On Friday the Uber IPO will hit the markets. The deal comes on a week that will be the busiest for new offerings since 2014, as there are 13 deals expected.
But of course, much of the attention will be on the Uber IPO, which has a price range of $44 to $50 per share. Assuming the deal gets done at the mid-point, the amount raised will come to $8.5 billion.
In light of the mixed performance of the Lyft (NASDAQ:LYFT) IPO, it looks like the Uber valuation is somewhat muted. So this may mean there will be a nice gain on the debut. Yet this could prove temporary. Keep in mind that the Uber IPO has some notable risk factors.
Let’s take a look:
Uber IPO: Growth
Growth has been decelerating. In 2017, the revenues spiked by 106% but came down to 42% in 2018. But more troubling is that the core ride-hailing business – which accounts for the majority of revenues – has stalled. Consider that the company has been aggressive in fending off competitors by giving out more incentives and promotions. Let’s face it, there are few barriers to entry except access to large amounts of capital, which is plentiful nowadays.
The cruel irony is that Uber’s largest investor, Softbank, has been one of the biggest funders of the rivals. For example, portfolio company Didi has taken market share in key markets in South America.
True, Uber has diverse revenues streams. But these businesses are also coming under pressure. In the food delivery market, DoorDash has made significant gains in the U.S. and Rappi has been getting traction in Latin America (by the way, both are backed by Softbank).
There may also be a major threat to Uber Freight. Recently Amazon.com (NASDAQ:AMZN) launched its own online brokerage platform as it plans to make one-day delivery a standard.
In light of all this, Uber’s losses have ballooned, coming to about $1 billion in the first quarter compared to $3 billion in revenues. To put things into perspective, when a company gets to the scale of Uber – such as Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) did – they are almost always solidly profitable.
Uber IPO: Business Model
On Wednesday, drivers from Uber and Lyft plan to stage a “strike.” While it’s difficult to gauge the potential turnout, the event will certainly get lots of buzz (it appears there will be demonstrations in ten cities). The strike also points out some other weaknesses in the Uber business model.
“We do see added risk from Uber aiming to take greater share of the fare from drivers and expect that the more Uber pushes here, the more drivers will fight back and protest, increasing the likelihood of regulations (particularly at the state level in the U.S. and in Europe) of minimum wage guarantees,” said Wedbush analyst Daniel Ives.
As we head into the elections next year, there is the possibility for this to become an issue. It’s not a good political look when VCs, executives and founders get rich and the contractors barely get by.
Uber IPO: Self-Driving Cars
Self-driving cars are likely to be a game-changer for Uber since it will lead to significant reductions in the labor costs. But there are some things to consider.
First of all, Level 5 autonomy is still far off. And even if the technology is rock-solid, the regulatory process could be onerous.
Next, Uber has had a checkered history with autonomous vehicles, with a pedestrian death last year. The company’s investment in the technology also pales in comparison to other major players in the space, such as Google’s Waymo and GM’s (NYSE:GM) Cruise (oh, and Softbank has invested billions in Cruise).
In other words, one of these companies could leverage their own systems to create a robotaxi network, which would put quite a bit of pressure on Uber.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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