unfortunately for Uber, the capital markets are far less forgiving than the institutions and venture capital funds that have poured billions into it over the years. Public markets expect results.
Big losses and no clear trajectory to profit is a sure way to alienate markets and drive off shareholders. That is what happened to Snap Inc. (SNAP, Financial) when it went public; the high-flying tech stock has taken a beating since its IPO.
Zombie valuation
In truth, Uber looks more like a zombie than a unicorn. The ever-increasing valuations make little sense in light of the company’s fundamentals and competitive set. Players such as Lyft will make the ride-hailing business increasingly commoditized, which makes a valuation of 50 times revenues look suspect from the outset.
The October bond offering offers another clue about Uber’s true value. A company valued at close to $100 billion should not have to pay 8% on a tranche of debt. Clearly, the debt markets have a clearer understanding of Uber’s fundamental cash and profitability problems.
Cui bono?
The big question now is how the market will value Uber. It may get a decent pump at first, much as Snap did. But it is not likely to last in light of the blistering scrutiny of the public market. Secretive financial dealings will no longer be possible and management will be forced to engage with analysts and other shareholders that are unlikely to give so many free passes.
Ultimately, the big beneficiaries will be the venture capital funds and other early-round investors. They will enjoy big profits in the liquidity event of an IPO. Some may hold their positions, and others will be in a lock-up for a while, but it seems almost certain that these investors will be taking profits rather than holding stock under the glaring light of public market scrutiny.
Verdict
This is definitely an IPO to avoid. Uber’s valuation is already eye-watering. The only investors likely to benefit from going public are the current shareholders. That looks likely to be a problem for many such private companies that have enjoyed inflated valuations thanks to floods of allocator capital into alternative assets and wildly optimistic assumptions about long-term growth and profit.
Whether there are other unicorns worthier of their valuations than is Uber is a subject for another time. But in this case, the verdict seems fairly clear: Buying the Uber IPO looks like a fool’s errand.
Disclosure: No positions.
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