Uber is likely to be priced to hit the markets at a valuation somewhere between $83B and $91B. If the markets remains as euphoric about the crop of 2019 technology IPOs, it may open higher, perhaps at $95–100B.
To decide whether or not it is a great long term investment, we have to assess whether or not it will achieve a valuation of -say $180M or higher in the next 5–7 years.
Here are the pros and cons, based on my analysis of Uber’s S-1
- Large addressed market. I don’t believe that the addressable market is $12 trillion, but it is still very large, and Uber’s ambition of becoming “the Amazon of Transportation” will support a much larger company, if it can be realized.
- Broad product/market footprint. In ride-sharing, Uber is in multiple continents and large markets outside of North America: Europe, Latin America, India and the Middle East. It is also a major player in food-delivery with UberEats, and has an emerging business in Uber Freight.
- Numerous assets. It owns share in regional rivals it sold out to, including Didi Chuxing in China and Grab in Southeast Asia, as well as an Autonomous Driving effort that is being spun out of Uber, with other investors willing to help fund its technology development, which is a huge positive.
- Sensible management. Uber’s executives “get” the need for profitability, and have clearly articulated strategy to get there: aggressive pricing to hold on to market share until competitors become “rational”.In moving towards profitability – as Uber lost, to support its valuation – it will be an absolute requirement.
- Very high valuation at IPO. Early investors will definitely make the majority of the money here. Amazon, one of the spectacularly successful IPO investment opportunities of our times hit the market with a market valuation of $453M. Uber will start with a number that is 20 x Amazon’s. Put another way, Uber would have to match Amazon’s valuation today to provide a 10 x return.
- Severely declining growth rate.Uber’s growth rate in its core ride-sharing business has slowed greatly from 95% YoY 2016/17 to 33% YoY 2017/2018, and the food-delivery business also showed anemic growth in the last two quarters of 2018, growing again inQ1 due to huge incentive spending why Uber. Uber insists that this is an aberration, but it is doubtful.
- Continued losses. During its roadshow, Uber has signaled its “scorched market” approach to maintaining market share, and early indicators are that it has gained some share back from Lyft, but at the cost of increasing losses. During the road show, Uber management has also emphasized that in the long term, ride-sharing markets will be duo-polies, with two profitable service providers who are focused on maintaining market share profitably versus competing for share. The question is, how soon can this happen? And will public markets tolerate these level of continued losses while the markets that Uber competes in rationalize? Lyft’s Q1 financials released this afternoon showed great revenue growth – with deeper losses due to IPO-related expenses. Lyft’s first-quarter revenue tops expectations. It is notable that Q1 2019 was Uber’s most unprofitable quarter ever, as the company recovered market share losses to Lyft and in the food-delivery space with aggressive incentives.
- Competitive environment. Softbank is a double-edged sword for Uber. They keep investing in UberEats competitors (Doordash, Rappi in Latin America) as part of a sectoral bet on food-delivery. It is hard to bet that this market – and many regionally focused competitors – are ready to be “rational” with pricing.
- Driver availability.This is one of the biggest limiters to ride-sharing growth in the US, as drivers want a bigger share of the pie. Uber drivers will go on strike over pay and benefits ahead of the company’s $90 billion IPO. Autonomous vehicles will not be mainstream in the next 10 years, so driver elimination is not a choice.
- Regulatory & Legal risk. The list of Uber’s currently open lawsuits is long and wide, and there are many, many more regulatory battles ahead. They are likely to, collectively, limit growth and divert management attention.
The pros and cons are both significant lists. Since this is not particularly helpful in making a decision, let’s ask a different question.
How likely is it that Uber will be a truly transformative company 10 years from now, the way Amazon, Google, Facebook have been transformative?
Of all the technology IPOs of 2019, it seems to be the company most likely to become that. Uber is an international brand, has been transformative, and is well led.
But there are major risks.
Uber’s IPO is over-subscribed and will be successful in raising $8–10B for the company. The only question is whether it will attract sufficient long-term investors who will hold on to the stock through the inevitable volatility that it will experience, given the rough road to profitability.
My bottom line is that at a conservative price/valuation, Uber is a highly desirable stock to have in my portfolio of holdings – not anywhere close to “betting the farm” on it levels, but as a reasonable holding.
I expect Uber’s stock price to be volatile while it finds a path to profitability, and am willing to be patient and get to that price over time. At or close to the low end of Uber’s price range ($44/share), as a long term investor, I will be a buyer. At anything higher, I will wait.
– Vinod Mahendroo
MBA from Harvard Business School