Uber and Lyft go public: losses and a debate over value

Uber Technologies began trading on the New York Stock Exchange on Friday 10 May 2019, after setting the price of its initial public offering at $45 a share the day before. It opened at $42 and closed the session at $41.57, 7.6% below the offer price. Six weeks earlier, on 29 March, its rival Lyft had made its debut on Nasdaq. According to AP, Uber’s was the largest US flotation since Alibaba’s in 2014, and both companies are still losing money.

What happened

Uber sold 180 million shares at $45, towards the bottom of the $44–50 range it had indicated, and raised about $8.1 billion. At that price the company was valued at around $82 billion, less than the $100 billion to $120 billion that had been talked about months earlier, though more than the $72 billion at which its private investors had valued it.

Lyft had priced its shares on 28 March at $72, above the initial range of $62 to $68, raising about $2.3 billion at a valuation of $24.3 billion. In its first session the shares rose by about 9%. They have fallen since: on 9 May, the eve of Uber’s debut, they were trading more than 20% below $72.

Growing companies that lose money

The two companies’ prospectuses show the same pattern. Lyft had revenue of about $2.2 billion in 2018 and lost $911 million, against a loss of $688 million the year before. Uber had revenue of $11.3 billion, up 42%, with an operating loss of close to $3 billion, and it acknowledges in its prospectus that it has made significant losses since its inception and may not become profitable. According to AP, it has lost about $9 billion since it was founded.

Those who defend the valuations point to the size of the business: Uber reported 5.2 billion trips in 2018 and close to $50 billion in gross bookings, only part of which is its own revenue, and both groups are still growing. Sceptics point out that this growth has been bought with losses and that the business depends on local regulation: in Barcelona, for example, a Catalan government decree on chauffeur-driven vehicles led Uber and Cabify to suspend their service at the end of January.

What is worth understanding

The price of a flotation is set by the company and its underwriting banks according to the demand they detect before the debut; the first-day price mainly measures how the market reacts that day. An initial rise or fall does not say whether the company will be profitable or what it will be worth in a few years’ time.

Valuations of companies that do not yet make money rest on future profits, so they tend to be more sensitive to changes in interest rates and in market sentiment than those of companies with stable earnings. It is also worth remembering that earlier shareholders are usually bound by periods during which they cannot sell, so the supply of shares can change when those periods end.

For a family or a company with portfolios or funds that include this kind of security, what is useful is to know how much exposure there is to loss-making companies, what criteria the manager uses to include them, and how they fit with the objectives and time horizons of each portfolio. Ask your adviser how to apply this to your own case.

Going public is a way of raising funds, not proof of profitability.