Money Management

The Uber IPO is broken. On Friday, May 10, 2019, the stock opened at $42 per share, $3 below its offering price. A broken IPO is a stock that trades under its offering price shortly after going public. This drop in price seems to reflect Uber’s tumultuous existence with culture issues, scandals, infighting, and most recently a driver strike in protest of its IPO. Uber might not be ready to face the spotlight, and scrutiny, of being publicly traded.

Ten years ago, Uber set out to change the way we move, and to that end, it’s been successful. Uber’s technology simplified hailing a ride– instead of searching for money for an undetermined, and questionable, price– riders merely press a button on the app which provides all of those services in one.

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Uber Technologies Inc. (NYSE: UBER) is the world’s biggest transportation network company operating on six (6) continents in over seven hundred cities. 

Beyond Uber’s primary platform, it has two additional lines of business: Uber Eats, a meal delivery platform and Uber Freight, an on-demand marketplace connecting shippers and carriers. 

Uber sought to raise $8.1 billion by offering its shares to the public at $45 per share. This price already was $2 under the midpoint of its proposed range of $44-$50. Although it initially seemed that Lyft’s recent IPO poor performance caused the price reduction, it appears that there might have undercurrents regarding Uber’s status. So what’s wrong with Uber?  

The ride-hailing business isn’t profitable

Although TaaS provides riders with affordable and convenient transportation options, the business model might not be sustainable. Lyft and Uber, the world’s largest ride-hailing companies, have sustained massive operating losses throughout their history. Uber is the most unprofitable IPO; Lyft is the second. Uber’s prospectus reveals that it lost $4.08 billion and $3.03 billion for 2017 and 2018, respectively with an accumulated deficit of $7.9 billion. In addition to Uber’s consistent massive losses, revenue growth from its ridesharing operation has slowed dramatically.  Growth decreased from 95% in 2017 to a mere 33% in 2018. Coupled with the ominous, “we may not achieve profitability,” things do not look bright for Uber. 

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Lyft, Uber’s closest competition, illustrates the industry’s disruption as a shift away “from car ownership to Transportation-as-a-Service, or TaaS.” As an example of the industry’s potential, Lyft shares that car ownership has economically burdened U.S. consumers, who spend over $1.2 trillion annually on personal transportation. 

Uber is the world’s defendant 

Uber is currently in litigation on four of the six continents it operates. Defending and resolving litigation is costly and erodes the company’s bottom line. Uber faces suit concerning its development of autonomous cars, classification of drivers, and reckless business practices.  Commentators believe that many of these issues are a direct result of ousted former CEO, Travis Kalanick’s culture of “win at all costs.”  

The Autonomous car initiative

Anthony Levandowski, a former Google employee, was selected to lead Uber’s self-driving initiative after Uber acquired Otto, his self-driving truck tech startup. However, shortly after this announcement, Google filed arbitration demands against him alleging breach of his employment agreement which included violation of the non-compete clause. Uber revealed that its contract with Levandowski requires it to take financial responsibility if damages are assessed.

If the arbitration demand wasn’t enough, Waymo, Google’s self-driving technology subsidiary, filed suit claiming theft of trade secrets and patent infringement arising from Otto’s acquisition. Uber settled the claim for 5.1 million shares of stock in addition to hiring an independent software expert to ensure Uber’s autonomous vehicle hardware does not misappropriate Waymo’s intellectual property.

The classification of drivers

Because drivers choose whether to provide services, use their own vehicle, and are free to work with Uber’s competition, Uber believes that drivers are independent contractors, not employees.  However, the independent contractor classification is being challenged in the United States and internationally. In the U.S., over60,000 drivers have challenged this classification, Uber has reserved $132 million for litigation. Currently, these claims exceed the reserve, they are projected to settle anywhere between $146 million to $170 million. Uber has settled two consolidated class actions with California and Massachusetts drivers for $20 million. In Switzerland, several government agencies have classified drivers as employees for social security purposes; Uber is currently challenging this classification. 

Reckless business practices

In its early years, one of the hallmarks of Uber was a rogue operation; in other words, operating without a license in jurisdictions where it was required.  Uber is defending itself against taxi medallion ownersin Massachusetts alleging unfair competition violations in June. 

Taiwan’s Ministry of Transportation fined Uber and its drivers approximately $800,000 for each ride that took place from January to February 2017. In Europe, Uber was preliminarily charged criminally for aiding and abetting illegal taxi traffic in 2015 in Copenhagen. Uber recently received a request relating to its activity in Copenhagen in 2016 and 2017. Two weeks ago, an Australian law firm filed a class action on behalf of over 6,000 participants in the taxi, hire-car, limousine, and charter vehicle industry alleging conspiracy by unlawful means between April 2014 and August 2017. 

In November 2017, Uber revealed it concealed a data breach of sensitive and personal information for over a year. Uber settled with the Attorney General for each of the 50 U.S. states and the District of Columbia for $148 million. Uber was also fined over $1.5 by European regulators concerning the breach. There are still pending regulatory matters which include litigation with the City of Chicago and approximately 14 individual and class action lawsuits. 

Uber is not Amazon

In the days preceding the IPO, Uber’s CEO, Dara Khosrowshahi, compared Uber to Amazon. His basis was that is Amazon one of the biggest companies in the world, but at the time of its IPO, it was not profitable. Although it’s a desirable comparison, it is simply wishful thinking. 

There are significant differences between companies.  First, when Amazon IPO’ed in 1997 it had been in business for approximately three years. In Amazon’s 10th year, it had profits of $476 million, a far cry from Uber’s $3.03 billion loss at the same point. Second, Amazon has also faced multiple economic headwinds and has managed to still come up on top.  Uber, on the other hand, has been the beneficiary of ideal market after the 2008 recession. Uber has not generated a profit since its inception and has relied on $24.7 billion in funding from notable venture capital funds, such as SoftBank’s Vision Fund and Sequoia Capital. But that unchecked flow of cash that ended Friday, with their first public injection of funds.

The growth at all costs mantra has finally caught up to Uber.It now is accountable to a larger pool of investors. Uber must employ cost-cutting strategies, and revenue generation like its life depends on it, because, well it does. 

Can it be fixed?

The problems with the Uber IPO are indicative of the issues with the company overall. Uber still has opportunities. The company has dramatically improved its culture by changing its Executive team and Board of Directors. Uber’s current team has an average tenure of a little over a year, excluding Chief Technology Officer Thuan Pham.CEO Dara Khosrowshahi, the former CEO of Expedia, appears to be a breath of fresh air for the once chaotic startup.

Uber appears to have restored its autonomous vehicle technology program with the $1 billion partnership deal with SoftBank, Toyota, and DENSO. Investors should watch this deal closely because development could be limited by the terms and conditions of the Waymo Settlement.

Uber Freight provides an exciting path to profitability listed as “other bets” in its prospectus increasing 457% from 2017 to 2018.  The quickest route to profitability might be using Uber’s technology to move things, not people.

Overall, investors should probably wait until at least the lock-up period is over in November before considering it as an investment. Even then, it is unclear if Uber will be a worthwhile investment. It’s a strong possibility that the early investors received all of its value, leaving very little for the average investor. For the average investor to get value, Uber must overperform. However, with profitability currently nonexistent, this is a large (almost impossible) task especially considering the significant drop in growth in its primary revenue driver.We are all watching to see if Uber will rise like a phoenix or sink like the Titanic. 

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