On the Digging Deeper podcast we are going to discuss Uber, its IPO, and what it means for a company that has endured its fair share of trouble across the world.
Harish Puppala | Rakesh Sharma
The year 2018 has been a great year for IPOs - both globally and in India. Many marquee businesses have gone public in the last 12 months - from tech companies like Spotify and Dropbox to financial services companies like Axa and World Gold Trust to consumer goods companies like IQIYI and Nio Inc. All of them had offerings of over 500 million dollars. Spotify, of course, famously went to market at $165 per share, which meant an IPO of $9.2 billion. Its shares are currently at $136, making for a valuation of 23$.27 billion. (Sidenote: News is they are coming to India in the next six months. What it does to the Gaana-JioSaavn race will be interesting to watch.)
Business Insider estimates that there were 173 IPOs in the United States alone, until September, raising over $45 billion. Other reports claim that the number reached 188 by December. David Ethridge, US IPO Services Leader at PwC, told Business Insider, “continual period of very strong market conditions” were behind the strong IPO dynamic. He added, “People have had a long period of time to look at the marketing, say this is going to continue and let's get ready to go public.” A few days ago, SoftBank Corp had the second largest IPO in history (the largest ever being Alibaba), and the biggest ever in Japan, after its telecom unit raised $23.5 billion selling extra shares. Never mind the Trade War of 2018 and Trump anointing himself a superhero by the name of Tariffman, over half the Tech IPOs in the US were by non-American firms, and 11 from China. Trade war? What trade war?
It is apparently a great time to go public.
And one such IPO is what we are going to discuss on Digging Deeper. Uber and its IPO and what it means for a company that has endured its fair share of trouble across the world. We will also take a look at the implications of the IPO in India. My name is Rakesh, and this is the general story of the year in IPOs and a specific ride to Uber IPO on Moneycontrol.
A great time to go public - that seems to be the sentiment, in the main, across the business world. India too has had an eventful year with regard to IPOs. The Economic Times reported that India had seen 128 IPO listings – both on mainboards and SME platforms – until September-end. That was 12.8 percent of the 1,000 IPOs launched globally in 2018. Besides the US which had 173-188 IPOs, as mentioned earlier, Hong Kong had 153 IPOs, the Nasdaq had 109 IPOs and Tokyo had 66 IPOs. In terms of value, India ranked seventh, with companies raising $5.2 billion via IPOs this year - that’s 3.6 percent of the $145.10 billion raised globally through IPOs. In 2017, that number was over $11 billion, which pushed India to sixth place.
All of this points towards 2019 being a great year for IPOs. Some outlets reported that we could see IPOs that could lead to valuations of $100 billion. Companies like Uber, its rival Lyft and tech firm Palantir are preparing to go public provided the markets hold up. Lyft announced it had filed confidentially to go public. Uber too, reportedly, did so the next day. It does look like the rivals are racing to debut their IPOs in 2019.
Uber is a particularly attractive case. While Lyft is said to be looking at a $15 billion valuation, and claims 35 percent of the US market, Uber, which controls 60 percent, is looking at a valuation of $120 billion when it comes time for the IPO. It currently has a $71 billion valuation, according to a Vox.com report, and last year’s revenues stood at about $37 billion. Vox is blunt in its assessment: “By leaving the experimental, erratic startup world and getting listed on the New York Stock Exchange, Uber and Lyft will assume images of being mature, stable, and transparent companies — a reputation neither has necessarily earned just yet.”
It’s time for the yuppie-startup-hoodie-hipster to grow up, wear a suit, and take an Uber (or a Lyft) to Wall Street.
Why should you care?
Vox had this to say about why Uber’s IPO is important:
“Their IPOs could...have major implications, as they will be the first companies in the so-called gig economy to go public; Gallup estimates that 36 percent of the American workforce, or 57 million workers, now work in the gig economy. By sharing their closely held internal information with the public, as companies do in their SEC filings, Uber and Lyft will reveal how much they profit while gig workers fight for rights, which could open the floodgates for change.”
Alright, that sounds a bit like an anti-capitalist agitprop flyer, but let’s break that down. What’s a gig economy? It’s when you have a temporary job or gig. Investopedia.com defines a gig economy thus: “In a gig economy, temporary, flexible jobs are commonplace and companies tend toward hiring independent contractors and freelancers instead of full-time employees. A gig economy undermines the traditional economy of full-time workers who rarely change positions and instead focus on a lifetime career. Due to the large numbers of people willing to work part-time or temporary positions, the result of a gig economy is cheaper, more efficient services, such as Uber or Airbnb, for those willing to use them. Cities tend to have the most highly developed services and are the most entrenched in the gig economy.”
