Uber IPO: right now it’s all about the price range and the 1Q numbers
When Uber files an amended S-1 with its price range later this week or early next we’ll know two things that we don’t know now:
Are the Company and its underwriters just head-faking a high valuation anchor so they can come in low and let everyone who is struggling to get their heads around the $100-billion price talk move at least into the yellow zone and out of the red?
Will the Company print its 1Q 2019 numbers in the amendment at all? If so, what do those numbers tell us about growth and profitability (since we don’t have the metrics we need to run a high-confidence model on our own – see below)? And if not, why not? Lyft is announcing its 1Q on May 7, so if Uber is going to price its deal on May 8 and NOT tell us its 1Q results beforehand then those numbers must be problematic, and boy is this set up to look like Facebook’s IPO disaster seven years ago.
Uber seems to be missing the two major lessons of Lyft’s recent misfortune:
Transparency. Sure Uber broke out Bikes and Scooters, and didn’t scramble the eggs of driver vs. passenger discounts with revenue reductions and sales & marketing costs so you can’t tell what goes where, and they gave us “illustrative” unit economics, and a few other things that Lyft failed to do. BUT good luck to anyone who wants to build a high-confidence model with the data in the Uber Opus 395-pager. No driver counts at all, no churn rates, acquisition costs, retention rates, etc. etc. You know, the stuff you need to build a churn model at the unit level. So what we can anchor into is an operating loss of $3 billion that is way better in terms of margin than Lyft’s but still a gnarly number when you lack the inputs to pencil out a path to profitability. And this sum-of-the-parts stuff with an arbitrary insider valuation for autonomous, a Lyft-revenue-multiple-based valuation for ridesharing, and upside in Uber Eats just doesn’t solve the 3-billion-dollar problem of the overall operating loss. If losses don't improve, IPO proceeds will only be 3 years of runway, and then what? Nothing good.
Valuation. Just like Lyft, we don’t know what the long-term model looks like to get to rational profitability but we DO have good reason to expect this deal is ex-pen-sive!! And we also suspect the nosebleed asking price is anchored in the two huge issues that forced the Lyft team to push their luck a) the powerful need, psychological or otherwise, to value the Company north of the arbitrary (and some would say preposterous) last private market valuations, and b) incentive structures for management that are struck at aggressive levels that will optimize for early shareholders who consider an IPO to be an exit (this is the end), vs. a view that the IPO can establish the Company’s long-term public-market shareholder base (this is the beginning).
Ride-sharing bulls are having a tough moment after digesting the Uber IPO prospectus because it raises an uncomfortable possibility: maybe ride-sharing as a business just isn’t a profitable proposition. Maybe, like with airlines, gains are possible as a cyclical trade or by getting it right with one carrier vs. another but in aggregate the return on capital nets to zero. Maybe the $20 billion invested in Uber and Lyft so far – if it was trapped forever and not able to get liquid in these IPOs – would just be a transfer of value from investors to normal people who got to ride in the back for awhile but would otherwise have just taken the subway.