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IPO

Uber – What you need to know for tomorrow’s IPO

Uber is the world’s largest ridesharing and food delivery business. It is also the largest “start-up” in the world with a pre-IPO valuation at around 79 billion. Here’s all you need to know for the coming IPO.

Listing

Uber, (NYSE: UBER) will debut on the NYSE Friday, May 10th, with the company hoping to raise up to $10 billion at an initial share price range of $44-$50. This could place Uber at a valuation of up to 90 billion, and considering all the hype we would be surprised if it peaked at the 100 billion market in intra-market trading on Thursday. Upon IPO Uber has secured the support of PayPal holdings whom have committed to investing $500 million at initial share price, as well as Toyota Motor Corp. in partner with Denso Corp, both of whom are linked to the Softbank Vision Fund who will invest a further $1 billion upon IPO.

Struggles with profit and valuation

Part of Uber’s anticipation has been generated by its level of profitability. As the new wave of mega-IPOs begins with companies such as; Lyft, AirBnB, WeWork, and others, they all have a common they are unprofitable, or at best very recently achieved profitability. Uber might be the worst of these. Along with Lyft, in Uber’s filing, the company warned it “may not achieve profitability” along expecting operating expenses to “increase significantly in the foreseeable future”. This places both Uber and others in a tricky position valuation wise, with no earnings or evening reliable futures earnings how can we justify any sort of valuation.

Comparing with Lyft

To answer this many are looking towards past tech IPOs, with heavy emphasis being placed on Lyft given they provide the exact same core service. Lyft, like Uber, was a hotly anticipated IPO a few weeks ago but since it has gone awry haven fallen 24% since its offering. Despite this seemingly casting a cloud on Thursday’s offering, we feel that Uber’s story might be a little different.

Size matters

For starters, Uber is significantly larger than Lyft with operations in numerous international locations along with various autonomous vehicle assets and it’s massive food delivery segment, Uber Eats. On top of this profitability in ridesharing is heavily dependent on scale, which Uber has. This alone leads us to believe that Uber deserves a much higher valuation than Lyft.

Conservative price range

Looking at the pre-IPO activity Uber peaked at an estimated 120 Billion valuation, this arguably inflated valuation was estimated by investment banks during the IPO process. We mention this as 120 billion is a much higher valuation the 80-90 billion range the company is listing at. Indicating a more conservative IPO, very different from Lyft to continually raised its price range leading up to and the day before listing. These price hikes we felt were extremely ambitious and inflationary, which is partly the reason for the steep decline in share price. With Uber taking a safer approach we feel they should be able to steer themselves away from such a drastic drop that Lyft experienced.

Why buy Lyft when you can buy Uber?

Finally, when comparing Uber and Lyft the same statement kept arising amongst our team, “Why buy Lyft when you can buy Uber?”. At this point, Lyft is widely considered the 2nd to Uber, much like Bing is second to Google. As such we feel that Uber is the wiser investment simply given it’s comparison to Lyft in terms of scale.

Last minute updates

Despite all this there are a few more things to consider prior to the IPO. Lyft intends to release it’s first post-IPO earnings this afternoon, Wednesday May 8th. Given the similarities, regardless of scale, between the companies these earnings could have an effect on the IPO’s performance. The Uber IPO is not being received well by all Uber associates. Drivers have heavily criticized Uber for cutting wages over the past couple of months leading up to the IPO date, as well as decreasing bonus. Some drivers have expressed concern with how they are treated, stating that they feel as though Uber is just “dealing with them” until autonomous vehicles can replace them. Rideshare Drivers United is planning walkouts Today, May 8th to protest the Uber IPO across the entire US including Los Angeles, Chicago, Philadelphia, Boston, New York City, and Washington DC.

Final Thoughts

At the end of the day, no can truly anticipate how the market will react. We don’t anticipate a long bull run off IPO for Uber but we would be surprised should the stock perform worse than Lyft.

Check out our most recent report on Aritzia Inc. Here