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Uber: One of the biggest and worst IPOs in history

In 1998 we were told, “don’t get in cars with strangers”. In 2008 we were told “don’t meet people from the internet alone”, and in 2019, we order ourselves a stranger from the internet to get into a car with alone...

Uber has created an industry and certainly re-defined transportation but that wasn’t a smooth ride – pun intended.

If you take a look back on Uber’s history, they’ve made plenty of mistakes, from breaking laws, to rape allegations, to gender inequality and racial discrimination investigations, to killing someone with their self-driving car. I mean, wow, that’s one unconventional path to IPO!

Despite not being profitable, Uber has experienced fast growth in an industry they created. A significant part of their growth and their operating expenses has been offering drivers incentives, for example, if a trip costs the rider $10, the driver gets $7 plus another $1 in Uber incentives. Uber gets $2. If Uber ramps up its incentives to $4, it actually loses $1 on a $10 trip, according to their SEC filing.

Being a 'loss leader' for Uber was a way to create a 'network effect' similar to Netflix, which wanted to offer video streaming, but the right technology was not yet in place when they started. So, they rented out DVDs by mail. Shipping DVDs is not a great business because they scratch easily and don’t last long and there are delivery costs, but it allowed them to be in every household.

According to Uber’s SEC prospectus, the company posted losses from operations of $3 billion in 2016, $4.1 billion in 2017 and $3 billion last year.

Uber said it expects operating expenses to increase “significantly” for the “foreseeable future,” warning that “we may not achieve profitability.”

But Uber was one of the most watched IPOs since Facebook in 2012, and what gets investors excited is its market dominance and revenue growth.

From 2016 to 2018, revenue nearly tripled from $3.84 billion to $11.27 billion. Gross bookings, or the total value of trips and not just Uber’s cut, more than doubled from $19.2 billion to $49.8 billion in 2016 to 2018.

Although they achieved the fifth weakest one-day return for a company with a value of at least $10 billion over the past 24 years, according to data from Dealogic, David Erickson, Wharton lecturer and former co-head of global equity capital markets at Barclays, says Wall Street sees Uber as part of an elite group of tech companies that include Amazon, Facebook, Google and Netflix.

Five years ago, Amazon was trading at $331 a share with a $153 billion market cap. Today, Amazon trades around $1,835 a share with a $900 billion market value.

In the fourth quarter of 2018, Uber served 91 million monthly active platform consumers (MAPC) and partnered with 3.9 million drivers.

Since 2015, its drivers have earned $78 billion, plus tips.

Uber now operates in more than 700 cities in 63 countries and six continents, enabling more than 10 billion trips globally and there’s still a lot of scope to grow.

Despite an #ElectrifyUber campaign launching before their IPO suggesting Uber contributes to congestion and emissions, currently rides only account for less than 1% of all miles driven globally, and out of the 4.1 billion people in the countries it operates in, only 2% have used Uber.

But Uber must turn a profit to keep investors on side, but it’s not uncommon for tech companies to be unprofitable when they go public. Amazon, which went public in 1997 didn’t become profitable for 12 years after. The problem Uber faces is that more competition in this space will only drive their margins lower.

It’s important to note that over one-third, and maybe close to half, of the company's losses stem from Uber's investments outside of its core business, like its freight business and autonomous-vehicle project, according to The Information's data. This could be the way forward to increasing their margins.

Khosrowshahi, the CEO of Uber and the former CEO of Expedia, is a well-known, seasoned CEO with a significant track record in his own right which is one of the positives that a lot of institutional investors are taking comfort in.

But often founder-CEO’s are more mission driven and make bolder moves, as an example, you can see the comparison between Steve Jobs, Apple’s Founder-CEO and their new CEO, Tim Cook. The iPhone really hasn’t changed, and their sales are dropping.

Uber is clearly one of the most transformational companies in the world, and the company has singlehandedly changed the nature of transportation worldwide. If they can continue on this path and increase their margins, this could be a benefit to the investors that join them on their journey.

It could be time to add Uber to your watchlist.

Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.

Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.

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