Uber Technologies Inc. (UBER) is set to hit the New York Stock Exchange on Friday, but the timing of its initial public offering (IPO) and the struggles of ridesharing rival Lyft Inc. (LYFT) are driving a heated debate about whether Uber will be one to chase on Day One.
Shares of the San Francisco-based ridesharing company initially will be priced at $45 per share, giving Uber a valuation just north of $82 billion. That makes the IPO the largest to hit the market since Facebook's valuation ticked north of $100 billion for its IPO in 2013.
It is worth noting that Uber chose to price its IPO at the lower end of the range estimated by analysts, possibly providing some room to grow, in contrast to Lyft's initially lofty pricing.
Assessing the Opportunity
In terms of opportunity, Uber and those looking to catch the excitement are incredibly bullish.
"As of the quarter ended December 31, 2018, we had Ridesharing operations in 63 countries with an aggregate population of 4.1 billion people," Uber's S-1 filing states.
For reference, that addressable transportation market as Uber sees it is equal to more than half the world's population.
"Our Personal Mobility total addressable market consists of 11.9 trillion miles per year, representing an estimated $5.7 trillion market opportunity in 175 countries," the filing adds. "Our current Personal Mobility serviceable addressable market consists of 3.9 trillion miles per year, representing an estimated $2.5 trillion market opportunity in 57 countries."
Add in meal deliveries by Uber Eats and shipments via Uber Freight, which have end markets estimated by the company at $2.8 trillion and $3.8 trillion, respectively, and the opportunity appears massive.
The filing adds that Uber will look to address $500 billion in opportunities in 20 nations where affiliates of Uber operate.
For those keeping score, that market opportunity is $15.3 trillion, or over two-thirds of the GDP of the United States.
Analysts were more conservative in assessing how much Uber can penetrate these end markets, but still acknowledged large opportunities that Uber appears best in class at addressing.
"We estimate ridehailing, food delivery and freight brokerage market sizes of $300bn, $340bn and $130bn by 2028, respectively, with Uber addressing all three," Atlantic Equities analyst James Cordwell wrote in a note initiating coverage. "Transportation-as-a-service addresses a large market opportunity and with our analysis showing scale enables superior returns and a clearer path to profitability our preference is for Uber over Lyft."
Cordwell added that Uber's global reach differentiates it from the domestically focused Lyft.
Path to Profitability
Of course, the question of profitability is looming largest over Uber.
In a familiar refrain for IPOs hitting the market in 2019, Uber has yet to hit a profitable point.
"We have incurred significant losses since inception, including in the United States and other major markets," the company's S-1 filing states. "We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability."
In 2018, the company incurred operating losses of $3 billion, a hefty figure, but still down from the $4 billion lost in 2017.
The total deficit for the company was reported at $7.9 billion. That tempers the $8.1 billion in capital that the IPO is expected to raise as it barely eclipses the losses the company has incurred.
However, a broader base of businesses across the globe make Uber's path much smoother than Lyft's in the eyes of analysts anticipating the IPO.
"Similar to Lyft, we see a difficult path to profitability for Uber as well, but think Uber's larger global network will help and we note we see an easier road for Uber Eats and Freight which may help offset some of the challenges," Wedbush analyst Ygal Arounian said. "Bottom line is that we expect Uber to be operating at a loss for at least the next few years, but believe investors should be more patient with Uber's investments as its leadership position will help lead to better long-term competitive positioning."
A key factor that Uber is placing its chips on is the future of autonomous driving, which would relieve margin pressure on a company that pays a massive base of drivers.
The word autonomous is mentioned a whopping 110 times in the company's prospectus, highlighting its importance to the company and the investment that CEO Dra Khosrowshahi is placing into the program.
"We are investing in technology to power the next generation of transportation. Our Advanced Technologies Group ("ATG") focuses on developing autonomous vehicle technologies, which we believe have the long-term potential to provide safer and more efficient rides and deliveries to consumers, as well as lower prices," the company filing reads.
The program, which began incubation in 2015, is one of the key long-term theses for those looking for a more accessible path to profitability.
"Autonomous vehicle technology also has the potential to drastically change the business models for ridesharing companies as well as disrupt the current competitive status quo," D.A. Davidson analyst Tom White said. "The bottom line is that it's unclear to us whether UBER will be a leader on the cutting edge of autonomous driving technology long term, but we view UBER as relatively better-positioned in this area than some of its other ridesharing peers, such as LYFT."
That said, the arms race in autonomous driving places the company in direct competition with self-driving stalwarts such as Alphabet Inc.'s (GOOGL) Waymo, Apple Inc. (AAPL) , and Tesla Inc. (TSLA) (if Elon Musk's robotaxi promise is to be trusted) as well as Ford Motor Co. (F) and other automakers to a lesser extent.
Whichever company can get to the promised land of full self-driving first will be a massive disruptor, and there is no guarantee Uber will be that company.
"We view autonomous vehicles as more a risk than an opportunity for Uber and Lyft as it creates the potential for disintermediation, especially if the autonomous vehicle market is relatively consolidated," Atlantic Equities' Cordwell warned.
Further, Uber would face undue pressure from its drivers, which have already created a stir over their independent contractor status and wage issues, launching widespread strikes shortly before the IPO. Alphabet or Tesla, for example, would not contend with such problems.
The Key to Investing: Timing
Aside from the strikes that are drawing negative attention the company shortly before Uber hits the NYSE, the elephant in the room is the market's recent slide amid President Trump's tariff tweets.
The implications for Uber's IPO is that is entering a market that is no longer overly euphoric for new tech IPOs, especially those operating at large losses.
Lyft has fallen about 30% from its IPO high, Pinterest Inc. (PINS) has sunk about 20% from its post-IPO high, and even the high-flying Beyond Meat Inc. (BYND) has fallen 20% off of its spectacular surge. In short, market sentiment could be shifting.
In this light, it might make sense why so many IPOs were eager to go public while the market was red-hot and more accepting of unprofitable companies hitting the exchanges.
The percentage of loss-making companies listing shares for the first time has reached tech bubble proportions of about 80% of all IPOs. Bernstein: pic.twitter.com/GK9DuPcvUz— Tracy Alloway (@tracyalloway) April 18, 2019
For the broader market, a bad reaction is a big deal.
"The [Uber] IPO Friday will soak up a fair amount of liquidity and give us some feel for how much of a speculative appetite there still is out there. If Uber fails to hold its pricing like Lyft did it will be a negative for the broader market," Real Money contributor James "Rev Shark" DePorre warned. "There is good reason to proceed with a high level of caution as the market continues to sort out the trade issue and looks for positive catalysts."
Evading the Over-excitement
With a high level of uncertainty at play, what is a retail investor to do?
The consensus on Wall Street so far is bullish, with a consensus "Overweight" rating and a $57.67 price target for Uber. That would suggest significant upside and give some reason for many to chase the excitement that the listing is generating.
But, not so fast, my friend, says Real Money Pro's Doug Kass.
He instead advised that the best way to play the IPO is simply to sit on your hands.
"Most retail investors should generally avoid IPOs, which, with the benefit of smooth-talking Wall Street salespeople, force overpriced properties being sold by insiders and professional venture investors," Kass said. "Uber may be a vivid example of one to avoid tomorrow."
Eric Jhonsa will be hosting a live blog on Friday at 11:30 a.m. ET to answer reader questions about Uber's IPO and other tech stocks. Please check the Real Money home page at that time to join us.