Uber (UBER +0.77%) has taken investors on a rough ride in its first few days as a publicly traded company.
After three sessions, shares were trading 11% below its $45 IPO price, which was already at the low end of the $44 to $50 selling range it specified in its IPO filing. At one point, Uber stock had lost as much as 20%. The sell-off got so bad that CEO Dara Khosrowshahi felt the need to send employees an email reminding them that the share prices of Facebook and Amazon had also both swooned just after their IPOs. He also promised that, like them, Uber will recover and go on to greatness.
Some of my colleagues think that a price recovery is in the offing, but I'm not so sure. Leaving Uber's own deteriorating financial numbers aside for a minute, one thing just doesn't make sense about the company's valuation.
Image source: Uber.
Take a look at how Uber's market cap compares with those of other American auto stocks.
| Company | Market cap (As of closing on May 14) |
|---|---|
| Uber Technologies | $66.7 billion |
| General Motors (GM +2.58%) | $52.6 billion |
| Tesla (TSLA +1.87%) | $41.2 billion |
| Ford (F +3.99%) | $40.9 billion |
Source: Ycharts
Unlike GM, Tesla, and Ford, Uber isn't an automaker. It bills itself as a tech company and sees itself as a disruptor in the transportation industry, starting with ridesharing and moving into food delivery, freight, micromobility like bikes and scooters, and other areas.
However, Uber's primary business is ridesharing, and it will remain that way for the foreseeable future. Though ridesharing has been treated by investors as if it defies the normal economics of transportation, it very much fits within the confines of the auto sector and the broader transportation industry.
After all, it competes with traditional taxi services, public transportation, rental cars, and car ownership. In addition, ridesharing apps in some ways even increase demand for car manufacturers by allowing virtually any qualified driver to turn their car into a business.
The math problem
Uber and Lyft (LYFT +1.99%) are losing billions of dollars a year, in part, because they are competing fiercely with each other, but also because they must compete with other transportation options. Given the protests by drivers over worker pay and the companies' unprofitability, it seems likely that they will eventually be compelled to raise their prices.
If Uber and Lyft do start charging more, some people will shift back to alternatives like taxis, public transit, rental cars, or even driving their own cars. So an eventual rate hike to improve company financials may not be the easy solution that rideshare drivers and some shareholders expect it to be.
Competition is coming
When an industry disruptor comes along, incumbents in that industry tend to respond by aping its behavior. In video streaming, HBO and now Disney have or will soon follow Netflix in offering over-the-top streaming services. Brick-and-mortar retailers have amped up their e-commerce offerings to compete with Amazon. And in the hospitality industry, online travel agents and even hotel chains are following Airbnb by offering more independently operated properties like vacation rentals. Marriott even said recently that it would launch a home-rental business that is essentially a version of Airbnb.
Now, GM, Tesla, and Alphabet's (GOOG +1.62%) (GOOGL +1.70%) Waymo are all in the process of rolling out their own ridesharing services. But these new entrants are different in one important way: They're being built from the ground up around autonomous vehicles (AV). With that advantage, these companies threaten to leapfrog Uber, essentially disrupting the disruptor.
GM is preparing to launch its AV ridesharing service in San Francisco later this year, and its Cruise AV subsidiary is now valued at $19 billion, meaning GM's highly profitable, traditional car manufacturing business is valued at just around $30 billion. Alphabet's Waymo One ridesharing service is already up and running in Phoenix, and the company has plans to expand it to new cities.
Tesla CEO Elon Musk said at a presentation last month that his company will have robo-taxis available by next year. Though that announcement was greeted with skepticism by some analysts, Tesla has something of an advantage over traditional automakers. It can update its vehicles' software remotely, as soon as upgrades are available.
"All [Tesla] cars being produced all have the hardware necessary — computer and otherwise — for full self-driving," Musk said. "All you need to do is improve the software."
Even Ford is testing self-driving cars with an eye toward a potential ridesharing service. It hopes to be ready to sell AVs by 2021.
What all this means for Uber
Uber's own AV ambitions suffered a setback when one of its test models struck and killed a pedestrian last year. The company temporarily suspended on-road AV testing, but that's now underway again. Uber expects to transition to AV ridesharing over the long term, arguing that its base of drivers gives it an advantage for now. However, if one of its rivals can successfully ramp up an AV ridesharing service, it will be able to undercut Uber significantly on price.
That Uber, which lost nearly $4 billion last year before investment gains and is seeing revenue growth slow significantly, has a higher market cap than GM, Tesla, or Ford is hard to rationalize, especially given its vulnerability in AVs. Those automakers all have significantly higher revenues than Uber, and GM and Ford are both profitable. Tesla has been profitable at times, and is arguably more disruptive than Uber thanks to its technology, supercharger network, and batteries, all of which constitute a competitive advantage that Uber patently lacks.
Barring an unforeseen breakthrough, Uber's valuation should eventually align more closely with those of its competitors. If it is being valued based on its potential, the market should treat GM, Ford and Tesla that way as well.
