As equity markets in 2019 look to avoid the volatility of the previous year, several high-profile IPOs slated to roll out over the coming year offer tech investors a lucrative schedule of so-called “unicorn” tech startups planning to go public. Headlining this year’s public offerings is ridesharing giant Uber Technologies Inc., the San Francisco-based ride-hailing app that commands the majority of the global rideshare market.
After the government shutdown briefly stalled the SEC review of Uber’s IPO filings, the company looks to stave off nervous equity investors and deliver on their long-awaited public offering.
Uber’s impending IPO could be one of the largest in U.S. history, continuing the trend of massive IPOs by former privately-held Silicon Valley behemoths such as Snap Inc. and SurveyMonkey, and most recently its ridesharing rival Lyft. Though the company has not had to report earnings and financial data to its investors while they’ve remained private, Uber has regularly released financial results to private shareholders over the past two years to provide transparency into its profits and losses in expectation of an IPO in the future.
With a private valuation exceeding $70 billion in 2018, Uber could be worth as much as $120 billion once they conduct their initial public offering. While the initial valuation could make Uber the largest tech IPO in U.S. history, there are considerable headwinds Uber must overcome to avoid the same share price deterioration in the post-IPO market landscape that Snap experienced following their IPO (Snap Inc. shares are down about 58% from their IPO price in March 2017 as of April 3, 2019).
Growing Competition in Rideshare and Food Delivery Sectors
Alternative ride-sharing services and food-delivery apps pose a considerable threat to Uber’s continued growth and market dominance. Lyft Inc., Uber’s biggest rival in the ridesharing market, beat Uber to the punch with their recent IPO on March 29th.
With a price target around $72 immediately prior to the public offering, Lyft’s share price has fluctuated greatly in the days following, but remains near its target at $71 as of April 3rd. Lyft has continued to make significant gains in the rideshare market over the past two years, nearly doubling their claim of the market from October 2016 to October 2018, with most recent estimates ranging near 28.9% in October 2018. Food-delivery services such as Grubhub, DoorDash, and Postmates also offer a substantial threat to the continued expansion of Uber’s food delivery business, claiming a combined 64.1% of the food delivery market as of July 2018.
Stiff competition challenging Uber’s two most lucrative sources of revenue should make investors cautious when considering investing in the company immediately upon the release of public shares, especially when considering the historically-large valuation and mainstream popularity of the company. Tech unicorns have been plagued by overvaluation in the past, with early investors suffering significant losses in the post-IPO market landscape, and Uber’s company profile is similar to those that have plummeted in past IPOs.
The uncertainty surrounding Lyft’s fair value estimate and the variance of FVEs across different analysts and firms make Uber’s initial valuation difficult to predict. The continued growth of its competitors and Uber’s ability to continue expanding their services both in the U.S. and abroad should be important factors to consider for potential investors when creating their own valuations.
Global Growth and Volatility in the Equities Market
Uber’s lofty valuation is threatened by a reduction in investor confidence due to the stock market’s increased volatility and uncertainty over the past year. Most US equities suffered significant losses in stock value over the course of 2018, with the S&P 500 falling by 6.2% and Dow Jones Industrial Average falling by 5.6% over the past year. Out of all asset classes in 2018, only Cash and US investment grade bonds managed to avoid the negative. The last time this happened was 2008.
This does not mean the stock market is bound for a recession, however the returns in 2018 and reduction in investor sentiment serve as notable headwinds to equity markets in 2019, particularly to newly public companies in which investor confidence, and thus cash flow, rests heavily on early positive returns on equity. Uber’s status as a unicorn tech startup turned industry leader of a market that they created makes it particularly uncertain whether their IPO valuation could be a drastic overestimation of Uber’s ability to continue its global growth and market dominance in a more bearish and volatile market environment.
Is Uber a lucrative IPO investment opportunity?
At the moment, there seem to be a significant number of factors that will affect Uber’s post-IPO performance and determine whether initial investment in the offering produces positive returns. Uber faces a number of growing competitors in both the rideshare and online food delivery markets, promising slower growth than the past few years and a stronger company focus on user retention. The volatility that the financial markets have shown over the past year make this a dangerous time to count on Uber to maintain their initial valuation if its IPO turns out to be as large as analysts predict, especially when taking into account the evidence of investor uncertainty regarding Lyft’s recent public offering.
In this unstable market environment, it’s possible for Uber’s price to skyrocket in the weeks following the IPO, however Uber’s competitive landscape, a volatile market, and nervous investor sentiment seem to suggest caution when considering being the first to own public shares of the rideshare company. A potential investor needs to evaluate their personal tolerance for risk before allocating capital to securing IPO shares, but with such a lofty valuation and the investor fervor that surrounds the historic IPO, this opportunity seems to offer substantially more risk than reward.