The time has come: Ten years and $76 billion in the making, Uber will reportedly be hitting public markets on Friday. The big question on everyone’s mind: What will this IPO look like? Smaller ridesharing competitor, Lyft, took the plunge last month and has delivered lackluster performance thus far, while other unicorns including Beyond Meat and Zoom Video are trading more than 100% above their IPO prices. Much like Lyft, Uber’s IPO was reportedly oversubscribed two days into its roadshow. The strong response suggests that investors are still eager to get into the company, despite Lyft’s rocky start.
While Uber benefits from broader scope and larger size overall compared to Lyft, the company will have to convince investors it can mitigate the risks inherent in its business model. As a global company, Uber will be more susceptible to political risk, such as the market’s negative reaction today about potentially higher tariffs on Chinese imports. Because Uber is a larger company, the magnitude of its losses is considerably higher than its smaller counterpart. Uber’s operating loss was $3 billion in 2018 vs. a $977 million loss for Lyft. With an uncertain road to profitability, Uber will have to clearly and convincingly demonstrate its long-term growth potential.
The collective results from unicorn IPOs this year suggest investors are valuing companies by their individual merits, not collectively as a risky asset class. The table below illustrates how the share prices of four recent IPO companies have changed at various benchmarks. Two of the companies that went public with net losses on their income statement, Pinterest and Beyond Meat, priced their IPOs nearly at or below their last private financing share price. At $50 per share (the upper range of Uber’s most recently disclosed price range), the company would be going public at a share price only 3 percent above its last private financing. Clearly, Lyft’s performance in the public markets has had an effect on Uber’s potential valuation. Though the ultimate IPO price could be above the current range, it’s unlikely the company will seek the $120 billion previously rumored. This conservative strategy could be a boon for shareholders, relieving some pressure on the company, which is likely years away from turning a profit.
|Share Price Change from Last Private Financing to IPO Price||Share Price Change from Last Private Financing to Close 5/3||Share Price Change from IPO Price to Close 5/3|
One notable takeaway from the table is, at every level, unicorns that have completed IPOs this year are trading above their last private financing rounds. While some pundits have posited these companies are overvalued given their operating losses, public markets have shown they don’t agree. Two primary reasons for this are growth and growth potential. The average revenue growth for the five companies listed was 112%. By and large, these companies claim to have tapped only a small percentage of their total addressable market. The risk inherent in such claims is that those ambitions may be overstated, but investors realize such growth figures are difficult to find in other asset classes.
In its current range, Uber’s IPO will be the third-highest valued tech IPO ever and the largest such IPO in the past five years. Uber’s IPO may have a direct impact – positively or negatively – on the other unicorns looking to enter public markets this year, including Postmates, WeWork, and Slack. Postmates will be especially interested in Uber’s IPO because it is a pure-play competitor of one of Uber’s fastest growing segments – UberEats. Over the past three years, respondents of our annual ridesharing survey have identified UberEats as the fastest-growing service used.
Financial information provided in Uber’s S-1 tells a similar story. Despite contributing only 8% of net revenue in 2018, UberEats revenue grew 106% from 2017 to 2018, while ridesharing revenue grew only 40% in the same period. This trend suggests food delivery is developing as the next major battleground in mobility.
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Even so, the results of the IPO may be difficult to interpret. On one hand, Uber’s EV/Revenue multiple at IPO above Lyft’s could indicate how much investors value the other services it, like UberEats. That said, Uber may earn a high multiple based on the broad services and geographic diversity, coupled with the nearly $5.7 trillion market it is looking to capture. Either way, Uber’s performance will undoubtedly have broad implications for Postmates and other unicorns next up to bat. We will be closely monitoring the company this week as it completes its historic public offering.
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