Uber’s Fall To Give Rise To Investor (IPO) Caution?

In the wake of what can only be termed a disappointment, Uber’s IPO may paint other companies that are newly public or aiming to come public with a broad, and decidedly negative, brush.

At this writing, on Tuesday morning (May 14), Uber shares were briefly positive before dipping into the red and then positive again, but just barely. Should they finish the day with yet another loss, investors who bought in at the $45 offer will be underwater by double-digit percentage points.

To be fair, the initial bumpiness of the initial public offering can be traced to company-specific details. For instance, competition is fierce within the ride-hailing industry, and as has been well documented, strikes over worker pay abound. In the meantime, the company has been busy trying to expand beyond simply bringing customers hither and yon, with plans to deepen and broaden its bets in logistics and food delivery.

But as Yahoo Finance noted, Uber joins a list of firms that had disappointing IPO opens, and as many as 10 other companies are on that list. Size does indeed matter, as Uber is the only firm among them to have an offering of more than $4 billion. Fellow ride-hailing company Lyft, also operating in the red, also sports a “busted IPO” moniker to its name, with a positive day on Tuesday but at $50 a far cry from its $72 IPO price.

Thus, a bit of a warning light flashes for companies that may have been prized for their top-line growth but have no operating profits (yet, or, might we posit, perhaps ever) to speak of. Turns out that simply being a growthy tech firm is not enough, and by way of contrast, consider Zoom, which has positive earnings and which saw its shares surge by more than 70 percent on its first day of trading.

The divergent performance perhaps show that scrutiny is moving from the top-line growth to how companies are spending what comes into their coffers, which includes, of course, IPO proceeds.

WeWork, to cite another example of solid trajectory of revenues but losses, filed earlier this year to go public, and with a reported $47 billion valuation also has revenues that recently doubled to $1.8 billion last year but lost $1.9 billion.

For now, at least, the dust is still swirling amid trade wars. But as that dust settles, investors will take a much harder look at what they are getting when they buy in at the ground floor. In essence, it’s not too far-fetched to surmise that investors are being asked to subsidize growth, with a promise that things will improve, as these and other platform companies scale past a tipping point that brings operations into the black. In the meantime, the harsh drubbing that has followed, we think, may bring at least some firms to reconsider public debuts. Tapping debt is still (relatively) affordable, and waiting for the volatility of geopolitics may be a more comfortable strategy.

Uber’s own CEO took the (unusual) step of issuing a letter to employees that was optimistic, by pointing out that companies like Amazon had rough sledding upon public debuts and then took off. The promise is one thing, the path is another.