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An Uber Anomaly

Ploutos profile picture


  • Uber priced $1.2B of B3/CCC+ rated debt at a coupon of 7.5% this week.
  • This article highlights how unusual it is for a CCC-rated company to have such a large equity market capitalization.
  • In this piece, there is a discussion of the rationality for that disconnect.

On Sesame Street, the puppet characters would sing: "One of these things is not like the others..." The edutainment show was teaching its young viewers to spot contrasts.

On Seeking Alpha, I want readers to look at this graph of the equity market capitalization of public companies with CCC or lower credit ratings from S&P. Which of these things is not like the others? The answer: Uber (NYSE:UBER).

The equity market capitalization of public companies with CCC ratings highlights the uniqueness of UberOn Thursday, Uber printed an upsized $1.2B bond deal to finance part of its pending acquisition of Middle Eastern transportation company Careem. The bonds are rated B3/CCC+ by Moody's and S&P, making the debt deeply speculative grade.

The very low credit ratings and healthy equity market capitalization set up a startling contrast. One easy enough for a pre-school Sesame Street viewer to spot. Bond rating agencies are signaling that the debt issuance has a meaningful risk of default, but equity holders, who are subordinate to this debt in the Uber capital structure, are signaling meaningful optimism about the upside of the business.

From the chart above, one can see that the equity market capitalization of Uber at nearly $58B, is more than 5x the market capitalization of the next largest CCC-rated company with public equity, Carvana (CVNA). It is larger than the combined market cap of the 40 or so public companies in the graph that are among the largest companies with CCC-rated debt.

Why the disconnect between bond ratings and equity market cap? Bondholders are senior in the capital structure, but they forgo upside in exchange for priority of recovery in a restructuring. While bondholders are hoping for the timely payment of interest and return of principal, equity holders own the upside of Uber becoming a dominant global transportation and delivery company.

The bond market also is disagreeing to some degree

This article was written by

Ploutos profile picture
Institutional investment manager authoring on a variety of topics that pique my interest, and could further discourse in this online community. I hold an MBA from the University of Chicago, and have earned the CFA designation. My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

Analyst’s 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.

Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (40)

Value Digger profile picture
According to Oracle's Larry Ellison, UBER is "almost worthless":

Nah, it's only worth half that. :)
Larry thinks the company is worthless. He declared that UBER has "an app my cat could have written".

Its funny what happens when someone respected by the street says the emperor has no cloths. Read the Barrons article. Its funny and insightful.
M Plaut profile picture
If Uber will no longer be able to exploit its workers and will have to pay them like employees, as California wants, that will destroy its business model.
"that will destroy its business model."

You mean it too again exposes the facts that their "business model" was FLAWED from the start and that they have been unable for 15 years to deliver it at a Profit, right?

When you are charging the customer a Price that is ~20-30% or 50% Below Break-even for either Driver and Uber then that is NOT a functional Business model that is sustainable.

To date Uber has only survived this long by
1) Intentionally Breaking the Law globally
2) Paying early Drivers unsustainable Rates the first 12 months then cutting them by 10% or so
3) Driver Turnover CHURNING who burn up their Car's Assett value without due compensation, living off the Cash Flow until they give up.
4) New market entry HYPE via the News Media
5) Burning to ashes all their early Investor capital to the tune of Billion$
6) Now burning up recent IPO investors funds
7) Inability to fix systemic problems.
8) Exploiting Drivers by LYING TO THEM, withholding critical information from them, not training them, not providing them with the "services promised" by Uber, not training Uber staff properly, and not paying DRIVERS an adequate compensation for their work and the assets provided to deliver the service to customers AS PROMISED by Uber Sales/promotions.
9) Drivers are NOT "independent contractors" - they have NO ability or "power" to charge Riders a fit and proper Fee for Services Rendered.
marriottmare profile picture
Long uber
Value Digger profile picture
Amid regulatory headwinds (i.e. California's AB5), investors are also advised to keep in mind that UBER is an excellent TAX LOSS SELLING CANDIDATE and therefore, UBER could hit $20 per share by year end. Specifically:

- The funds that bought UBER at the IPO price of $45 per share will most likely sell it in Q4 2019 for tax loss reasons.

- The funds that bought UBER after the IPO will most likely sell it in Q4 2019 again for tax loss reasons.

All these funds lose money from their investment because UBER is at its lowest price since IPO.

Additionally, the insiders will sell it in November 2019 when the lock-up period expires to lock in their tremendous profits. Their average buy cost is much lower than $30 per share.

