Driving IPOs


Financier Worldwide Magazine

July 2019 Issue

Ride-hailing companies such as Uber and Lyft have disrupted their industry and been the vanguard of the so-called ‘gig economy’.

Though both companies have had their issues, they have quickly become staples of the rapidly evolving urban transportation sector. The ride-hailing industry is expected to grow significantly to $26.3bn by 2023, with a compound annual growth rate of 9.3 percent, up from $18.4bn in 2019, according to Statista. Changing attitudes toward vehicle ownership and technological development of autonomous vehicles are set to drive expansion.

Given the projected growth of user numbers and revenue, it is unsurprising that both companies attracted significant investor attention prior to their recent initial public offerings (IPOs). Uber, has 110 million users globally, with net revenue of $11.3bn, according to Statista, while Lyft has 18.6 million users and net revenue of $2.16bn, according to the US Securities and Exchange Commission (SEC).

Despite their user numbers, however, neither Uber nor Lyft has achieved profitability. Lyft’s share price has declined since its aggressive stock launch in March on the NASDAQ. Its IPO priced at the top end of its upwardly revised range, assigning a valuation of more than $24bn through an offering that raised $2.34bn. Since its launch, concerns about the company’s potential for profitability have lingered. The company’s stock, which debuted at $72 per share, fell to $60.12 in April. By the time of Uber’s IPO, Lyft had lost 27 percent of its IPO strike price. Though the company posted quarterly revenues of $776m in its first quarterly earnings announcement as a public company, the company also recorded a loss of $1.14bn for that period, more than it lost in all of 2018.

While investors remain bullish about long-term prospects for both Uber and Lyft, strong revenue growth has yet to translate into profitability.

Uber’s IPO, launched in early May, saw the company raise $8.1bn by selling 180 million new shares, making it one of the largest public offerings of all time. However, in the run up to the offering it had hoped to sell 180 million shares at around $50 apiece, which would have valued the company at about $90bn. However, in light of Lyft’s struggles since its March listing and ongoing concerns about the state of the global economy, Uber listed its stock at $45 per share, giving it a market value of $75.5bn, well below its initial target. In the first few days of trading, shares in Uber fell over 18 percent to $37.10, wiping over $20bn off its market valuation.

The last few years have been challenging for Uber, financially and from a reputational perspective. The company reported an estimated net loss of $1.07bn on $3.07bn in revenue during the first quarter of 2019, according to SEC filings. Revenue growth slowed to 19 percent compared to the same quarter last year, down from 22 percent in the comparable fourth quarter. These figures may be a millstone around the company’s neck as it looks to convince investors that its market share, growth trajectory, global scale and diversity of businesses are viable long term. Sustainable profitability has been hard to come by as it competes globally with rivals. Uber Eats, the company’s food delivery service, has also been a drain on its resources in an increasingly crowded market. Uber’s investments in autonomous vehicles have added to losses, which jumped to $940m in Q4 2018, up 43 percent from the previous quarter.

Uber has also suffered from an image problem. Investigations by the US Equal Employment Opportunity Commission into concerns about gender inequality, criminal investigations into its business practices and internal investigations following the resignation of the company’s former head of HR over allegations of racial discrimination, have forced Uber to overhaul its internal culture and repair its tarnished brand.

The week of Uber’s IPO also saw a number of its employees (and of Lyft) strike and protest wages and working conditions across the US and other countries. Many say they make below minimum wage in the US and some claim they actually lose money.

According to reports from CNBC, Morgan Stanley, which underwrote Uber’s IPO, was so concerned about the offering that it employed a tactic known as a ‘naked short’ to provide extra support for the stock ahead of the listing. By utilising this tactic, Morgan Stanley sold more than 207 million Uber shares in the initial offering, exceeding the 180 million shares it had bought from the company and the 27 million shares it had the option to buy at a fixed price. A ‘naked short’ allows banks to make money if a company’s stock falls, but they lose money if it goes up.

While investors remain bullish about long-term prospects for both Uber and Lyft, strong revenue growth has yet to translate into profitability. And with investors increasingly concerned about market volatility, ongoing trade wars, worker unrest and IPOs struggling to match expectations, there will likely be a few bumps in the road for ride-hailing companies and other tech companies considering a public offering.

© Financier Worldwide


Richard Summerfield

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