After a decade since the launch of Uber Technologies Inc. (formerly UberCab 2009-11), the public is finally getting to own a piece of the cab-hailing giant. Uber (NYSE: UBER) opened its trading today on the floor of the New York Stock Exchange, with an initial public offering (IPO) price of $45 per share — finally gravitating towards the lower end of the announced range of $44 to $50 per share. This puts its market valuation at $82.4 billion on a fully diluted basis, with the company expected to raise around $8.1 billion from the IPO.
Dara Khosrowshahi, the CEO of Uber, spoke on CNBC today ahead of the launch of the company’s IPO. When probed on the reason for Uber pricing its shares lower than anticipated, Khosrowshahi commented that the environment was uncertain, and that the share prices were a reflection of that.
“Success today is a stable price, a little bit higher than the pricing, not a lot higher… We want there to be a fair price that the company received, but we’re going to be measuring success in three to five to ten years, not in one day,” said Khosrowshahi.
Uber remains one of the most validated companies within the equity funding ecosystem, raising nearly $25 billion in investment spanning 23 rounds. This includes a lot of investors — both angel and venture capital — that stand to gain millions through this exit. Benchmark, one of the earliest investors in Uber during its Series A round in 2011, would make around $7.9 billion on a $30 million investment — a 27,000 percent growth over eight years.
Jeff Bezos, the founder of Amazon, had also personally invested $3 million into Uber, which is now worth around $400 million. Apart from this, Bezos also has some stake in Uber through Benchmark, the details of which are still uncertain. Travis Kalanick, the former CEO and co-founder of Uber, has a stake worth around $5.5 billion.
Though the early investors are raining in the millions, the same cannot be said of the late investors like SoftBank and Saudi Arabia’s Public Investment Fund (PIF), both of which paid $48.77 per share to collectively invest $4.55 billion in 2016. This investment aside, SoftBank also bought 200.8 million shares at a heavily discounted price of $33 per share, which it bought for an estimated $6.6 billion.
The numbers game behind Uber’s valuation
Uber’s valuation of $82.4 billion is a drastic scale down from initial expectations that anticipated a $120 billion valuation. Though Lyft’s (NASDAQ: LYFT) post-IPO performance seems to have had a great bearing on Uber’s final valuation, the company’s below average performance in Q1 2019 could also have led to the downscaling of its valuation.
Then again, the valuation is by no means modest. If Uber fixed its worth based on the same scale that Lyft used to measure its stock valuation, Uber would only be valued at around $55 billion.
Last week at the IPO road-show, Khosrowshahi detailed his plans for the future, mentioning that the company expects to earn a profit margin of 25 percent on the earnings before interest, tax, depreciation and amortization (EBITDA). Uber has a long way to go before that, as its recent first-quarter results show the company to have a loss margin of 31.4 percent.
In all likelihood, Uber is set to lose more money as it continues to spend heavily on driver subsidies and coupons for new riders — all in an attempt to secure its customer base across its different markets. This is evident from the company’s inability to stem its EBITDA losses, which the company insisted would fall by two-thirds its 2018 value, or to around $500 million, but in reality, has only blown up further.
The company also is in a sticky situation with regard to expanding within different geographic markets as recruiting new drivers in an already saturated market is growing harder. Uber is facing the addition of more incentives and more attractive pay percentages for drivers to join, which further weakens its cause. And unlike other verticals, it is incredibly hard for companies within the on-demand mobility segment to attain profitability just by expanding their geographic reach.
Roadmap to the IPO
Despite the cacophony of investors and the multitude of questions that surround Uber today, the journey of the cab-hailing giant from its humble beginnings as a luxury-car hailing startup in San Francisco to its IPO, has been nothing short of spectacular.
What started out as an idea to confront the sky-high prices of hiring cabs by founders Travis Kalanick and Garrett Camp, has disrupted last-mile urban transportation, ushered in the much-debated “gig economy” model, inspired startups across a variety of segments, and democratized personal mobility at the most fundamental level.
