Uber Lock-Up Period Expires, Stock Continues to Drop

Uber

Wednesday, November 6 has been a date that has been looming with Uber stock since it debuted in May. That day is now here, and a flood of supply is now in the mix.

During an IPO, some of the shares of a company get offered for sale at the issue price, which gets bought by institutional investors to be put on the secondary market, the stock exchange. A lot of company shares don’t get put up for sale initially, ones owned by people in the company.

In order to prevent a glut of supply during the IPO process, where the sellers simply overwhelm the prospective buyers, sending the price plummeting, or only allowing for a low price to be obtained if all these shares are included in the initial offering, supply during the first few months is strictly controlled to give the fledgling stock a chance at a good start in life.

Eventually, the flood gates must be opened, and the opportunity for people in the company to sell their shares on the open market is a primary reason why companies go public. We need to keep in mind that this is not really about the welfare of the company, as shareholders view their stake in the company instrumentally, to make money from, and this is exactly what they seek with IPOs.

With Uber, both the stock and the company face a troubling future, and we’ve done several articles already making this all clear. While we’ve been bearish on this stock all along, we certainly aren’t alone, although there are various degrees of optimism out there including some bullish views as well. We share no such optimism and find it hard to believe that so many people are so hopeful with a company with such a broken plan to make money that seems so destined to fail.

This isn’t just to say that the stock will struggle for several years, with a reasonable chance of one day achieving the lofty goals that many have set for it, even speaking of what they do as the future of transportation. This is a taxi business and a delivery service that is competing in an industry with a lot of competition and thin margins and things will only get worse, not better.

It is not even just about the battle between Uber and Lyft, and Uber’s other gig economy competitors, as they all have to compete with the establishment in this industry. They have enjoyed significant benefits thus far from being able to sidestep regulation that has weighed upon their traditional competitors. These benefits will be greatly diminished as regulators respond to this new industry, and have started to do so already.

Meanwhile, this is what you really call cut-throat competition, where all throats get cut and we just watch them all bleed. Putting money on such a thing is questionable to say the least. We’re supposed to pull back at the sight of blood when we’re competing in business, and this tendency to bleed does serve as a natural barrier normally, but not so with these businesses, who simply are content to keep playing their fiddles while Rome burns.

Uber’s so-called ride share business seemed like such a good idea at one time, but thinking that everyday people would wish to take on the inconvenience and risk of picking up strangers along the way when they travel by car and seeing this happen on a big scale was just not realistic or reasonable.

What happened instead is that Uber ended up attracting professional drivers, which ended up tossing their ideas of capturing the efficiencies of ride sharing and instead put them in direct competition with taxi companies. While we may have thought that a company with the reach and means of Uber could just beat them on scale, what happened instead is that Uber has been beating itself up, by growing its business but doing so at a loss.

Uber gets more and more rides, and given that they lose on every ride, more rides simply means more losses. The Uber Eats part of the business has progressed the same way, and both the ride and the delivery service has now become so competitive that you need to lose on the rides or deliveries to gain the business, which is not business anyone should want.

When Expanding Your Business Just Adds to Losses, You Have a Big Problem

As Uber, Lyft, and other competitors further saturate the market, scaling up further does not offer any real hope of getting out of this mess. The situation is so bad that hopes of Uber doing something different besides losing a lot of money became hinged on their one day running a huge fleet of driverless cars, because if they want to make money, the drivers do really need to go, especially given that they will cost even more as new regulations kick in treating them as employees.

This driverless car dream isn’t that realistic either, as the capital costs to put this together would be enormous, as they don’t own any cars right now and would have to buy a huge amount of them. This looks much more like a pipe dream and one that is years away at best, as well as not even being realistic. The optimism here is primarily based on people to move away from owning cars in droves and travel by taxi exclusively, but this involves a fundamental misunderstanding of the car market, in a way we should also find disturbing.

