Uber Technologies’ listing in New York on Friday morning was one of the most anticipated initial public offerings (IPOs) of the past few years. It was also one of the biggest.
At a listing price of $45 per share, the company raised $8.1 billion (R115.7 billion) and achieved a total market capitalisation of $82 billion (R1.2 trillion). That values the company at only slightly less than Naspers, which has a market value of R1.5 trillion.
Uber, however, has never turned a profit. Over 2018 it recorded a loss of $1.8 billion (R25.7 billion) and a net operating cash flow of -$1.54 billion (-R22 billion). This is one of the reasons it had been so difficult to set a listing price.
“Public market investors find it very difficult to value companies that are loss-making,” says Rory Spangenberg, director of global equities at Northstar Asset Management. “That is going to be what Uber battles with.”
Before the listing there was a great deal of speculation about where Uber’s value would be set. Some suggested it could come to as much as $120 billion, but the final listing figure was well below the high end of the range. On its first day of trading, the stock was also immediately down 7.6%.
Gerrit Smit, head of equity management at Stonehage Fleming, says this highlights the challenge that any investor has when it comes to analysing the company. He considers Uber more of a speculative play than an investment.
“We would put it in the bucket of alternatives and not try to project any numbers because nobody can do that with any conviction, especially when it comes to profitability,” Smit argues. “You can perhaps have a go at revenues, and then the only metric you can apply to try to value the business is price-to-sales, because there is nothing else.”
He also believes it is worth comparing Uber’s financial fundamentals with those of some of the more established tech stocks.
“On those numbers we can come up with quality companies that are cheaper, and give you a lot of earnings and cash flow,” says Smit. “Alphabet, for instance, is extremely profitable, a strong cash generator, and its projected top-line growth is only a few percentage points below Uber’s.”
|Tech stock financials as at Dec 31, 2018|
|Sales||$11.3 billion||$136.8 billion|
|One-year historic growth||42%||23%|
|Three-year consensus compound growth||24%||17%|
|Gross income||$3.5 billion||$77.4 billion|
|Earnings before interest and tax (Ebit)||-$2.8 billion||$31.5 billion|
|Operating cash flow||-$1.5 billion||$48 billion|
Source: Stonehage Fleming
Uber may be growing faster than Alphabet, but Google’s parent company is many times larger, has demonstrable cash flows, and has a far stronger balance sheet. It is also delivering earnings at a high margin.
This is something that Uber is far from proving. In fact, in its IPO filing the company cautions that it “may not achieve profitability”. This highlights how Uber has had to subsidise its growth because it is so difficult to establish a competitive advantage in its industry.
“The competition is so fierce because there is no barrier to entry,” Smit says. “Anyone can write a ride-sharing app and put up a business. So what happens – and this is where we are now – is that for any of these businesses to build their brand and market share they just have to continue undercutting each other. That is why Uber doesn’t promise any profits.”
Spangenberg shares these concerns.
“The competitive advantage for a business like this can be the network effect – matching personal mobility demand and supply,” he points out. “And Uber has done a pretty good job of this, which does bring a scale benefit. But is there any pricing power inherent in that? What stops their typical consumer from downloading another ride-hailing app? There is no friction to switching. Even the drivers will turn from one app to another. So there is nothing that actually holds you on that app.”
What might the future hold?
Anyone buying Uber shares is therefore placing their faith very much in a future that is largely unknown, and substantially unproven. Yet it is a future that many people get excited about.
Uber has already become synonymous with disruption. Anyone who comes up with a disintermediated or technology-driven business model also immediately gets the moniker of ‘the Uber of’ whatever industry they are in.
The potential for what else the actual Uber might be able to achieve is therefore far from insignificant. Some believe that how it transitions to the use of autonomous vehicles may be the start of that.
“It does feel like the future, even if you cannot work out how that future is going to be profitable,” says Smit.
“If it works out it can work out spectacularly, but I would say the chances of that are below 50%.”
What the market has seen from tech companies, however, is that having patience with the right companies can be enormously rewarding.
“There may be a parallel here with Amazon,” Spangenberg suggests. “The market really battled to value Amazon for a long time until it broke out web services. Then suddenly we had line of sight of a business that was growing at 50% a year at 20% operating margins, even though the retail business was still losing money. That was something tangible for the market to hang onto.”