The financial media, which is always on fire about something, is currently ablaze with talk about Uber’s looming initial public offering (IPO). The ride-sharing service, whose name has become synonymous with ride-sharing services, is a highly-visible company that unquestionably disrupted the business of getting from here to there – just as Netflix up-ended home entertainment and Apple changed the definition of “phone.”
Understandably, many investors are wondering if they should add Uber to their portfolio when it hits the market. If you’re one of those people, here’s some context that may help you make a decision.
Once upon a time, meaning about 20 years ago, investors bought into initial public offerings because the company going public was already an established money-maker. The cake was already there ready to cut into thousands of slices that would (hopefully) grow ever larger – and maybe even spin-off tasty dividends along the way.
Enter Amazon. The pioneering online store disrupted more than retail. It put a dent in how some people think about IPOs. When Amazon went public in 1997, it had yet to show a profit in its two-year history. It went on to lose money for another two or three years.
The rest is important history. Some investors bailed on Amazon during its early struggles. But those who stuck with the company for the long-haul were handsomely rewarded. Amazon went public at $18 a share; that same slice of cake is worth about $1900 as I write this.
Many American investors chose to learn this lesson from Amazon’s history: It’s OK to buy into the IPO of a money-losing company if the company has the game plan, competitive advantages, management talent, and resources to eventually transform and dominate its category.
That’s a legitimate approach. The trick is determining whether a particular company has what’s needed to achieve that profit-spewing level of dominance. This already difficult assessment is made more difficult by all the hype that tends to surround a high-visibility IPO.
Does Uber, which is currently losing money hand-over-fist ($3 billion in 2018), have what it takes to conquer its quadrant of the transportation galaxy, which encompasses ride-sharing, food delivery, and freight delivery? Perhaps. But there are doubters. Many doubters.
These doubters being their arched-eyebrow argument by noting that Uber competitor Lyft is currently traded at 20% below its IPO price – and Lyft is growing faster and losing less money than Uber.
Uber skeptics contend that Uber has few if any, competitive advantages. It’s easy for ride-share-seekers to switch from Uber to Lyft or Europe’s Bolt. Just close the Uber app and open the competitor’s app.
Compare that reality to Facebook’s situation. People may grouse to their friends about Facebook’s many failings, but currently, there is no comparable platform in the social media sector.
And while Uber claims to have the largest global ride-sharing network, 24% of its bookings come from just five cities – New York, Los Angeles, San Francisco, London and Sao Paulo, Brazil. Some analysts say this means Uber could one day face stiff competition from local ride-share services that could profitably super-serve their cities.
Uber’s publicly-stated plan to “reduce driver incentives” in an effort to boost profits could help fuel the rise of local competitors.
Equity researcher David Trainer believes Uber could be profitable well down the road if the ride-sharing industry shakes out into a duopoly or oligopoly situation similar to the situation airlines enjoy in many cities. In this scenario, Uber and one or two much smaller competitors would own a local market.
But even that math is daunting. According to Trainer, “If we assume Uber can earn airline-like pretax margins of 8% by the end of next year (its current pretax margins are -24%), the company must grow revenue by 40% compounded annually for the next 7 years to justify its current valuation” of $80 billion to $90 billion. That means Uber would need gross bookings of $650 million in 2025. That could prove a challenge given that a Goldman Sachs report says global ride-share booking will be just $285 billion in 2030.
Given the above, Trainer believes Uber’s best hope for long-term survival and profitability is to partner with or be acquired by an innovative, deep-pocketed tech company like Google parent Alphabet.
Whether to add Uber to your portfolio is a very personal decision that could lead to any one of innumerable outcomes from a huge pay-off to deep disappointment. My only advice is to make your Uber decision as you make all your investment choices – with facts and reason, not hype and emotion.
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