2017's Uber IPO

One of the most anticipated financial events in recent history is upon us:

The decade’s fastest-growing tech company is about to go public—and it’s going to make some investors very, very rich. So what should you do? Is this a once-in-a-lifetime IPO that you can’t afford to miss? Or is it an overpriced dud that you’ll lose your shirt on? Let’s take a look…

Your Ride to Profits

The company I’m referring to is Uber, the high-flying taxi start-up. Many insiders are comparing its upcoming IPO to Google’s 2004 IPO, an event that ushered in a multi-year bull market in tech stocks. Others, however, believe Uber is overpriced. They believe its IPO will be more reminiscent of Facebook’s botched public offering in 2012.

But before I make any predictions, first let me introduce you to the company itself.

Meet Uber

Uber is a taxi service. Basically, it connects riders with independent car drivers. After you book a car using Uber’s mobile app, a driver rushes to your location. The app even shows you, in real-time, when your driver will arrive. And when you make it to your destination, there’s no need to pull out your wallet: your fare is automatically charged to your preferred payment method. This “uber convenient” experience has led to tremendous growth for the company...

Uber By The Numbers

Since launching in 2009, Uber has logged more than 2 billion rides. To make money, the company takes a 20% commission on each ride. The driver keeps the rest. And its revenue growth has been staggering. To see what I mean, check out this chart of its Quarterly Net Revenues:

Uber Quarterly Net Revenues

As you can see, its quarterly net revenue (i.e., the 20% it earns from each ride) grew from $8 million in Q4 2012, to what’s expected to be $1.5 billion in Q4 of 2016.

That puts it on track to generate $5 billion in 2016, and an estimated $10 billion to $12.5 billion in 2017.

Show Me The Profits

But despite all those revenues, the company isn’t profitable. There are many reasons for this: For starters, to capture market share, Uber is spending heavily to advertise and promote its service. Secondly, as it enters each new city or country, it blows through millions in legal fees dealing with local Taxi & Limousine Commissions.

And not all its fights end in victory. For example, after spending billions of dollars on a price war with its competitor in China, it recently gave up and retreated. With all these expenses, its losses keep growing.

To see what I mean, look at this chart of its Quarterly Losses:

Uber Quarterly Losses

All told, losses for 2016 are an estimated $3 billion.

Time for the IPO

CEO Travis Kalanick is eager to delay an IPO for as long as possible. After all, it’s easier to smooth out these bumps in the road as a private company, where reporting requirements are less strict, and investors are more forgiving. But Uber is facing intense pressure to go public.

Its early investors have provided it with billions of dollars in capital, and now they want a return on their capital. They want an “exit.” So now it’s time to get back to our critical question: With an imminent public offering, and this exciting but money-losing company already valued at $68 billion, could you profit if you bought shares at the IPO?

Uber’s Value as a Public Company

To get a sense for Uber’s value as a public company, let’s look at some comparisons. The Internet company with the highest revenue multiple today is Facebook (NASDAQ:FB), at 9x sales. (In other words, Facebook is valued at 9x its annual sales.) But Facebook has profit margins of 63%, whereas Uber is losing money. Perhaps a better comparison is eBay, which, like Uber, offers a “marketplace.” eBay is profitable and trades at about 4x sales.

So if Uber trades like Facebook, it might be worth about $100 billion. And if it trades like eBay, it might be worth closer to $40 billion. Now let’s see what this means for you…

Guaranteed Profits

It’s always challenging to put a value on a company like Uber—a start-up that’s disrupting a massive industry and growing like a weed. For example, many thought Facebook was overvalued when it was a start-up worth just $1 billion. Today it’s valued at nearly $350 billion. So the question is, could you make money if you invest in Uber’s IPO at a value of $40 billion to $100 billion?

It’s certainly possible…

Look, if Uber can keep growing—and if it can overcome its regulatory hurdles and competitive challenges—it could become a great success story. But on the other hand, it could just as easily turn out that Uber is overhyped.

As a recent example of something similar, look at Twitter (NYSE: TWTR): Twitter went public at $26 amid great excitement. But it hasn’t lived up to its potential, and today it trades at about $17. So when you’re thinking about whether to invest in Uber’s public market debut, remember that there’s only one IPO trade that can lead to guaranteed profits…

Private Market Profits

Instead of buying shares at the IPO, you should be selling them. You see, private investors have been buying shares in Uber for years. For example, investors like you could have invested in Uber in 2010. That’s when Uber used the AngelList crowdfunding platform to raise money. And when Uber goes public, all the investors who already own shares—all the folks who got in when Uber was still private—can finally sell their shares.

And here’s the thing: No matter where Uber prices its IPO, those existing investors are nearly guaranteed to make money. That’s because when they invested, Uber was worth as little as $4 million. So even if the company IPOs at the low end of its likely range—$40 billion or $50 billion—those early investors could still turn every $1,000 they invested into an estimated $5 million.

That is how you make guaranteed profits on an IPO.

So here’s what we recommend: Unless you’re selling private shares at Uber’s IPO, walk away…Save your money to invest in a private company that could become the next Uber.