Intense volatile sessions are becoming the norm on Wall Street and in other financial markets these days. One day, the Dow Jones pops 523 points, the next day the index crashes 3%. Investors are hoping and praying for a Hail Mary to let the good times keep rolling. They may get their wish in two mobile applications that some are speculating will file initial public offerings (IPOs) – the first offering of a company on the public stock exchange – sometime next year. But, as we have recently witnessed in the IPO market, traders’ biggest desires can easily turn into a nightmare.
For years, there has been talk that Uber and Airbnb will go public. With valuations of $76 billion and $38 billion, respectively, it would be a no-brainer for these iconic 21st century brands to submit ticker requests on the New York Stock Exchange. The word on The Street is that both companies are aiming for 2019 IPOs, but those plans may be delayed amid putrid internal financial conditions.
Will these two companies lead the running of the bulls or will they get crushed during the stampede?
Let’s take a look at Uber’s prospects for success in a 2019 market.
Uber’s Billion-Dollar Problem
The San Francisco-based juggernaut has joined a long list of tech companies that are drowning in red ink. Uber reported a $1.07 billion loss in the third quarter 2018, a 20% increase from the previous quarter’s $891 million decline. But this has been the norm for quite some time, with the company losing $4.5 billion in 2017 and $2.4 billion in 2016.
The main cause for Uber’s quarterly loss has been stalled growth. While bookings climbed 6% to $12.7 billion and revenues jumped 5% to $2.95 billion, growth has been sluggish, causing Uber to enter foreign markets and potentially merge with local rivals.
The other dirty little secret is Uber’s spending and debt-binge. In a nine-year period, Uber has spent a whopping $11 billion – and there are little signs the behemoth is slowing down. In October 2018, Uber raised $2 billion in a junk bond sale, which was more than the original $1.5 billion it wanted. It also maintains a $2.2 billion credit line, a $1.13 billion term loan due in 2023, and a $1 billion loan from Goldman Sachs to offer subprime auto loans.
When you factor the billions in investments the company is making in technology, markets, drivers, and automobiles, the company is losing roughly $2 billion every year.
This raises the question: Is there an Uber ride on the road to profitability?
Scandals Plague Uber
Social responsibility is a key attribute for Uber customers, and the proof is in the pudding.
According to research firm eMarketer, Uber has lost market share to primary competitor Lyft following a plethora of scandals relating to workplace harassment, unethical practices, and other public relations nightmares. Shelleen Shum, eMarketer’s forecasting director, says Lyft benefited from Uber’s troubles, seeing a 41% increase in business last year.
What’s been going on at Uber? An internal investigation, as well as a dozen lawsuits, uncovered bullying, sexual harassment, and discrimination within the company. The results of the probe led to the termination of 20 employees.
Following a $10 million legal settlement, Uber released a television commercial from CEO Dara Khosrowshahi:
“Moving forward, it’s time to move in a new direction. This begins with new leadership and a new culture. One of our core values as a company is to always do the right thing. And if there are times when we fall short, we commit to being open, taking responsibility for the problem and fixing it.”
Uber’s reputation has also been hurt by human resource strife. Ostensibly, drivers are working long hours, receiving little pay, and are upset by the constant squeeze. One March 2018 MIT study found that drivers earn an average of $4 per hour, and 74% earn less than the minimum wage in their state – though Uber disputed the findings; Khosrowshahi called the institute “Mathematically Incompetent Theories.”
And then there is the sexual assault perpetrated by drivers against passengers. Since 2014, more than 100 U.S.-based Uber drivers have been accused of sexual assault. After conceding that “it’s clear that sexual violence remains a huge problem globally,” Uber introduced some new safety features, including a panic button that immediately contacts 911. It also stopped forcing accusers to secretly resolve their claims outside of court and will now permit them to sue the company.
And, of course, who can forget about the harassment of Republican passengers?
An Interesting Stock
Despite Uber’s innovations, industry disruptions, and value, it is not immune to the laws of basic finance.
In this environment, nothing is for certain. Considering the performance of recent IPO stocks, most of which have lost money in the months leading up to their debuts, disappointment is likely for Uber and its investors. Snap – the company behind social media site Snapchat – shares soared 44% from its IPO price, but then cratered to around $6 a year later. Dropbox, another online service provider, had a hot start, topping $43, but then plunged to $23. Survey Monkey is another stock that is trading below its IPO.
The common theme for these companies is that they don’t post a profit. Whether this is a sign of a bubble in tech shares can be debated, but the parallels of the dot-com era are prevalent. Despite Uber’s innovations, industry disruptions, and value, it is not immune to the laws of basic finance. Once interest rates return to historical norms, it is going to be difficult servicing the debt to sustain expansion.
Is there an app to stave off financial ruin?