Investors have been talking about an Uber and Lyft IPO for years now, and we may be seeing it sooner rather than later. Reuters reported last Friday that Uber “has filed paperwork for an initial public offering”, which follows on news that Lyft has done the same thing. The two companies are apparently in a race to go public first, fueled by their mutual rivalry.
This does not mean that investors will be able to buy Uber stock next week or even in January. Both companies have filed confidentially with the SEC as opposed to releasing their financials in public, and Uber has apparently yet to pick a lead banker for the share sale according to Bloomberg’s report on the matter. But since we know two of the most anticipated IPOs are finally arriving in a couple months, it is time to take stock of what we do know and whether they are long-term assets or completely overhyped.
Worth the Cost?
The first thing to understand is how large these IPOs are. The largest IPO of 2018 was Spotify (NYSE:SPOT), which was valued at nearly $30 billion at the time of its IPO though it has fallen in value since. By comparison, Lyft achieved a valuation of over $15 billion in June, and will almost certainly be seeking a much higher total in its IPO.
But both of those companies pale compared to Uber. Uber was recently calculated at being valued at $76 billion, and initial reports of its IPO indicate that some banks are seeking a valuation of over $120 billion. Uber would likely raise somewhere from $10 to $20 billion, making it one of the largest IPOs in history.
These eye-popping figures will attract investors who would otherwise never invest in an IPO, especially since Uber and Lyft are household names in a way many other tech companies are not. But the hype should not detract from the fact that there are tons of serious questions surrounding both companies, and especially Uber.
We may not know Uber’s exact financial situation as it has filed confidentially. But we do know that Uber has been losing money heavily for years, and the situation is not improving. The Guardian reported that Uber lost over $1 billion in its last quarter, compared to $891 million in the previous quarter. Lyft has been increasing revenue in a way that Uber has seemingly struggled to do recently, but it also has constantly reported losses in the hundreds of millions.
Tech companies losing money at the time of their IPO is nothing unusual, and they frequently point to Facebook (NASDAQ:FB) or Amazon (NASDAQ:AMZN) as successful examples which they can emulate. But there are multiple differences between Uber and those success stories. First, Facebook and Amazon managed to avoid controversy until they were profitable in a way that Uber has not. Even if we suppose that Uber’s workplace controversies have been fixed by the departure of CEO Travis Kalanick last year, we have seen governments inside and outside the United States pass laws against Uber and ridesharing.
Second is the fact that Uber is not a tech company in the same way that Amazon is. Its technology is not difficult to replicate, as is shown by how other companies have made an Uber for everything from food delivery to flowers. And while Uber has invested in various technological ventures such as luxury cars and a discussion about buying bike-sharing company Like, they will not sprout fruit for years at best and more realistically decades. Lyft could potentially show that it could be profitable by detailing how it plans to take Uber’s ridesharing real estate, but Uber needs to give a much better answer for how it will end its growing losses and become profitable.
IPOs and the U.S. Economy
In addition to considering whether these companies are a valuable investment or not, investors also need to consider the implications of these companies going public for the U.S. economy. Why are both companies choosing to go public now after waiting for the past few years?
The answer likely has to do with the recent stock market turbulence as well as growing fears that the U.S. economy could enter a recession either in 2019 or later. But if that is the case, it only gives the impression that Uber is going public to lure in gullible investors buying on its well-known name. The Uber and Lyft IPOs are going to attract a great deal of attention and glowing press once they formally announce their plans to go public. But investors should not mistake popularity for financial soundness. It is too soon to definitively state one way or the other whether these will be sound investments. But as of now, there are far more reasons to be skeptical about either company’s ability to become profitable and continue to grow over the long term.