Some IPOs are better than others. Uber’s IPO is definitely in the less exciting category, but things could have gone a lot worse so far. Uber is holding up pretty well but for how long?
Uber stock hit the market as a very anticipated IPO back on May 10, opening at $42 a share. It’s first 2 days of life weren’t the easiest, and at the end of day 2 of trading, the stock dropped to $37.10.
That’s a pretty big percentage loss for any stock in two trading days, and they certainly didn’t hit the ground running like good initial public offerings do. The bears were out in full force with this one, and many, including us, wondered how long it would actually be before they started making money or what it would even take for them to get there.
It’s not all that terrible that a company goes public well before they turn a profit, as investors can often see past the red and cast their vision on a future time where the underlying company may turn things around and get profitable. This does involve our imagining them growing their market share and scaling up and having these economies of scale eventually produce some good profit.
Uber, on the other hand, is pretty scaled up now and holds a commanding position in the so-called ride sharing market, and while this market may indeed grow some more, economies of scale don’t really apply all that much to them.
Uber isn’t really a ride sharing company as much is it is a taxi company, as their drivers are not really occasional ones that are just giving people a lift on their way to where they are already going, their drivers do this for a living and in fact earn a better living than your average taxi driver. This is why they have had little trouble attracting drivers, but this is nowhere near ride sharing, where we might expect the charges to be pretty low considering that drivers sharing rides are not going out of their way that much.
Operating a taxi service does require prompt service, and they do have to compete with the local taxi companies in this regard. No one wants to wait all that long for a taxi and in order to serve this market properly, you need a lot of full-time drivers on the road and can’t rely on the happenstance that comes with true ride sharing,
We’re all too aware of how Uber’s business model is playing out these days, where they get a lot of rides but it costs them more to provide these rides than they take in. They are undercutting the local taxi companies and taking away a lot of their business, but doing this and losing a bunch of money every day does not exactly equate to business success.
Losing Money is One Thing, Wondering When This Will End is Another
With Uber, it’s not so much that they are spilling red ink, it’s about when this may all end, and what sort of changes have to happen for this to occur. We do know that they have to pay their drivers too much right now and this is causing them to lose money on their rides, but paying their drivers less would presumably cause them to lose too many.
We could even say that their human driver model is a broken one, and their building such a huge customer base is only of value if they can extract a profit from this and not just subsidize the rides of their ridership as they are doing now.
There is talk about their turning profitable in a couple of years, but even that may be overly optimistic. The only realistic hope for them seems to be for them to lose their drivers and buy cars that drive themselves and hope to cut costs that way, but this appears to be pretty far off into the future and we need to wonder how they are to get by until then.
Their business model also assumes that a lot more people will give up their own cars in favor of riding around in Uber autonomous cars one day. This might be cost-effective in some cases, especially in large urban areas where parking is a real issue, but this does involve having to wait for a ride versus just getting in your car and driving off.
Having autonomous cars versus ones driven by humans isn’t really going to change this dynamic very much, if anything, and the sheer inconvenience of car service will keep this market hemmed in both now and in the future. It’s not that unreasonable that the car service market will expand from where it is today, but this expansion will be limited, and we can’t just project massive changes in the way people get around just based upon hope or wild speculation.
Uber really doesn’t need this to thrive though, and the market right now is plenty big enough if they can find a way to get their costs down enough to stop losing money on rides. Adding more volume isn’t the answer right now as that just serves to extend their losses, they have to make some pretty drastic reductions in how much this costs them, and therein lies the real challenge.
Going fully autonomous might seem pretty exciting, but Uber’s future with this pretty murky right now, as we’re nowhere near ready to implement such a thing. This would also require that Uber raise enough capital to fund such a huge project, and there are no assurances that their business model at that point in time will even be a workable one, especially given how lousy their current one is.
Uber’s Stock Price is Being Held Up by Hope, But Hope only Endures So Long
We need to even ask how people are still stepping up and paying as much as they are for this stock, which would be understandable if the present looks grim but the future looks bright, but neither look all that bright for Uber right now.
Uber’s recent earnings report had a special kick to it, as they actually reported more losses than revenue due to their adding $3.9 billion’ of losses attributed to offering stock options to their people as well as bonuses to their drivers. This had to get on the books sooner or later, but sure doesn’t make an otherwise dismal quarterly report look any better.
Their operational losses are the ones we need to be paying attention to, not these one-time write downs, but that story is not a pleasant one either. Revenue came in at $3.2 billion, with losses coming in at $1.3 billion. Losing $1.3 billion in a quarter this far along in their development is not anything to be optimistic about at all and speaks very loudly at just how broken their business model is right now.
This did cause the stock to drop by 8.5% on Friday, where they had inched above their issue price of $42 the day before and dropped back down to $39.23, which is still above their all-time low on day 2 and in an area where there is quite a bit of support now. However, these support levels have been based upon old data, and with new data, the market might not be so willing to keep them in the fairly tight range that they have traded in since the stock hit the street.
Optimism still abounds though and the fact that we didn’t go even lower than this on Friday well attests to this. This is a case where we would otherwise expect a downward course of a much greater magnitude, if not for this optimism, but we also have to ask just how long it will stay at its current levels if they just keep losing more and more money and burning through more and more cash, and they went through $900 million worth this last quarter.
While this is not a stock we would want to short just yet, we might get there at some point down the road, but we’re going to need to be patient and wait for the patience of those who remain bullish on this stock to wane more.
Uber is not a stock to be excited about on the long side right now though, and it’s hard to imagine things changing in the near term at least that would propel it very far. It is living in pretty much a dream world right now, and we already have the dreaming exerting its forces, which will come more and more against reality as we move forward.
Maybe things will change with Uber one day, but that day is not today or even anytime soon. Hanging around a stock that is subsiding on mere hope right now surely is not the best place to park your money, and as more and more people realize this, and more and more losses pile up, to say that the near-term upside is limited may be quite an understatement.