Four reasons Uber’s IPO stalled on Friday
Uber Technologies hit a wall of investor skepticism about big but unprofitable tech companies Friday, its shares registering a rare first-day loss for an initial public offering.
The stock ended the day at $41.57, a decline of 7.6 percent from the $45 price set by the ride-hailing company for its IPO on Thursday evening. After opening at $42, the shares never got higher than $44.85.
Uber’s disappointing debut came even though the San Francisco company and its Wall Street bankers priced the deal conservatively, hoping to leave enough room for the shares to get a “pop” that draws positive attention to a newly public company. Instead the deal foundered, frustrating investors who had bet on collecting a quick profit by flipping the shares.
It was another twist in Uber’s stunning and controversial rise from pugnacious startup to pugnacious transportation giant, a decade-long journey marked by repeated run-ins with local officials, the forced departure of cofounder Travis Kalanick amid allegations of a toxic corporate culture, and expansion into food delivery, bikes and scooters, freight trucking, and autonomous vehicles.
Uber was the most anticipated tech IPO since Facebook in 2012, and its rough start could dampen enthusiasm for the expected stock offerings of other tech companies with a lot of buzz and no profits.
They include Slack, which makes corporate messaging software, WeWork, the co-working real estate landlord, and Airbnb, the short-term residential rental company.
“This is going to cause some more caution in the IPO market,” said Matt Kennedy, a senior market strategist at Renaissance Capital, which manages IPO-focused exchange-traded funds. “Silicon Valley’s mantra of growth at all costs just does not fly on Wall Street.”
Despite’s Friday’s setback, Uber has been a spectacular investment for its early investors. According to The Wall Street Journal, First Round Capital put $510,000 into Uber in 2010, an investment valued at $2.5 billion based on the IPO price of $45 a share. The company’s biggest investor, SoftBank’s Vision Fund, is sitting on a stake worth $9.3 billion at the end of the day, while Kalanick owns $4.9 billion in shares.
And while it’s far too soon to write off Uber, there are several reasons why it hit the market in reverse.
1. Many investors doubt that the ride-hailing business can be profitable, or that Uber — or its smaller rival Lyft — has a strategy to make it profitable. A recent regulatory filing by Uber showed combined losses from operations of more than $12 billion from 2014 through 2018. The red ink flowed even as revenue soared to $11.3 billion from $495 million over the same period.
“It’s an industry with two large competitors who will continue to cut prices to gain market share,” said Peter Cohan, who lectures on innovation and strategy at Babson College. “They will always be squeezed on the cost side.”
2. The terrible performance of Lyft, whose stock had fallen 23 percent since its March 29 IPO. Lyft, also based in San Francisco, shed another 7 percent Friday.
3. It’s a tough market for stocks overall. When Uber started trading at 11:51 a.m. — after nearly 2½ hours of haggling between buyers and sellers — the Standard & Poor’s 500 index was down for the fifth straight day, a slide driven by mounting US-China trade tensions. The S&P 500 rebounded after Treasury Secretary Steven Mnuchin said the most recent talks with the Chinese in Washington, D.C., were “constructive.” Uber staged a brief rally Friday, but it ran out of steam later in the session.
4. Uber has an image problem. The company’s app, by far the largest ride-hailing platform, is blamed for ruining the livelihood of taxi drivers in New York, Boston, and other cities. It largely flouted local transportation regulations until officials pushed back. And there is a widespread perception that it exploits drivers.
“As Uber’s wealthy investors get wealthier today, remember that most of the drivers who built the company are still making poverty wages, often far less than minimum wage,” Brendan Sexton, executive director of the Independent Drivers Guild, said Friday in a statement.
Uber’s market value shrank by more than $6 billion during the day, from $82 billion. In the windup to the IPO, the company’s bankers — led by Morgan Stanley, Goldman Sachs, and Bank of America — were suggesting a market value of as much as $120 billion, in part because Uber is one of the rare companies whose name has become a verb — like Google.
The outcome may give other companies pause when they are wooed for an IPO by investment banks, said Chester Spatt, a finance professor at Carnegie Mellon’s Tepper School of Business.
Friday’s stock price decline didn’t affect the $8.1 billion Uber raised by selling shares, though it will likely diminish demand for the extra shares, known as a green shoe, that are typically set aside for later sale at the initial price.
Uber’s IPO ranks as the largest for a tech company in the United States since the Chinese e-commerce behemoth Alibaba brought in $22 billion in 2014. But the better comparison may be Facebook, which raised $16 billion in May 2012.
The social network eked out a small gain on its first day of trading, adding just 0.6 percent. By the end of 2012, it had lost 30 percent. But despite that early sell-off, Facebook has returned nearly 400 percent as a public company.
“We stay away from IPOs for several reasons,” Richard Mathes, president of Mathes Co., a New York investment adviser, said in an e-mail. “These include avoiding mispricing by the banks underwriting the offering, the usual gyrations an IPO stock goes through in the early days of trading, and the volatility associated with insider selling and lockup periods. We prefer to give a stock eight months to a year to settle down before we consider an investment in it.”
The average first-day gain for 240 IPOs since the start of 2018 was nearly 17 percent, according to Renaissance Capital. Just two of 32 venture capital-backed companies ended the day with a loss.
Jennifer Ellison, a principal at B/O/S, an investment adviser in San Francisco, has a lot of clients with connections to Silicon Valley, but just one bought Uber shares on Friday. She draws a parallel to the waning days of the dot-com boom.
“The market is frothy, and we are in IPO-land, and it just feels like the late 1990s,” Ellison said.