As Lyft, Uber, and Airbnb prepare for an IPO, we should compare these firms to…whom?
February 15, 2019 | Blog

As Lyft, Uber, and Airbnb prepare for an IPO, we should compare these firms to…whom?

Most tech firms would probably like to think of themselves as unique, that they are truly without peers.

In the case of mega unicorns like Lyft and Uber, that might actually be true. Both companies have disrupted several industries and have expanded beyond on demand car service into e-commerce, food delivery, bikes, scooters, and autonomous vehicles.

So when a company like Lyft or Uber goes public, how should Wall Street view it? Investors, especially institutions, normally evaluate a company’s performance by comparing it to other firms in the same industry. For example, the S&P and Dow Jones have created several stock indices in which investors can benchmark one company’s performance to the rest of the group in industries like transportation, energy, consumer staples, and healthcare.

However, in addition to Uber, tech firms like Facebook, Google, Apple, and Amazon defy easy classification because they operate or impact so many different industries.

For example, Apple generates most of its revenue from hardware sales of iPhones and computers but CEO Tim Cook recently said that he expects the company to generate “material” revenue from health services this year. Facebook is a social media network that also sells virtual reality headsets from Oculus. Amazon is an e-commerce platform that also makes original movies and TV shows. All of these companies also offer payment services.

No easy classifications in the digital age

The emergence of high-speed Internet and mobile devices makes industry classification outdated because tech firms can easily (and quickly) blur such boundaries, some experts argue.

“Times have changed,” according to 2016 piece published in the Harvard Business Review. “Industry walls are disintegrating at a rapid pace…Today, technology is just a standard part of corporate infrastructure, like operations or marketing. It’s not an industry in itself.”

The article was authored by Yoram Wind, a professor of marketing at University of Pennsylvania’s Wharton School, Megan Beck, chief product and insights officer at machine learning startup OpenMatters, and Barry Libert, chairman at OpenMatters.

“These (tech) companies, which are remarkable for beating out historic leaders like Exxon despite their relative youth, are all digital platform organizations that leverage a growing and virtual network of suppliers and customers,” the article said.

When a company goes public today, it receives a General Industry Classification System (GICS) designation. Launched in 1999 by S&P Dow Jones Indices and MCSI, the GICS categorizes companies into one of 156 sub-industry groupings “according to its principal business activity.” GICS further organizes those sub-industry groupings into 69 industries, 24 industry groups, and 11 sectors.

If that already sounds complicated, consider that the S&P Dow Jones and MCSI has had to revise GICS several times in recent years, including renaming “Telecommunications Sector” to “Communications Services,” creating a new sub-industry called “Internet Services & Infrastructure” under the “IT Services,” and moving e-commerce companies from “Information Technology” to “Consumer Discretionary.”

Instead, the authors of the Harvard Business Review piece propose using just four categories:

  • Asset Builders: companies that make and sell physical things
  • Service Providers: companies that use people to offer services
  • Technology Creators: companies that generate and deliver intellectual property (software and data)
  • Network Orchestrators: companies facilitate transactions and interactions within a network

“Instead of focusing on vertical industries, it’s time to look at business models instead,” the article said.

“Our research has shown that companies that build and manage digital platforms, particularly those that invite a broad network of participants to share in value creation (such as how we all add content to Facebook’s platform or that anyone can sell goods on Amazon’s), achieve faster growth, lower marginal cost, higher profits, and higher market valuations,” the piece said. “For organizations like these, business model is a better way of identifying competitors and comparing performance.”

Peer groupings and executive compensation

Another factor to consider is executive compensation. Companies use GICS classifications to determine how much to pay CEOs and other top executives by comparing their compensation to their counterparts in similar companies/industries.

But such methods are highly subjective; for example, Apple developed two sets of peer groups to benchmark executive compensation, according to its proxy statement.

Primary Peer Group: Alphabet (Google), Amazon, AT&T, Cisco Systems, Comcast, Disney, EMC, Facebook, Hewlett Packard Enterprise, HP Inc., IBM, Intel, Microsoft, Oracle, Qualcomm, Time Warner, Twenty-First Century Fox, Verizon

Secondary Peer Group: 3M, American Express, Boeing, Coca-Cola, General Electric, Johnson & Johnson, Nike, PepsiCo, Procter & Gamble

That’s more than two dozen companies from an eclectic mix of industries. Indeed, it might seem odd that Apple considers as peers companies that make soda, sneakers, and aircraft.

Institutional Shareholder Services (ISS), a powerful proxy advisory service, now monitors and evaluates the peer groupings companies use to justify executive pay.

“ISS will review cases where the standard methodology appears to have produced inappropriate peers and may adjust peer groups in these cases,” the firm said. “The basic principles of the methodology will apply: peers should come from similar industries and be of similar size, and company peers should be prioritized where possible.”

Classifying tech unicorns

So what kind of peers would be appropriate for some top unicorns? SharesPost has compared Airbnb to online travel firms like Expedia, Priceline, and TripAdivsor.

You could also argue that major hotel chains directly compete with Airbnb. Indeed, the company has partnered with merchants in other travel segments (e.g., rental car companies and airlines) to create joint incentives that resemble third-party loyalty programs longed favored by hotels. Airbnb has also created a “Journeys” program in which hosts not only provide lodging but also tours, transportation, meals, and activities like wine tasting or mountain climbing.

Slack is a communications platform that provides messaging, video, and group chat services. That means it competes with Microsoft’s Skype, Facebook/Instagram, Apple, Google, and Zoom.

Lyft and Uber obviously compete with traditional taxi services and car rental companies. But Uber also delivers food and retail goods, just like Amazon. Furthermore, Lyft and Uber are investing in autonomous vehicles, which means it will compete with everyone from Alphabet to car makers like General Motors, Ford, and Tesla.

When unicorns like Uber and Lyft do go public, it will be interesting to see how these companies compare themselves to their peers, whoever they may be.

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This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

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The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

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Thomas Lee

Thomas Lee

Thomas Lee is the Senior Writer at SharesPost. He was previously a business columnist at the San Francisco Chronicle. Lee has written for the Star Tribune in Minneapolis, St. Louis Post-Dispatch, and Seattle Times. He is author of “Rebuilding Empires” (St. Martin's Press), his book on the future of big box retail in the digital age.
PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.