In the wake of Lyft Inc.’s LYFT disastrous initial public offering in March, most investors wisely tempered their expectations for Uber Technologies Inc. UBER. The ride-hailing market leader, which followed Lyft into the public arena last week, scaled back its expectations twice in the runup to its debut.
Unfortunately for Uber, even its comparatively more conservative IPO price proved far too rich for investors’ tastes.
A calamitous debut
Uber’s first two days on the stock exchange proved to be an unmitigated disaster. Shares fell 8% right out of the gate on May 10, and things only got worse from there, continuing a painful downward trajectory throughout the Friday session. The weekend offered little respite to the beleaguered ride-sharing company. On Monday, Uber’s losses continued with the stock down a gut-wrenching 18% from its Friday debut.
Uber finally managed to snap its losing streak to post its first ever up day on Tuesday. The stock climbed 7% during the trading session to close at $39.96 per share. That remains a far cry from its IPO price of $45 per share, which was already at the lower end of a considerably muted offering. Indeed, Uber’s market capitalization hovered not far above $60 billion on May 13, not much more than half of the $120 billion the company had initially sought in its IPO.
Underwriter’s blues
While those investors and traders who decided to try to catch this falling knife have been left to lick some deep wounds, even they might spare a sympathetic thought for Morgan Stanley (MS) and its fellow underwriting institutions. The venerable investment bank did its utmost to defend Uber’s vaunted share price during its first foray into the public market, but its best efforts proved fruitless.
Indeed, Morgan Stanley actually deployed a rare “nuclear option” in its desperate effort to provide a price support lifeline to the faltering Uber. The lead underwriter did not merely adopt the usual greenshoe overallotment, but actually went as far as to engage in naked short selling in its effort to fend off the relentless downward pressure afflicting the stock. Ultimately, this highly unusual strategy failed to pay off.
Lament for the retail bag holder
The rise in recent years of massive private tech unicorns like Uber has been supported by a historically unprecedented quantity of capital flooding into venture capital and private equity sectors. However, even these shockingly deep pools of funding have their limits.
Hence, an IPO becomes necessary for such cash-hungry growth companies to keep the lights on. More importantly, they provide the only realistic exit opportunity for the individuals and groups with stakes in the overvalued behemoths. No single private buyer is ever going to absorb a company with a bulging unicorn valuation, so it is left to retail investors to hold the bag for them, to use the parlance of Wall Street veterans.
Everyone’s underwater now
While many Uber investors may have hoped for a clean getaway in the wake of an IPO, the immediate collapse of its stock price has left more than retail newcomers underwater. Indeed, many longtime shareholders have taken a bath too, as Axios reported Sunday:
“A whopping 81% of the $29.55 billion in equity that Uber has raised is underwater. IPO investors have lost $655 million, while investors from 2016 and 2018 have between them lost $2.27 billion.”
While some have managed to get out while the getting is (comparatively) good, many of Uber's backers have paid a steep price for their loyalty in recent days.
Verdict
The nasty beating Uber has received thus far is a prelude of things to come. This is no simple matter of growing pains, as we have discussed previously. The company’s underlying business model is riven with problems. In fact, if lawsuits surrounding its contractor employee model fail to crush Uber’s business, its apparently structural unprofitability ought to do the trick.
Disclosure: Author is short Uber and Lyft.
Read more here:
- Graham and Buffett on Profiting From Market Irrationality
- Lyft's Labors Lost: 1st-Quarter Earnings Fail to Impress
- Uber Faces New Headwinds as It Prepares to Go Public
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