Uber’s epic journey is about to get interesting
“To ignite opportunity by setting the world in motion.”
If you think that sounds like the mission statement of a Silicon Valley tech unicorn, you’re not wrong. It fronts Uber’s S1 filing, firing the starter pistol on its long-expected IPO. It’s a bold, vague statement, and unpacking it a little helps us to understand where Uber intends to go.
Despite being a business that has derived almost all of its growth as a ride-sharing application, its ambitions lie beyond taxis. Uber Eats has been a first step towards a more rounded offering. Rumours abound regarding scooters, bicycles and freight. The tagline, “The Amazon of Transportation” has been doing the rounds. A successful IPO will fuel these ambitions further.
Undoubtedly, Uber is a global brand, one we’re all familiar with, which is more than can be said for some others on the IPO waiting list. Uber’s ambition, funding strategy and global reach dwarf most other unicorns. Right now, they seem to have it all. However, sustaining that growth post-IPO will be an almighty challenge.
A decade of growth and controversy
Despite being only 10 years old, Uber has single-handedly transformed the taxi industry. It now operates in more than 63 countries, completing 15 million trips a day. But its growth hasn’t been linear and the company has been weighed down by controversy and scandal.
Travis Kalanick built the Uber experience, pioneering an industry that matched transportation supply and demand via smartphone technology. As CEO, Kalanick aggressively pushed the company’s global expansion, raising billions to fuel growth until a series of legal and ethical scandals resulted in him being ousted by the board in 2017.
These outrages have been handled by Kalanick’s replacement, Dara Khosrowshahi, who has tried to convince investors and users that the company’s male-dominated, uber-aggressive culture is over. In short, he’s made Uber boring, and the success of his work means that the company is heading for the public markets to raise $100 million at a $100bn valuation.
Scale without profit
Of course, I’m a user. Who isn’t? Such anecdotal evidence makes the Uber investment story compelling. However, I’m cautious around the prospect of the shares post-IPO.
Firstly, it’s not profitable (obviously). In 2018, Uber Technologies revenue growth slowed and losses persisted in Q4, falling a further 15% between 2017 and 2018, hitting a whopping $1.8 billion. It recently warned that it “may not reach profitability” any time soon, with operating expenses set to increase. As an investment opportunity, it seems a curious one.
Lyft’s is a salutary tale. After going public a fortnight ago, it’s struggled to maintain its initial valuation, sliding from $72 to $55. OK, Uber is bigger, but its losses are bigger too and expected to grow. Shareholders need profit and it’s hard to see where that’s ever going to come from.
A liquidation opportunity
Secondly, there are a lot of existing investors who are seemingly very motivated to “get out.” Uber’s cap table is a venerable who’s who of this past decade’s top technology investors, including Softbank, Saudi Arabia, Benchmark Capital, and others. Of course, in any IPO, early investors will look to take some chips off the table. But this one feels particularly motivated, given the amount of wealth creation that has occurred. And reports that CEO Dara Khosrowshahi has been offered a $100 million payday if he can get the company’s valuation for $120 billion (or find a buyer who will buy the whole thing for $120 billion), definitely fuel the impression that the insiders urgently want to take their chips off the table.
The devil in the detail
A final point shows the benefit of digging deep into the weeds of an IPO prospectus. Hidden in the detail is a note that should concern investors who have long questioned the sustainability of Uber’s business model, asking whether they really can just keep growing forever.
The note states that if Uber’s drivers were to be forced to be reclassified as employees rather than independent contractors, “Any such reclassification would require us to fundamentally change our business model.” Presumably, this means that driver costs would skyrocket and threaten the future growth prospects of the company.
Uber has acknowledged this peril and is currently facing arbitration cases from over 60,000 drivers who claim that they were misclassified as independent contractors. Uber admitted in its prospectus that this possibility was an existential threat to its business, one that could be catastrophic for the company and for investors.
So how will it work out?
Of course, IPO-silly-season is being played out against the backdrop of a bull market that’s entering its 11th year. It can’t go on forever and there are likely many reasons for investors to be cautious about many headwinds facing of the financial markets right now.
Pessimistically speaking, the Uber IPO might be the beginning of the end. It reminds me a lot of the Blackstone IPO in 2007 … a poster boy for the era cashing out at the top. Uber’s mission may be to set the world in motion. But there’s a slim but very real chance that the biggest IPO of all might be the one that brings markets to a grinding halt.