It's not easy to be a ridesharing company going public this year. Uber Technologies (NYSE:UBER) tumbled in its first two days of trading, losing nearly 18% in the process. Smaller rival Lyft (NASDAQ:LYFT) has had some more time to fall out of favor, but it has shed a third of its value since it went public in late March.
Both companies are growing in popularity among users, but steep bottom-line losses and a lack of visibility about their potential paths to profitability are scaring away public investors. Things might turn around for Lyft eventually, given that it's the faster-growing of the two ridesharing specialists. But the easier money here has to be in banking on an Uber bounce, since it's the undisputed top dog in this rapidly expanding niche. Here are three reasons to think the initial sell-off of Uber stock was overdone.
1. Uber has actually fallen by more than you think
Pull up a stock chart, and it would appear as if Uber shares have plunged 17.6% since their rough Friday morning debut, but in reality we're looking at an even bigger hit. Some underwriter proposals late last year had Uber worth as much as $120 billion. Even last month -- with Lyft already tanking as a debutante -- documentation sent to holders of Uber's convertible notes pegged its value between $90 billion and $100 billion.
The market's lukewarm reaction to Lyft's IPO dampened enthusiasm for the slower growing but much larger category leader. Uber had to settle for a fully diluted market cap closer to $82 billion, and two trading days later we're talking about a fully diluted price tag closer to $68 billion.
Investors will say that Uber has shed nearly 18% of its value, but we're actually more like 43% below peak Uber. One can argue that the hype was too much a few months ago, but it reality suggests that it's the pessimism that is now overdone.
2. Uber is about more than just ridesharing
When Lyft hit the market with less than a fifth of Uber's trailing revenue, it was hard to fathom that it owned a third of the stateside ridesharing market. The math makes more sense when you consider Uber's growing presence overseas as well as its many other revenue streams.
Ridesharing accounts for $9.2 billion of Uber's $11.3 billion in 2018 revenue, but the balance comes from a wide range of offerings that go beyond hailing rides for people. Takeout orders and other merchandise need rides, too. Uber Eats, Uber Freight, and vehicle financing are all part of the mix at Uber.
Uber Eats is important, and not just because it's a great way to score some pad Thai for lunch. It opens the door for drivers of vehicles that don't make the cut for flagship passenger service. Drivers with older cars or vehicles with limited seating -- including motorcycles, scooters, bikes, and Corvettes -- can cash in on the gig economy. Delving into freight and vehicle financing just shows the scalability that's possible when you're the top dog.
3. Wall Street love is coming
If you think that the bearishness is thick with Uber as a broken IPO, then come back in a few weeks. Underwriters involved in an IPO typically wait 25 days before initiating coverage. And when an offering is trading below that price, those analyst notes tend to be bullish. If you sold your best investors shares of Uber at $45 last week, you better have a price target above that mark when you finally put out fresh coverage less than four weeks later.
There are 28 firms listed on Uber, helping it sell more than $8 billion in shares last week. The bullishness will be biased -- and transparently so -- but the Wall Street gushing will be public. Underwriters coming to Lyft's aid only gave it a temporary pop, but timing is also everything.
Uber hit the market at a rough time for all stocks. If the climate is kinder early next month and Uber stock is still under water, the wave of bullish analyst initiations could be the surge that gets it back above the splash line.