Uber: Improving The IPO Odds

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About: Uber Technologies, Inc. (UBER), Includes: LYFT
by: Stone Fox Capital
Summary

Uber is poised to cut the proposed IPO price.

The failure of the Lyft IPO has taken some of the premium off the Uber valuation.

The proposed IPO price still doesn't offer retail investors a reasonable upside in the stock.

The IPO is likely to price above the proposed range, suggesting investors sit this one out.

The good news for retail investors is that Uber (UBER) plans to cut the target valuation of their upcoming IPO. The failure of the recent Lyft (LYFT) IPO has the ridesharing company reining in valuation expectations somewhat. The bad news is that the actual IPO pricing is likely to still eliminate any opportunity for retail investors to participate in stock gains.

Still Unreasonable Public Valuation

According to the Wall Street Journal, Uber plans to price the IPO at a market valuation of $100 billion. The valuation is down substantially from the previous expectations for $120 billion.

My previous research already predicted that a valuation in excess of $100 billion and especially the $120 billion valuation wouldn't work. The Q4 results that included an $817 million adjusted EBITDA loss were worse than the numbers used in my analysis following the Q3 results.

Uber plans to raise roughly $10 billion in the IPO with a potential pricing range of $48 to $55 expected on May 9. The real key is where the stock actually prices and opens up for trading on May 10.

The amount could actually far exceed this initial pricing range, if market demand exists. Such a scenario would again lock out small retail investors from the pre-IPO gains.

The company doesn't yet list any of the share details, but a $10 billion IPO at $55 per share would require an offering of ~1.2 billion shares. One concern not addressed in the initial S-1 is how many shares insiders are going to sell. The IPO pricing might actually sink if too many insiders are unloading shares.

Struggling Business

Uber has previously provided financials so the details released in the S-1 don't really provide new information to investors. The ridesharing leader continues to lose substantial amounts on a quarterly basis.

The company officially started service in 2011 and has now reached operations in over 700 cities and 63 countries. Uber does claim unparalleled scale while only reaching 2% of the population where they operate.

Source: Uber S-1

So investors have to decide whether they view Uber as having plenty of time to reach scale and a profitable business model or the company still has plenty of growth opportunities via new market opportunities like Uber Eat and Uber Freight.

The issue with the business model is that scale doesn't work when the company actually outlines a model of negative net revenue on some trips.

Source: Uber S-1

Similar to Lyft, the company is generating substantial operating losses. Despite reaching an incredible scale with revenues topping $10 billion, the company has massive operating expenses and is required to give drivers substantial incentives. In 2018, the operating loss topped $3 billion and an adjusted EBITDA loss of more than $1.8 billion.

Source: Uber S-1

The adjusted EBITDA losses even reached the largest quarterly level in Q4. The financials aren't getting better, requiring the company to continue financing substantial losses.

Source: Uber S-1

At some point, Uber can't just keep chasing new markets at a loss. The company doesn't need to be on the bleeding edge in order to become the ultimate winner in some very large markets.

With a $100 billion valuation, Uber would trade at 8.5x trailing sales. Lyft trades at public market value of $20.3 billion based on a diluted share count of 350 million shares with the stock at $58. The failed IPO now trades nearly $14 below the $72 pricing level with a valuation at 9.4x trailing sales estimates.

The problem is that any pricing of the Uber IPO above the proposed pricing range will place Uber already at the valuation multiple of Lyft. Retail investors won't overpay to the same extreme as the Lyft IPO, but the upside still appears limited without further cuts to the IPO price.

Takeaway

The key investor takeaway is that Uber cutting the initial IPO valuation improves the odds for retail investors, but the valuation is still murky. The IPO could still price above the proposed pricing range and trade at an even higher initial trading price than where Lyft is now.

Investors should avoid the IPO. Without a substantial discount from the proposed $100 billion valuation, Uber still doesn't offer any reasonable upside for retail investors who would also take on additional risk that the ridesharing company never generates a profit.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.