Uber’s (UBER) disappointing initial public offering on Friday may be good reason for other tech companies going public this year to be concerned.
The ride-hailing company priced its shares at $45 per share, raising $8.1 billion and giving it a valuation of over $82 billion. It ended Friday 7.6% lower at $41.57 per share — a disappointing Wall Street debut for the most highly anticipated tech IPO of the year despite Uber’s relatively conservative approach with its IPO pricing.
Although at least 10 companies this year went public and opened lower than their IPO prices, Uber was the first company ever with a $4 billion-plus offering to do so, according to data provided by Dealogic.
Three experts Yahoo Finance spoke to said Uber’s lackluster start should give other tech companies set to IPO later this year reason to be more conservative when pricing their own forthcoming IPOs to better manage investor expectations. Many companies set to IPO have yet to become profitable.
Uber’s $45-a-share pricing was toward the low end of its stated range of $44 to $50. But experts we spoke to say that Uber should have set that range even lower. The company, which lost $1.8 billion in 2018, also should have provided investors concrete guidance as to when it expects to become profitable, according to the experts we spoke to.
Uber’s first day of trading served as a stark contrast to the video conference company Zoom, which was already profitable when it IPOed in late April and saw its stock surge nearly 72% during its own first day on Wall Street.
Pricing (even) more conservatively
Dan Ives, managing director of equity research for Wedbush securities, says Uber’s IPO raised a “yellow flag” for other tech companies poised to go public this year, including Airbnb, Instacart, Palantir, Postmates, and Slack. For those companies, Ives says Uber and Lyft (LYFT) can serve as case studies for company valuations. In Uber’s case, Ives suggests some investors still found Uber’s IPO valuation overpriced even though it was far less than the $120 billion valuation bandied around in late 2018.
Uber’s more conservative approach came after Lyft’s aggressive underwriters moved that company’s IPO price above the initial range in late March. Lyft like Uber, continues to hemorrhage money — the company lost $911.3 million in 2018 — and it has provided no clear guidance as to when it could turn a profit, other than to say 2019 would be Lyft’s “peak loss year.” Lyft stock is trading almost 35% lower than its all-time high in late March, plunging over 7% on Friday alone following Uber’s IPO.
“With Lyft making a train wreck of things and Uber’s first day, it can be choppy out there on Wall Street,” Ives explains. “But yet, you look at Pinterest, Zoom, and the number of other of these IPOs [whose stocks] have been up and to the right, and I think what you're seeing is investors are being picky about valuations.”
Pinterest (PINS) and Zoom (ZM) are faring significantly better than their ride-hailing counterparts. Pinterest, which narrowed its losses 52% year-over-year to $63 million in 2018, saw its stock jump over 28% during its first day of trading and climbed 19% overall since its Wall Street debut. Zoom, meanwhile, has performed even better, thanks largely to the fact that it was actually profitable before it IPOed: the video-conferencing company earned $7.6 million in net income on revenues of $336 million for its most recent fiscal year ending this January and saw its own stock soar 80% during its first day of trading. (Zoom stock is up 28% overall since its Wall Street debut.)
WeWork, take note
Marty Wolf, president of the Scottsdale, Arizona-based investment bank MartinWolf, contends WeWork, in particular, could take a note from Uber and its Wall Street debut. Like Uber, shared workspaces company WeWork, has also rapidly expanded during its nine years.
The company, which is valued at $47 billion, had 425 locations in 100 cities as of January, the company said in a blog post — up from 207 locations a year prior. WeWork also continues to rack up significant losses due to large capital expenditures going towards rapidly opening up new offices.
Although WeWork more than doubled its revenues from $886 million in 2017 to almost $1.8 billion in 2018, WeWork also lost $1.9 billion in 2018, according to Axios — up 103% from 2017.
“I think that [Uber’s IPO] will be a red flag for WeWorks and its road to profitability,” adds Wolf, who closely follows the technology sector and focuses on M&A advisory in the IT space. “WeWork is also a very complex business, it has lots of losses, and it’s not clear how you get to profitability.”
In an interview with Recode in August 2018, WeWork President and CFO Artie Minson cautioned the company’s losses will continue, mostly driven by construction and costs related to long-term rental contracts.
A lesson learned the hard way
The lesson? In addition to pricing their IPOs more conservatively (one thing Uber got right, investors agree), unprofitable companies like WeWork that expect to rack up significant losses in the short- to medium-term should provide investors a clearer, more defined road to profitability as their IPOs approach if those companies want to generate more investor interest in their stock.
Despite Uber’s disappointing Wall Street debut, investors like Troy Capital general partner Samit Varma remains bullish on the ride-hailing company, emphasizing his confidence in the company’s long-term prospects on the public market and reiterating Uber’s first day of trading was just that: its first day.
“From our perspective, the things that really matter to us are the fundamentals of the business and you know, do they have a core business model that makes sense?” says Varma. “Do they have a lot of growth opportunity?”
While companies set to IPO later this year like Airbnb, Instacart, Palantir, Postmates, and Slack certainly have more room to grow, Uber’s bumpy first day of trading underscores the inherent uncertainty around IPO pricing and timing.
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