Uber’s IPO collides with reality as stock slumps

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By:
Peter Lee
Published on:

Long-standing fears that the business model cannot work have hit Uber’s post-IPO performance.

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Is there a point in every successful investment banker’s career when they lose touch with reality?

Probably when they start making serious money.

Young financial journalists talk to and sometimes befriend traders, analysts and bankers their own age or a little older, some of whom go right to the top. Twenty years ago, I recall being invited to a long Friday lunch by three friends who had just been promoted at one of the big US investment banks, taking them to a point where seven figure salaries were coming into sight.

Conversation turned to what they would do with the money.

“What I would most like would be to have my own chauffeur,” said one, to general nods. “Someone who could hang around and pick me up after events like this, take me to the next one and drive me to work on Monday. I’d only have to pay him, what £60,000 or £70,000 a year?”

There was quiet at the table, at least among those who understood this was probably twice what Euromoney was paying the writer.

I smiled 12 hour later, somewhere off Old Street, as I ladled my companions into an unlicensed mini cab and negotiated a price to drop us south of the river. (Top tip to investment bankers: never try and outdrink a financial journalist.)

“This is a nice car,” I told the driver. He leaned back and grinned over a shoulder the size of a cannonball. “Yeah,” he replied. “But you should have seen the one I nicked last night.”

This was as close as I was going to get to a chauffeur, I thought. Economists had a phrase in those days for people trying to live champagne lifestyles on incomes suitable only for beer.

Champagne lifestyle

But Uber brought that idea within reach of the many living on beer incomes in the big cities: not exactly a chauffeur, perhaps, but a driver always on call, a few minutes away and comparatively cheap.

And while all unlicensed mini cab drivers were breaking the law, there was a chance your Uber driver might not be a criminal. At least the police would have a record of who had supposedly picked you up.

Price is a business idea straight from the streets, as Uber explained in the documents for its IPO that priced last week: “We can choose to use incentives, such as promotions for drivers and consumers, to attract platform users on both sides of our network, which can result in a negative margin until we reach sufficient scale to reduce incentives.”

Sell the product cheap, get users addicted, then ramp up the price. Investment bankers will understand this kind of thinking.

Here’s the thing though: while convenience and network effects – there always being a driver just a few minutes away – are important in ride-hailing, the key to the whole business is the price of the ride.

If they weren’t cheap, people would take the bus or the subway, or walk, or agree a designated driver. The day rides stop being low cost is the day riders stop using them.

Competition is relentless and not just from other ride-hailing ventures. In the week Uber floated, Estonia was discussing plans to make public transport free to use.

For 10 years, the genius venture capitalists have been subsidizing our cab fares – thank you for that SoftBank, Benchmark Capital, TPG and the rest.

It was great while it lasted, and well done VCs on convincing public market investors to provide another $8.1 billion to keep the game going a while longer. We’ll keep buying the rides for now, but probably pass on the stock, thanks. It doesn’t look tempting, even if the IPO was priced at a valuation below previous private capital raisings once you allow for the $8.1 billion of new cash raised.

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Uber's first ticket. The stock opened below its issue
price of $45

Of course, Uber was unlucky to list on a week when Tariff man was way out there on Twitter, and who knows where the stock, which opened below issue price – a rare occurrence for any new issue let alone a so-called tech unicorn – goes from here. But the strike by some drivers in the days before the IPO revealed a more fundamental concern.

Uber is about its drivers. The word ‘driver’ crops up 781 times in its prospectus, compared to 148 mentions of investors, 95 mentions of riders, 45 for customers. Here’s one mention that struck Euromoney’s eye: “Our business would be adversely affected if drivers were classified as employees instead of independent contractors.”

Fighting that one will keep the lawyers sharing the bounty from Uber’s backers for years to come.

Among the tasks of still newish chief executive Dara Khosrowshah is rebuilding the company’s relationship with drivers through initiatives such as encouraging tipping and introducing a two-minute cancellation time.

The first is a natural for many riders; the second a brand poisoner in our view. Hasn’t every Uber user been charged a fee from some driver who never accepted the pick-up, claims to have waited two minutes and driven off? Has anyone ever not been immediately refunded after contesting one of these?

Look around the sites where Uber drivers talk and when you get past through the boasts about high earnings from driving in unsociable peak times in busy cities, it appears that after running costs – a good car, petrol, insurance, repairs – many are on minimum wage and could do as well with less stress and more non-wage benefits, such as paid holiday, working at McDonalds.

Doubts

Uber’s IPO was a prestige ticket for the lead firms. But if a company can't show a real profit after four or five years of steady operations, Jeff Yastine, senior equities analyst at Banyan Hill Publishing, doubts it ever will.

“It worked for Amazon, but Amazon was at least cash-flow positive within a few years of opening its doors,” says Yastine. “Uber's been in business since 2009 yet, according to its own reports, had negative cash flow last year of $2 billion and pays interest on $4 billion in debt. If a company can't at least be ebitda positive during a decade-long bull market, with zero interest rates and the easiest of ‘easy money’ policies by the Fed… well, what further ‘help’ does it need to turn a profit?

“In my view, Uber's IPO is the age-old game of venture capitalists getting American investors keenly excited about a great idea for a stock, but not actually a great stock to own.”