Is Uber Taking Investors for a Ride?Submitted by Bernhardt Wealth Management on June 3rd, 2019
Once again, IPO fever is sweeping the tech sector. In May 2012, everyone was talking about Facebook’s initial public offering, which raised more than $16 billion and instantly made founder Mark Zuckerberg one of the world’s wealthiest people. Earlier this year, the cloud-based ride-hailing company Lyft went public to the tune of about $2.7 billion, and its larger competitor Uber made its debut May 10, offering shares at $45 and raising $8.1 billion. Several other tech companies plan IPOs for later this year. Some analysts estimate that the total number of “instant millionaires” created by all the money pouring into corporate coffers via the tech IPO wave will be in the 5,000-9,000 range.
But what about the people and institutions purchasing the stock? Have they fared well after buying into the “next big thing?” For Uber, Lyft, and other tech leaders—and for IPOs in general—the early results after the IPO are mixed, to say the least. It is not at all uncommon for a stock price to drop almost immediately after its IPO, and to a certain degree, this shouldn’t surprise anyone. An easy analogy for understanding this is buying a new car at the dealership. Everyone knows that when you drive that spanking new vehicle off the lot, it immediately loses several thousand dollars in resale value. That’s because many of the costs paid by the purchaser—the dealer’s margin being the main one—are immediately deducted from the value of the car. Similarly, there are many costs built into the share price of a stock going public for the first time. Investment banking fees, marketing costs, and many other expenses that have little to do with the intrinsic value of the company soon fall away as the shares begin trading in the open market based solely on what buyers and sellers think the stock is worth. So, in a way—and please understand, this analogy is only useful in terms of broad understanding—people who purchase stocks in an IPO are paying “extra,” and the post-IPO drop that many stocks experience is how the market strips away those costs.
Over time, of course, investors believe that the company will continue to become more valuable and that their patience will be rewarded. For example, Facebook shares, which were initially offered at $38, traded as low as $18 in the months following its May 2012 IPO. On May 31 of this year, Facebook closed at $177. Obviously, those still holding IPO shares bought at $38 are not disappointed with their investment. By comparison, shares of Uber (stock symbol UBER) closed at $40 on May 31, $5 below the price at which they were offered to the public about two and a half weeks earlier. Detractors point to the steady flow of red ink coming from Uber (and Lyft, for that matter), but true believers respond that similar conditions existed at other major tech players now considered anchors of the tech economy. Facebook posted net losses for the first five years of its existence, and mighty Amazon needed seven years from its 1994 founding—including four years following its IPO—to post a profit.
Will Uber, Lyft, and the other emerging tech giants follow a similar path? We can’t be certain. And certainly, investing in “the next big thing” isn’t right for everyone. But it’s far too early to declare that those who bought Uber on its IPO are losers.