At the $45 share price, UBER has a market cap of around $75.5 bln. Not too long ago it was believed that the company could be valued as high as $120 bln once it launched its IPO. So, in our opinion, it's fair to say that its IPO pricing is somewhat disappointing, considering how high expectations were.
UBER's CEO confirmed on CNBC this morning that the company purposely took a more conservative approach to its IPO in the aftermath of Lyft's (LYFT) poor performance. While LYFT's IPO priced strongly at $72 vs. the original expectation of $62-$68 (the price range was later upped to $70-$72), the higher price and loftier valuation made the stock less appealing to investors and positioned it as a target for short sellers.
The more conservative pricing gives UBER a more favorable valuation relative to LYFT, too. At $45, it has a trailing P/S of about 6.8x, compared to the 9.5x LYFT had at its IPO price. With the dive lower, LYFT's P/S has slid to about 7.3x.
Its dominant position in the ride-sharing market, its cheaper valuation, and its more diverse set of growth catalysts could help UBER avoid the same fate LYFT has endured since going public. While LYFT’s service has been picking up some share on UBER’s, it still significantly lags UBER in terms of active customers. In FY18, LYFT had 18.6 mln active riders, compared to 91 mln for UBER.
Additionally, UBER is casting a wider net with its Uber Eats and Uber Freight businesses, and it is investing much more aggressively in autonomous driving. In fact, in conjunction with this IPO, it secured $1.0 bln in new capital from SoftBank, Toyota, and DENSO Corp for its Advanced Technology Group (ATG) which is focused on developing self-driving vehicles.
So, UBER has a few key advantages compared to LYFT that could work in its favor once shares open for trading.
But there is a major caveat. The volatility in the market comes at an inopportune time for UBER. Given the high-risk nature of IPOs, they tend to be overly sensitive to fluctuations/weakness in the broader markets. And considering its shaky financials, there is plenty of risk involved with investing in UBER.
In FY18, the company had a staggering operating loss of ($3.0) bln. This is due to its steep investments in its other businesses, along with rising competition from LYFT, which has taken a bite out of its take rate.
As competition continues to escalate and as drivers continue to demand better pay, its take rate and contribution margin could continue to slide. This factor, combined with its ongoing investments, means that any improvement on the bottom line is unlikely any time soon.
Key Takeaways: UBER's pricing was underwhelming and somewhat disappointing. However, the softer pricing doesn't come as much of a surprise given the turmoil in the markets this week and LYFT's weak performance.
The conservative pricing has created a more appealing valuation, which could lure in more investors who may have been uncertain about its IPO. This relatively cheaper valuation, its intriguing growth prospects, and its dominant market size should help it avoid a fate like LYFT’s.
However, if the stock market continues its slide, investors will become even more risk-averse, which wouldn't bode well for UBER or the IPO market in general.