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Uber IPO sheds light on risks of the ride-sharing business

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Uber IPO sheds light on risks of the ride-sharing business

Uber Technologies Inc.'s IPO filing unveiled its losses in 2018 and other risks the ride-sharing company is facing, but analysts are still talking about growth opportunities.

"The filing highlights the risks and competitive nature of this industry but also that penetration of what Uber sees as the future addressable market is still a fraction of the opportunity," Ygal Arounian, vice president of equity research at Wedbush Securities, told S&P Global Market Intelligence.

Arounian also said Uber's IPO brings the ride-sharing industry and its future opportunity "front and center for investors."

Uber is poised to follow smaller rival Lyft Inc. in going public, but it will face some headwinds as it charts its course in a crowded IPO field.

According to Market Intelligence data, Lyft's current market capitalization is $16.29 billion. Lyft made its trading debut on the Nasdaq on March 29. After initially soaring on their first trading day, Lyft's shares have languished: They have been trading below their IPO price of $72 since April 1. Lyft shares were trading at about $57.92 in afternoon trade April 17.

Uber is looking to sell about $10 billion worth of stock in its IPO, which would give it a valuation of between $90 billion and $100 billion, Reuters reported April 9. That valuation range is lower than originally expected; Reuters reported that investment bankers had previously told Uber it could be worth as much as $120 billion.

"I think [Uber was] smart to lower [its valuation range] based on the stock reaction since Lyft's IPO, the challenges it highlights in its S-1 filing and slowing growth," Arounian said.

Uber has set a placeholder amount of $1 billion for the offering, but that figure is considered temporary and will likely change considerably once Uber releases more details of its offer.

Arounian added that Lyft's stock could face more challenges in the near term as investors dig into the Uber filing and roadshow.

Tom White, senior research analyst for D.A. Davidson & Co., said in an interview that it will be interesting to see whether Uber "can command ... a premium valuation or a premium multiple compared with Lyft despite the fact that it's growing a lot more slowly [than Lyft] and that Uber seems to be signaling in its filing that its margins are likely to decline here in the near term."

White said those are the kind of challenges Uber will face when it is selling the deal to investors. However, "there are a lot of positives as well," he added. "They have a leading market share position."

Uber did not respond to S&P Global Market Intelligence's request for comment on the story.

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In its prospectus, Uber reported that its net income was $997 million in 2018, but it reported an adjusted EBITDA loss of $1.85 billion. For the fourth quarter of 2018, the company posted an adjusted EBITDA loss of $817 million, as compared to a loss of $561 million in the prior-year quarter.

The company's revenue in 2018 totaled $11.27 billion, but its growth is slowing. First-quarter 2018 revenue grew 69% to $2.58 billion, while fourth-quarter revenue grew 21.8% to $2.97 billion.

White said that a $100 billion valuation for Uber given the current trajectory of revenues "would seem to imply quite a premium ... relative to Lyft and relative to probably a significant number of other tech companies."

"Getting investors comfortable with that premium multiple is going to be the challenge for the company," White said.

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In its prospectus, Uber identified a few risk factors that could adversely impact its business. One relates to the independent contractor status of Uber drivers, which is currently being challenged in courts and by government agencies in the U.S. and elsewhere.

The company said if its drivers were classified as employees instead of independent contractors, its business would be adversely affected.

San Francisco-based Uber also disclosed that it is the subject of inquiries and investigations by the U.S. Department of Justice. The company said the investigations could cover a broad range of matters, including their data designation and document retention policies related to a 2016 breach.

In 2016, hackers stole the personal information of 57 million Uber users, including the drivers. The information included names, email addresses and mobile phone numbers.

Uber, which disclosed the hack in 2017, said the breach may lead to additional regulatory investigations. "These government inquiries and investigations are time-consuming and require a great deal of financial resources and attention from us and our senior management," Uber said in the filing.

The company also said that it expects its operating expenses to increase significantly in the foreseeable future and that it may not achieve profitability.

Uber, with a diversified portfolio of businesses, has operations in 700 cities across 63 countries. The company's offerings include ride-sharing and new mobility products, food delivery platform Uber Eats, freight business Uber Freight and autonomous vehicle technologies.

As a private company, Uber has acquired 11 companies. The company on March 26 agreed to acquire its Dubai-based rival Careem Networks FZ LLC for $3.1 billion. Uber also owns minority stakes in companies such as Didi Chuxing Technology Co. Ltd., GrabTaxi Holdings Pte Ltd. and Yandex LLC.

The company's IPO comes after multiple rounds of funding. Until now, it has raised about $11.23 billion from investors.

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Uber also revealed its major shareholders in its IPO filing. SB Cayman 2 Ltd., owned by SoftBank Vision Fund LP, is the company's largest shareholder with a 16.3% stake.

Entities affiliated with Benchmark Capital Partners own 11% of the company, while entities affiliated with Uber co-founder Garrett Camp's fund Expa-1 LLC have a 6% stake. Saudi Arabia's sovereign wealth fund, The Public Investment Fund, owns 5.3% of the company.

Former Uber CEO Travis Kalanick, who still has a seat on the company's board, has an 8.6% stake in the company.

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