People could do that now if they were so disposed, and the fact that there is no driver versus the drivers that we have now with taxis really isn’t significant. The reasons that people don’t do this now is that owning their own car instead offers them on-demand service instead of waiting, as well as having the marginal cost of trips so much cheaper, where they don’t have to wrestle with spending quite a bit of money every time they want to travel.

If you drive 20,000 miles a year, as is typical for Americans, doing this by taxi would cost a lot more as well as being inconvenient. Uber ignores this demand and hopes that people will confine themselves to essential trips only and then assumes people will spend their valuable time waiting around for rides both ways, which does not resemble current preferences generally nor is it ever likely to.

Meanwhile, Uber is losing more and more money with no end in sight. If the best that you can really hope for is your losses not being as big as expected, without a clear exit plan or even one that can be reasonably envisioned to get them off this spiraling descent toward the ground, this should serve to temper enthusiasm to say the least.

Uber’s issue price back in May was $45, and it has been on a ride downward since. When a stock is moving down in the way that Uber’s has, and the lock-up period is about to expire, this will really get people motivated to get out of the stock or not buy it as we move toward this.

Over the last week, Uber has lost over 20%, and it is no coincidence that this last week was the week leading up to all these shares flooding the market. Uber lost 17% in the 4 trading days that served as a build-up to this, and the 3.85% more that it lost once these shares did hit the market on Wednesday was only a small part of this move.

Uber traded 130 million shares on Wednesday, more than 10 times its normal volume. There has only been one day where they traded anywhere near this many shares, which was on IPO day, traditionally the biggest volume day of an IPO by far, but on Wednesday, they came pretty close to this.

Wednesday’s losses would have been bigger or much bigger if not for the fact that the market had beat down the stock price so much now that many company shareholders may be hanging on and hoping for a rebound at some point. Uber may be well overvalued even at this broken-down price though, so this may be a move that they may ultimately come to regret.

The specter of this event was so significant that Uber actually had nice results from their quarterly earnings report on Tuesday, where they beat expectations for both revenue and losses. This wasn’t even seen as significant though and did not even slow down the fall that was underway, that’s how big of a deal this lockout expiration was.

All This Extra Supply Still Looms Big

The extra 120 million shares that were traded Wednesday may only be the first wave of a potentially much bigger one, and if more company shareholders decide to get out here, this could take us down quite a bit further. If Uber stock has been toxic all along, which we believe it has, and it sure has performed that way thus far, this looming threat of further share dumping may add to it considerably.

Should people decide that Uber is a bargain at $28 or wherever it ends up when the dust from this finally settles, this huge supply sitting on the sidelines and waiting for an opportunity will likely prevent any real rebound by their selling into any strength the market can muster. This is a play that even the sharpest and most nimble traders will need to be careful with, and is certainly not a situation that any investor wants to be in.

If you are an investor and have managed to hold this junk through all this turmoil and so much turmoil on the horizon as well, it might be tempting to continue to hold, but you need to ask yourself what you expect will change anytime soon to make this more likely to produce a positive return over time even from here. If this was such a good play, people would be lining up to buy it, not to sell it.

There is no such thing as sunk costs with investments, even though many investors incorrectly see it that way, thinking that where they got in has anything to do with what to do now. If your car leaves the road and you bump your head, and another car is heading toward you, the fact that you have already had one accident should never cause you to be careless about another.

In fact, given that you are already injured, this should make you even more risk averse, as the second whack will hurt more and put you even more in jeopardy. Thinking is important in investing, but sometimes you just have to stop thinking and just defend yourself when you are in such a bad spot like this. Rationalization with investing often costs money, and it sure has with this dog so far, and this is likely to continue.

If you want to play this on a much shorter time scale, like looking to ride it up a couple of bucks or so on a rebound, this isn’t even the time to be doing that. We might see an opportunity come up like this soon, but we need to wait for the bottom first otherwise we’re trying to catch a knife as they say.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.