On top of this, UBER will post its Q3 2019 report in November 2019 and it will be another ugly quarter with huge losses and significant cash burn. This ugly report will accelerate the exit from UBER.
blacky_ profile picture
excellent comment, thank you.
blacky_ profile picture
i love this cash burning machine. no positive return will ever be available for share holders. fantastic short case. 13 billion cash balance and still borrows money for 7,5%! insane.
cssys profile picture
do you think cvna bonds will remain solvent ???
Shortsellers Never see the long term Potential of uber becoming the largest transport company
The storyline is indeed comparable to FB or Amazon
Timing is the issue and thus patience required
The 5 times stock prognosis is probably far to conservative.. shorts will die here in the dozens
Time will tell
If Uber didn't have horrible management they might have realized your dream but by wasting billions overseas they are only compromising their already uncertain future. What is next? Uber drivers in Zimbabwe, Ghana, Uzbekistan? All good uses of precious capital.
Ploutos profile picture
I actually think the new CEO has done a nice job of changing the company’s culture. Ridesharing is a business, and Uber will be a leader. The competitors in the space have burnt billions of dollars of PE money to stake their lead. They are going to burn billions of dollars of public money too before they are ever profitable. I am highlighting that the market cap is too high relative to the riskiness implied by another market.
@xxypa says: "Shortsellers Never see the long term Potential of uber becoming the largest transport company"

Clearly @xxypa has Uber shares they desperately hope to unload asap. LOL
This talk is more about how rearranging the deck chairs on the titanic, might make it look better. Anyway, one quote from above was accurate and the most important:

"Uber equity is likely worthless"

There is so much wrong with Uber (always has been) if people can't see it don't want to see it, then they never will and deserve to lose their shirts.
Knife Is Falling profile picture
There was little movement at the day of lockup expiration, but since the announcement of moving lockup expiration date forward the company has lost over 25% of market cap.
Knife Is Falling profile picture
Sorry, wrong place, was answering one of the other comments.
Value Digger profile picture
The high interest expenses due to this expensive loan for Careem will definitely weigh on the stock price in the next months.

Additionally, it's clear that UBER has overpaid for Careem. UBER acquired Careem for $3.1 billion in March 2019, when things were rosy and UBER expected to receive of at least $100 billion, according to Reuters' article below:


" Uber will kick off its IPO next month and is expected to receive a valuation of at least $100 billion."

It also seems that UBER was "forced" to overpay for Careem and complete the deal because according to Reuters' article above:

"...........the deal was particularly important for Uber, whose ability to be a competitive global ride-hailing player had come into question after it sold its operations in China, Russia and Southeast Asia to local rivals after sustaining heavy losses. "
SDS (Seductive Dividend Stocks) profile picture
I guess Uber in XXI century is a'la an US airline company at end of XX century: good for customers and "staff", bad for investors..... OK, time will say....
Thank you for good article.
Uber was a private money losing company for 10 years before going public. The only reason it went public is it needed more cash to fund its operations. Its private owners refused to put more money in so it went public to fund its losses.

If Uber was trading at $ 10 it would be far to expensive,

UBER lockup is released November 6 and all insiders will be allowed to dump their shares.
ForestFromTrees profile picture
Lyft lockup already expired and almost nothing happened.
blacky_ profile picture
lockup should only expire 6 months after the first day of trading?
Thanks for the interesting article. One question - in the return matrix how is operating profitability defined as a metric? I tried going to the previous article that was referenced but it is behind a pay wall now. Thanks in advance.
Ploutos profile picture
Operating profitability = (Revenues - COGS - SG&A)/ book equity
Michael de la Maza profile picture
Great, great article.
Muppet, not puppet. 😉

Always appreciate your interesting research and clear writing—thanks, Ploutos!
Yes, very good job. The disconnect is that the stock should be much, much lower.
The market cap and debt rating is odd. Definitely UBER should have issued stock instead.
Uber is the best competition for amazon, it’s going to 10x from here...
Bulldog67 profile picture
I just love when bulls throw out 10X predictions with no fundamentals to justify their opinion!

Uber had over $6 billion in operating LOSSES the 1st 6 months of 2019. So what makes you think it will go up 10 times from here?

The only way Uber stock will increase in share price is with a large reverse stock split!
Bulldog67 profile picture

Great article that clearly points out that either the bond market or the stock market is wrong! My $$ are betting that the stock valuation will greatly shrink to a more realistic level - perhaps $5 or less per share!
CPA Bob profile picture
Why do you call Uber a CCC rated company? Moody's rated the debt offering at B3. Also, isn't Tesla just a notch above Uber?

Rating Action: Moody's assigns B3 rating to Uber's new senior notes; B2 CFR affirmed
12 Sep 2019
Approximately $5.6 billion of rated debt affected
New York, September 12, 2019 -- Moody's Investors Service ("Moody's") affirmed Uber Technologies, Inc.'s ("Uber") B2 Corporate Family Rating (CFR), B2-PD Probability of Default Rating, and B1 and B3 ratings for the company's existing senior secured term loans and senior unsecured notes, respectively, and assigned a B3 rating to the company's proposed $750 million of new senior unsecured notes.
Ploutos profile picture
The S&P rating is CCC+. Index inclusion rules are typically lower of two ratings or middle of 3.
Ploutos profile picture
For this piece, I took all of the HY index holdings with CCC+ or lower ratings from S&P and then pulled in equity market caps.
Neither was FB at one time.
Bulldog67 profile picture
FB had been profitable for about three years before it became a public company! How profitable has Uber been? .... oh wait!
ForestFromTrees profile picture
Amazon didn't turn a quarterly profit until....wait for it....2001. That was four years after their IPO.
carlomiami profile picture
In this piece , I show you how much of a short seller I am, LOL
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