Was Uber’s Tank Empty Before the (IPO) Trip Started?

The great Uber Technologies fools the market in the latest IPO fiasco. Will investors ever learn?

If you saw as it happened, you would have cringed. In the most hyped new stock offering in several years, Uber Technologies (NYSE: UBER) stock landed with a thud on the first day of trading. Although the stock has recovered since its May 13 offering, it’s still trading below its offering price of $45, hovering around the $42 mark in the two weeks since. There a few winners from Uber’s IPO, namely its founders, who are now multi-billionaires, many of its original investors, and its investment bank, Morgan Stanley. Investors? Not so much.

Most investors lost billions. In fact, thus far, Uber’s stock market debut lost more in dollar terms than any IPO since 1975. Their first clue should have been the equally dismal performance of Uber’s main competitor, Lyft Inc. (NASDAQ: LYFT), with its record 21% one month decline following its March 29 offering. (See: What Lyft’s IPO Should Tell You About Investing) Their second clue could have been the fact that Uber, which has yet to turn a profit, reported its worst loss of $1 billion in the first quarter of 2019. Worse yet, it’s commonly known that Uber loses more money than any other company to go public. But, no big deal.

Like Moths to a Flame

It seems the allure of investing in the biggest thing since Alibaba (NYSE: BABA), was too much for thrill-seeking investors who couldn’t tell the difference between an income statement and a balance sheet. Similar to Facebook’s (NASDAQ: FB) IPO, it was enough just to be able to say you were in on the offering. It didn’t matter that Facebook shares tanked following its IPO, though the stock has generated solid returns over the last five years.

This is not to say that investors should never invest in companies that are going public for the first time. Regardless of whether a company is privately or publicly owned, investors would be wise to approach any investment with a consistent and rational approach focusing on financial metrics and other fundamentals. However, many companies go public with no ascertainable value since they don’t generate cash flow or positive earnings.

Uber IPO was Doomed from the Beginning

Any shareholder equity that is yielding zero or less, isn’t worth anything, except what investors, or speculators, are willing to pay based on how they think the stock price might perform in the future. That’s exactly how Morgan Stanley set Uber’s IPO stock price – not based on profits, because there are no profits, now or in the foreseeable future – but rather on what they viewed as the public’s appetite for owning shares in the “hottest” company to go public in several years. Apparently, they were wrong, as initial trading drove the stock price lower. You can now invest in Uber at below its IPO, but why would you?

Is Uber a Good Investment?

Fundamentally, there are very few reasons to own Uber stock right now. Aside from the fact that it is bleeding red ink by the billions, the company is facing strong headwinds from regulatory, political, competitive and labor challenges that have slowed its trajectory. The only reason it has been able to expand this far was the tens of billions of venture funding, which is now fleeing the company as initial investors cash out. At best, retail investors will be in for a very bumpy ride for the next several years. It will take at least that long for the company to generate the kind of sustained earnings that can support its massive valuation.

As with Lyft and many other high-profile IPOs, the Uber experience should serve as a stark reminder for investors. Whether investing in a hot IPO or an established public company, it is important to look beneath the veneer of explosive sales growth, as alluring as that can be. If a company doesn’t have real earnings to support its top line, its true value is zero. Investors should always do basic due diligence to find companies with high and rising profitability, backed by a solid business model, with solid growth and return prospects that can stand the test of time.

Like this post? Share your thoughts!

Subscribe for updates

Share this post

Take stock of your investment portfolio today!