Does Uber’s Wall Street Bomb Herald The End of High Valuations For Companies That Can’t Turn A Profit?

On Friday May 10th 2019 Uber’s Initial Public Offering (IPO) on the New York Stock Market crashed and burned.  Uber and its bankers:

• promoted Uber at $120 Billion dollars in 2018
• dropped the sales pitch and valued the company near $100 Billion dollars at the start of 2019
• valued the company at $85 Billion dollars by the start of May 2019
• announced a share price of $45 the day before their IPO (Thursday, May 9th) valuing the company at $82 Billion dollars

By the opening bell,  Uber’s stock price start below the announced price (almost unheard of) at $42 a share making the company worth $69 Billion.

Uber is No Amazon

Uber, like many tech companies, likes to tell a relate itself to Amazon.  Uber management has been heard to say it is the ‘Amazon of Transportation’, but it simply is not and never will be.  Amazon ran at a loss for a decade because they CHOSE to keep prices near cost in an effort to both gain market share and eliminate bricks and mortar competition.  This contrasts starkly with Uber that has great difficulty either raising prices or lowering costs.

• If Uber raises prices, consumers will simply choose old school taxis, Lyft of one of a dozen other services.
• Uber can only meaningfully reduce costs by reducing drivers payouts which would be VERY difficult to achieve.  Uber drivers are already striking and claiming NET wages in the sub $8/hour realm.

The bottom line is Uber can spin a story about how they only have 3% market penetration and autonomous vehicles will reduce costs but the facts are:

1. increasing market penetration and therefore scale will not dramatically reduce their costs
2. insanely expensive “level 5” fully autonomous vehicles are a decade or more away

Investors in Uber competitor Lyft have seen a sustained 25% drop in share price since it IPO’d a few weeks ago.

Uber Can’t Make Money

Is all of this a sign that investors are finally coming to their senses?

Investors make money in one of two ways:

1. Dividends
2. Share price appreciation

If your company can’t make a profit, you can’t issue dividends and you aren’t likely to see your stock appreciate much after the hype dies down.

Stock price appreciation based on hype is called a bubble, and it will burst.

Uber Is Not Likely Going to Ever Be a ‘Real Company’

Sophisticated investors are not blinded by large numbers.  Here are some snippets from the worlds most notable business intelligence company, Bloomberg:

“$120 Billion Doesn’t Make Uber a Real Company…

…It may be the most genuinely novel and disruptive business in many years. It has reshaped people’s behavior in many countries, sparked conversations about the nature of jobs and forced governments and transportation planners to catch up. All that can be true, and Uber still might not last… This all might turn out to be a mirage.

…The company has never had to stand on its own feet financially, thanks to a constant stream of cash in the long bounce back from the global financial crisis. It’s not clear what Uber’s revenue or growth rate would be if it hadn’t been able to burn cash like money is free. Actually, money has essentially been free for Uber.

…An IPO, however, doesn’t answer the question of whether Uber has long-term viability.
SOURCE

In recent years there has been a near euphoria among early investors that feels like the dot bomb era of the late 1990’s.

Do you remember Toys.com or Drugs.com?  Of course not!  Those companies only held the promise of distant future profits, but could not deliver and went bankrupt after wasting  hundreds of millions in investors dollars.

Only a tiny fraction of startups become an Amazon or even a Tesla (still ‘on the bubble’, but likely to succeed).  Today Uber feels more like a Toys.com than an Amazon.

To stay on the right side of the law, Uber had to state in it’s IPO regulatory documents that it is more than possible they company will never make a profit.

Think about that for a minute.

On the one hand most IPO documents make some similar claim to avoid future shareholder lawsuits, but Uber takes it this disclosure to a new level by stating they have absolutely no timetable for profitability.  In 2018, Uber lost nearly $2 Billion dollars on sales of about $3 Billion dollars.  In 2017 they lost more than $2B and in 2016 there were rational reports that Uber was billing only about 41% of the cost of a ride.  There is a pattern here.

Uber Hype

Uber is now hard at the Karaoke mic pretending to be someone else and dancing up a storm of dust by ‘expanding’ into other businesses that also loose huge amounts of money but just MIGHT work out in the future.  The Uber Eats food delivery service is the only one that has enough revenue to show on a chart.  Today Uber Bikes, Uber Boats, Uber Scooters, Uber Autonomy are all just so much dust in the face of happy go lucky early investors.

It used to be that a company needed to show profits for one year prior to going public.  That was because it was assumed that only highly sophisticated investors would put their money into an idea.  Normal investors need to see the money.  Today there is no such limitation.  Wall Street and Bay Street have been able to sucker retail investors into buying dogs:

Uber Loses

Remember that is it not enough for the Good Ship Uber and friends to start making money.  They will need to earn enough money to cover the 10’s of billions in previous losses before the company can truly be said to be a success.

Personally, we love Uber’s service and have happily used it around the globe, but that doesn’t mean we think the company can make money.

Uber Drives Hype Investors To The End Of The Road

Our guess is that in the coming weeks, Uber’s stock price will bounce up based on emotion of a good story from the CEO, but it will not be able to sustain the hype in the coming months.  Reality will set it in at some point soon.

If you are a day trader or in it for a few months, Uber might be a great investment… or you could lose your shirt.

With no profits in sight, most investors will have had enough of “getting in early” and decide to get out while they still can, putting their money into “real companies” with profits and dividends.

Uber just might be the atomic bomb of investments the ends the insanity… for a few years.