Uber Inc. is poised to make initial public offering history. The ride-sharing company aims to smash all IPO valuation records and the market is abuzz with anticipation. Apparently, investor interest has been undeterred by the disastrous IPO of ride-sharing rival Lyft Inc. LYFT, which has sunk nearly 25% already. Uberâs offering was reportedly oversubscribed by day two of its roadshow.
The company is making big promises, but it is not at all clear that it will be able to deliver on them. Investors should look past the hype. Those who want to keep their money should avoid this IPO like the plague.
Fantasy valuation
Uber aims to price its shares between $48 and $55, implying a valuation of as much as $100 billion. Amazingly, that is actually considered âmodestâ compared to its initial plans, which aimed to hit $120 billion. Evidently, the more conservative valuation was decided in light of Lyftâs rocky public debut. Still, even if it only manages to achieve the lower bound of pricing guidance, Uber will still boast the largest IPO valuation in history. By far.
No matter how one slices it, Uberâs valuation is incredibly ambitious, pricing in enormous growth and vast future profits.
Fantasy metrics
Uber and its underwriters do not want to talk about profitability. Indeed, as one commentator pointed out recently, it seems they want to distract from real financial metrics:
âThe underwriters want us to focus on anything but the GAAP financials. We have full page, color pretty graphs right up front selling us metrics like âTripsâ... and neatly presented, very official looking tables offering up impressive sounding metrics like âGross Bookingsâ. When it comes the financials, we are sold hard on Adjusted EBITDA, a non-GAAP financial metric appearing in the document 57 times. Compare that to a mere 6 appearances for the critically important GAAP measure of âCash used in operating activities.ââ
The simple fact is the profits already baked into Uberâs valuation are far from guaranteed. The company remains deeply in the red, reporting an operating loss of more than $3 billion in 2018 with no clear end in sight.
Fantasy business model
Uberâs ride-sharing business model is predicated on the notion that, with sufficient scale and market share, it will become enormously profitable. Yet, in reality, scale has not helped all that much. Mounting losses and slowing revenue growth actually paint a rather unpromising picture, as Crunchbase recently reported:
âUberâs losses have increased steadily from Q1 2018 to Q4 2018, with the company posting losses of $478 million, $739 million, $763 million and $1.1 billion, respectively. Its net margin increased from -33.4 percent to -29.8 percent in Q4 2018. Still, slimming growth combined with growing losses isnât the best recipe for profitability.â
Uberâs ride-sharing business model has not yet managed to deliver profits, nor has it meaningfully improved margins to the point that profitability seems in any way imminent.
Verdict
Uber is promising big profits and big technological advances in the near future. There is no clear evidence either will be the case. For one thing, the company has competitors like Lyft, so its ultimate pricing power will always be constrained. Thus far, the expected economies of scale have failed to materialize appreciably.
We are wary of trying to predict the price action that will follow Uberâs IPO. That said, we are confident in the thesis that it is an unprofitable company that is radically overvalued. The only opportunity we see in this stock is on the short side, and that may well prove substantial indeed.
Disclosure: No positions.
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