On Friday, Uber Technologies Inc. (UBER, Financial) will make history as the most valuable initial public offering in the world. Yet, as the company prepares to make its market debut, a host of headwinds have emerged to threaten its valuation. An already questionable buy is looking increasingly vulnerable.
Drivers on the march
No company likes bad press, especially when it is preparing to tap public markets for the first time. Yet, Uber has gotten blasted with a litany of negative headlines. Many of the company’s drivers, who work as contractors rather than regular employees, went on strike in several major cities this week in protest to what they consider unfair working conditions.
The company’s efforts to placate workers, such as setting aside millions of dollars of shares specifically for its drivers, has done little to assuage them. Indeed, many reportedly looked askance at the offer. As a consequence, investors are growing increasingly worried about Uber’s long-term stability.
Undermining the business model
Uber is no stranger to lawsuits from taxi drivers and workers groups. Taxi companies feel threatened by the contractor model as well as its undercutting prices, so the recent class-action filing in Australia should not be surprising. Worker groups and lawyers have taken up the cause of contractors, trying to force Uber to classify its drivers as actual employees.
Lawsuits can be extremely expensive. And when they proliferate, it can mean serious trouble for a public company. If Uber fails to fight off these challenges, it would prove to be an existential threat to its business model. The company is already losing money hand over fist as it attempts to win market share. Were it forced to treat drivers as employees, it would probably not survive.
Lyft is a drag
The recent IPO of Lyft Inc. (LYFT, Financial) has also complicated things for Uber. When the smaller ride-hailing company went public earlier this year, it soon found its share price under threat. The stock has fallen substantially in its first months on the market as short sellers have piled on the money-losing company. Mediocre earnings reported this week have failed to offer much relief to Lyft's flagging share price.
While far larger than Lyft, Uber relies on essentially the same business model. Unsurprisingly, the cold welcome Lyft received has caused the company, as well as potential buyers, some distress. In response to its rival's flop, Uber revised its IPO target pricing in advance of its roadshow to between $44 and $50 a share. The high end of that guidance values Uber at about $100 billion, well under its original $120 billion target. Yet, despite reportedly being oversubscribed by the second day of the roadshow, Uber now expects its stock to be priced at the lower end of guidance, further dropping its valuation before it even hits the market.
Verdict
It is unusual to see a company fall so far in value before the public market even gets a shot at it, but these are unusual times in the IPO world. While Uber has let some of the air out of its valuation by choice, it is still extremely inflated.
Uber looks like an excellent short candidate going forward. However, investors should approach the IPO with caution. With the valuation seemingly lowered, some traders may think it is a bargain, at least at first. Volatility could prove quite extreme in the early days for this company, but its long-term downward trajectory has not changed.
Disclosure: No positions.
Read more here:
- Opportunity Zones: The Promise and the Problems
- SoftBank Is Not the Next Berkshire Hathaway
- Zillow's Strategic Transformation Presents New Dangers
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
