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Uber IPO: Be Ready to Be Underwhelmed

By Harsh Chauhan - May 4, 2019 at 12:09PM

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Uber's IPO range puts its valuation well under the $100 billion it was previously looking for, but there could still be negative surprises in store.

Lyft's (LYFT 5.98%) much-awaited IPO has turned out to be a disappointment for investors, as shares of the ridesharing specialist are down significantly since its stock market debut. Short-sellers have piled into Lyft stock, believing it to be overvalued. Analysts haven't been kind to the company, either.

This has set a bad precedent for Uber, the world's largest ridesharing company. Uber now plans to price its IPO in a range of $44 to $50 per share, according to an amended filing, which would value the company at less than $90 billion at the midpoint. That's down from the $48 to $55 range the ridesharing giant was reportedly targeting earlier.

This reported pullback in the pricing of Uber's IPO isn't surprising, as the company is contending with a ton of problems.

Man holding his head in his hands in front of a stock chart.

Image source: Getty Images

Uber's numbers are disappointing

One of the most significant takeaways from Uber's IPO filing was that the company might not achieve profitability. The filing said: "We have incurred significant losses since inception, including in the United States and other major markets. We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability."

Uber's IPO filing cites several issues that could get in the way of profitability. For instance, the company could get into a fare war with its rivals, or it might have to offer better incentives to its drivers so that they don't switch to rivals. Uber's IPO filing noted that a potential inability "to attract or maintain a critical mass of drivers" would make its platform "less appealing to platform users."

This isn't the only challenge that Uber faces. In fact, its S-1 filing clearly reveals that the company's growth is slowing. Uber's net revenue grew 42% last year, to $11.27 billion. That was much slower than its 2017 revenue growth of 106%. Similarly, the number of monthly active platform users rose just 35% in the fourth quarter of 2018. That figure had been growing at a triple-digit rate as recently as the first half of 2017.

Chart indicating slowdown in Uber's user growth.

Data source: Uber's S-1 Filing. Chart by author.

This massive slowdown in user growth is hurting the company's financial performance. Uber lost nearly $1 billion in the first quarter of 2019 on revenue of roughly $3 billion.

Assuming that Uber keeps up this run rate for the remainder of the year, it could lose around $4 billion on roughly $12 billion in revenue. That would be approximately double the $1.8 billion it lost in 2018. This isn't surprising, given that the company itself expects operating expenses to rise because of the competitive challenges it faces.

Does Uber's valuation still make sense?

Uber initially hoped for an IPO valuation around $120 billion. Now that it plans to price its IPO in a range of $44 to $50 per share, Uber expects to be valued at a maximum of $91.5 billion. The lower end of that pricing range would put its valuation at around $80.5 billion on a fully-diluted basis. 

Uber was last valued at $76 billion in the private market when Toyota invested in the ridesharing giant last year. That makes the current estimated price range for the IPO look fairly conservative. But because Uber's filings and its latest results reveal that the company's growth is slowing, many investors may conclude that Uber is not even worth the private market valuation it fetched last year, causing the stock to tumble.

NYU Stern professor Aswath Damodaran, a notable valuation expert, estimates that Uber could be worth somewhere between $58 billion and $62 billion.

Damodaran believes that Uber rival Lyft is worth around $59 per share: a little more than $15 billion. Indeed, Lyft stock has been trading near that level for the past several weeks. That's well below its IPO price of $72 a share.

Don't be surprised if Uber's IPO goes the Lyft way

Experts expect Uber's IPO to be among the biggest tech offerings of all time, and the largest one since Alibaba Group went public five years ago. But Uber may end up having a disappointing IPO, sharing the fate of its ridesharing rival. The stock could tumble because of Uber's slowing growth and a potential increase in losses that would weigh on investors' minds.

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