When Uber’s private equity owners and other shareholders hinted they were ready to float in late 2018, a valuation of up to US$120 billion was quickly adopted following investment banker indications. But then rival ride-hail and loss-making, Lyft, hit the market and promptly fell 28%, from a first day market valuation of US$22 billion to just US$16 billion at its 15 April low.
Uber Technologies Inc has now unveiled its IPO terms and Lyft’s on-market experience has had a detrimental impact on the valuation. Uber is seeking a valuation of between US$80 billion and US$90 billion (still above the last private share sale at US$72 billion) and is looking to raise as much as US$9 billion. This is still an extraordinary amount considering the company has stated that it doesn’t make any money and that it may not make any money.
Cheap money looking for new homes
Since the GFC, cheap and abundant money searching for a better yield filled the coffers of funds launched by private equity managers, which in turn allowed them to gamble on some unconventional roads to prosperity.
In the case of Uber, one can reasonably assume the loss of US$7.9 billion since 2009 is due to an attempt to leverage a first-mover advantage and synthesise a network effect to become more valuable as more customers adopted it. The only problem of course is that more Uber users doesn’t make the service better.
And Uber doesn’t benefit from scale advantages either. Consider that taxi companies rarely, if ever, monopolise more than one city and that there has been little desire on the part of buyers to consolidate taxi operators.
Of course, Uber’s strategy necessitated the disruption of incumbent taxi businesses, which initially regulators were delighted about. Competition begets lower prices and the cushy taxi monopolies and duopolies of many cities needed a kick in the backside. But the strategy also relied on by-passing the proper employment of drivers, something society and their representatives might ultimately be less happy about.
By throwing enough money and lawyers at the challenge, however, it was probably hoped that Uber would emerge victorious before any regulator could catch up.
Ultimately, great for consumers, lousy for investors
Perhaps what private equity didn’t count on was the emergence of competitors and the rapid adoption of their offerings. The preponderance of competitors such as Lyft in the US, Didi in China, EasyTaxi in Latin America, Grab in Asia, Yandex in Russia (now merged with Uber), Careem in the Middle East, Taxify (backed by Didi and now rebranded Bolt) and Gett in the UK, Israel and Russia, is evidence of not only lower than anticipated barriers to entry but also the commoditisation of the offering.
This suggests that depicting Uber as a technology company that transforms initial losses into future profits is an error of judgement. Uber, and ride hailing more generally, I believe will prove to be merely another example in a long line of ‘technologies’ that proved to be great for consumers but lousy for investors.
I cannot think of a large and successful major technology company that was as unprofitable for as long as Uber has been. Uber is already ranked as the biggest loss-making start up in history. By way of comparison both Facebook and Amazon were generating positive cash flows by year five.
The boldness of a strategy to offer an under-priced product (the providers don’t generate an economic return), flood the streets with cars and lose billions in order to decimate incumbents and bully regulators is typical only of boom-time conditions.
Private equity simply used mountains of other people’s money to engineer an outcome that history suggests must be organically-derived to prosper. Uber has raised more than US$20 billion since its Series-A funding round. This is two-and-a-half-thousand times more than Amazon’s pre-IPO funding and suggests Uber is being pushed to consumers rather than being pulled by them. It's an artifice than cannot be maintained indefinitely.
In his book The Origin and Evolution of New Businesses, professor Amar Bhide, stated;
“Many giga-businesses have no clue, when they start, about how they will become behemoths — think Microsoft developing Basic for the Altair in 1975, Sam Walton starting a country store, and Hewlett and Packard selling audio-oscillators. But being small, they can experiment to figure out what is profitably scalable and make radical changes if necessary. Which is why not having deep pockets to start with is a blessing not a curse.”
It is clear that Uber is providing its services at a discount to its costs. In 2018 that discount was roughly 27%. Meanwhile Uber drivers are reported to now be earning less per hour than taxi-driving operators. Clearly Uber cannot cut costs to boost returns without triggering even higher driver churn.
The popularity of the service is therefore more than partly due to it being too cheap.
IPO will pass the parcel to 'greater fools'
Tech insiders typically make all their money prior to the company floating. Venture capital and private equity funds and their limited partners are patient investors, happy to wait to sell their shares to a ‘greater fool’. But the stock market is far less generous. In the quarter to 31 December 2018, Uber’s bookings and revenue growth slowed dramatically. Year-on-year bookings growth has slowed from nearly 75% to less than 25%.
And this number may also reflect the disturbing fact that the proportion of people hailing a ride more than once per week is falling.
I am reasonably confident that investors who buy shares in Uber’s IPO will not make returns that justify the risk because I am far less confident that Uber has a place in the future of transport.
Roger Montgomery is Chairman and Chief Investment Officer at Montgomery Investment Management. This article is for general information only and does not consider the circumstances of any individual.