After 10 years as a private company, the innovative ridesharing business Uber Technologies went public on May 10.
With an implied market capitalization of $79 billion, Uber boasted a larger valuation than DowDuPont, US Bancorp, Charter Communications, Morgan Stanley, Gilead Sciences, Caterpillar and Blackrock. That’s more than twice the size of Target.
While the timing of Uber’s initial public offering (IPO) was admittedly poor (it closely followed the IPO of ridesharing rival Lyft and came on the heels of escalating US-China trade war tensions), it was still the most highly anticipated IPO since Facebook in May 2012.
Why? Because Uber has become a household name. It offers an incredible service at a reasonable price and a great story as the disruptor of the entire transportation and logistics market. But is it a good investment?
Here’s an interesting fact uncovered in a couple of Bloomberg articles: In late 2015, Uber held a private fundraising round at a valuation of $62.5 billion or $48.77 per share. Company leaders used the additional funds to further invest in the business, grow market share, and expand into new verticals (food delivery, scooters, aviation, etc.). Valuation expanded as a result.
But this year, the IPO price of Uber was $45 per share, compared with $48.77 in 2015. How did that happen?
A company’s market capitalization (calculated as total shares outstanding multiplied by share price) can go up, even if the stock price goes down. The trick is that the company issues more shares, which is exactly what Uber has done.
Bloomberg columnist Matt Levine explained this further in his opinion piece the night before the IPO launch, noting that since 2015, Uber issued $8 billion in stock to investors before the IPO. During the IPO, the company issued another $8.5 billion in additional shares. Together, these total $16.5 billion, basically accounting for the difference between $62.5 billion and $79 billion with a relatively flat share price.
From an investment standpoint, this is not the preferred way to grow market capitalization. A company’s market cap usually grows because the share price increases while the share count remains the same or is reduced (share count is reduced when the company buys back its own stock from shareholders). This creates wealth for the investor because his shares are now worth more. This has not been the case with Uber since 2015. In fact, investors in Uber’s 2015 private fundraising round lost money if they sold their shares at the IPO.
Since going public it has only gotten worse. Uber’s stock has been under pressure and continues to trade well below its IPO price of $45 per share. Why is this important?
It’s a reminder to not get caught up in the hype and the hoopla. Despite the fanfare, the exclusivity of being an Uber investor, and the storyline that accompanies a disruptive business, an investment in Uber underperformed a simple investment in the S&P 500 by over 40% since 2015. Since Uber has gone public, the underperformance has only grown.
Uber’s eye-popping $79 billion valuation captured headlines and set records, but a private investment in Uber as early as 2015 has provided a negative return. Like most things, the devil is in the details.
John Lueken is the executive vice president and chief investment strategist at CapWealth. This article was published in The Tennessean on June 10, 2019.