Uber had a monopoly on the on-demand cab-hailing market for a better part of four years, until companies mushroomed up in the same space, with its current U.S. rival Lyft launching in San Francisco in June 2012. Though Uber had a sizeable lead and a spread out global geographic footprint by the time it had competition, it has continuously been mired with issues and backlashes — consequences that every company disrupting conventional networks would eventually have to contend with.
Nonetheless, what remains a thorn on Uber’s conscience is its recurring inability to sustain in foreign markets. It has been a vicious cycle — Uber marking its entry into an alien market, showing robust growth in its nascent stages, wrestling against homegrown rivals for market dominance, to eventually capitulating and selling off its operations to its market rival.
China was one of Uber’s most promising markets before it ran out of steam against a more dogged and aggressive local rival Didi Chuxing, selling its operations to the latter and losing more than $2 billion in its fight for supremacy. A similar tale unfolded in Russia, where Uber merged with local rival Yandex, and in South-East Asia, where it folded to Grab.
As grim as this might sound, Uber’s fortunes were never in doubt as the company moved to invest in alternate and futuristic mobility including bike sharing, electric scooter sharing, food delivery, freight hauling, autonomous driving, and even vertical take-off and landing (VTOL) technology. A lot of these happened in part due to a conscious restructuring of the company to become synonymous with last-mile mobility and logistics.
Rivalry with Lyft
Within the U.S. market, Lyft has been a constant presence in Uber’s horizon, offering its services across most of the places that Uber operates in, and also expanding its footprint in alternate mobility like bike and e-scooter sharing. In many ways, Lyft has been a paler silhouette of Uber, persisting and regurgitating several business decisions of Uber — including its move towards new markets and niches.
For instance, Uber bought JUMP, a bike-sharing startup in April 2018, with Lyft hot at its heels buying out Motivate, another bike-sharing company in July 2018. Uber’s investment in e-scooter startup Lime was followed by Lyft introducing its line of e-scooters just a few months later.
Interestingly, Lyft broke out from of Uber’s shadow in the context of an IPO, going public in March 2019, more than a month ahead of Uber’s IPO in May 2019. However, the fate of Lyft’s IPO was far from being the success story it must have envisioned. After a brief rise in share price, the company’s stock cascaded down over the next few weeks to trade at $55.18 per share on NASDAQ — a full 20 percent decline from its record high of $87.24 per share.
Profitability concerns around Uber
Going public, the question has always been two-fold — when would Uber break even and how. Addressing these concerns would determine the longevity of the company and its worth in the market. Many investors fail to grasp the actual value of Uber, as it has never broken even and its roadmap to profitability is hazy at best. This also explains Lyft’s current debacle at the stock market, as both the cab-hailing companies depend heavily on the eventual commercialization of autonomous vehicles to attain profitability.
A sizeable portion of the revenue that an on-demand cab-hailing company generates goes into paying its drivers — the independent contractors that work within the gig economy. This is an operational cost that companies like Uber and Lyft cannot hope to circumvent at the moment, thus making it improbable for them to cut costs and inch towards profitability.
The only way for a cab-hailing company to attain true economies of scale, is when it cuts out human-driven fleets and replaces them with autonomous driving vehicles. However, a casual observation of the self-driving technology vertical would tell us that SAE Level 5 automation (a completely autonomous vehicle that can drive under any possible environment with no human intervention) is well into the future and would take at least a decade to materialize.
But unlike Lyft, Uber has its eggs in several baskets and can hope to break even through its other ventures like freight hauling and food delivery. Uber Freight, a digital freight matching marketplace, connects shippers with carriers and also provides fleets discounted fuel, equipment parts, and maintenance options. And unlike urban mobility solutions like cab-hailing, freight hauling is much closer to automation.
Level 4 automation is already a reality and can be expected to be commercially available in a couple of years. Trucks with that degree of automation will have the ability to autonomously maneuver across long highway stretches, with drivers taking control in the first- and last-mile — significantly reducing the burden of the job and decreasing operational expenses.