So there you have it. Many people work temporarily for companies like Uber - some estimates claim the gig economy could reach as high as 40 percent of employable Americans by 2020….that’s two years from now! So when Vox writes, “Uber and Lyft will reveal how much they profit while gig workers fight for rights, which could open the floodgates for change” they’re not entirely being hyperbolic. Well, okay, a little bit, but what respectable news outlet in 2018 isn’t trying to strike fear in your heart? Who knew the end of times would be so widely reported…The revolution may not be televised, but the end of times will most certainly be chronicled in a listicle. (“17 times the end of times is existential math that will blow your mind.”)
Robbie Kellman Baxter, author of The Membership Economy, said, “When Uber started, they were hiring drivers who saw the job as a hobby or side gig, but there are tons of drivers who say it’s an important part of their livelihood, and that makes Uber an important employer, whether or not they like to admit it.”
Anyway, back to Uber’s IPO. While the possible $120 billion valuation is the stuff of financial dreams, the truth is that the San Francisco-based company has been bleeding a smidge. In the three months to September, Uber lost $1.07 billion, a 20 percent rise from the $891 million the previous quarter. What about earnings, you ask? Its revenue grew 38 percent year-on-year to $2.95 billion in the quarter. Revenues were $2.5 billion and $2.7 billion in Q1 and Q2, respectively. But some analysts claim the growth rate is slowing. Bret Kenwell wrote in TheStreet.com that Uber grew sales 67 percent in the first quarter and 49 percent in the second quarter. Now, those losses we spoke of...the 1 billion and 891 million - that’s an approximate $2 billion loss over the last two quarters, not including the results from the first quarter. In Q1, Uber had a net loss of $577 million. But that may show up as a $2.5 billion profit to some investors when including an asset sale to Grab, a ride-hailing competitor. In 2017, Uber losses stood at $4.5 billion.
So while Uber, more than any other company, can be credited with completely changing transit by acting as a reliable replacement for major modes of transportation, it also affected existing cab and taxi services, and maybe even caused car sales to decline. Talk about a disruption. Uber says in its mission statement that it wants to “Ignite opportunity by setting the world in motion.” It doesn’t hurt that in the worldwide transport industry, with a total revenue of over $4 trillion, Uber is a big player.
Could it be about liquidity?
Matt Pencek, director of MorganFranklin, a consulting firm that advises Fortune 500 companies on IPOs, explained that while Uber has not faced trouble raising money to fund expansion, it is now filing for IPO because having its stocks sold on a public exchange is a way to obtain cash easily and quickly, as opposed to constantly courting private investors. Pencek told Vox, “The public market provides greater liquidity...Stocks can be bought or sold tomorrow, and so money is more readily available, as opposed to waiting on investors. The difference between public and private is like owning a home but being told you have to wait for a buyer to come to you, or that you can only sell your home to a few people every few years.” But why does Uber need liquidity? He explains, “They are moving from a business model innovation company to a product innovation one through autonomous vehicles and AI. It’s hard for a company to switch their business model, and so going public will provide liquidity.”
In fact, Pencek claimed it’s not just Uber, but tech companies in general that are primed to go for IPOs. He said, “Tech-centric companies want to go public sooner in their life cycle so that they can get capital, pump it back into the business, and scale. It’s not like a manufacturing business where $1 spent is a $1.20 return. These companies can easily grow when they’re handed money.”
We also mentioned maturity earlier. Part of the reason Uber wants to go public is to overhaul its image. Uber has had some pretty bad press for a while now. Reports of Uber’s less-than-optimal work culture, especially for such a high profile company, led to the replacement of CEO Travis Kalanick. The company is under investigation for gender discrimination. Then there were reports of spying on rivals as well as an app that allowed Uber drivers to evade regulators in places where Uber was declared illegal. Uber’s new CEO Dara Khosrowshahi swore to reform Uber. Analysts speculate that going public is one of the steps that will reform Uber - the company wants to signal that it is ready to be taken seriously and operate with more stability. Pencek said, “People tend to look at public companies as mature... public companies have to report on a quarterly basis and are subject to the regulatory process. It opens you up to an entire set of investors who drive transparency, and so filing for IPO could show you are ready for that.” Essentially, public companies are expected to work efficiently and follow the rulebook - something Uber reportedly wants to project. Khosrowshahi had told CNBC back in August 2017 that he believed Uber should be public, “something that shareholders could see in a timeline of 18 to 36 months.”
Even as everyone and their money managers wait with bated breath for Uber’s IPO, New York magazine had a long (overlong?) piece that another writer described as “Draw(ing) heavily on the work of economist Hubert Huran to make the case that Uber's IPO is, essentially, a scam to get foolish investors to put their money into a company whose hype far, far outstrips its ability to ever turn a profit.” Essentially, some believe anyone who buys into this IPO is being suckered. Sure, the naysayers are few and far in between, but Smith makes a case that cannot be dismissed off hand. She writes, “After nine years, Uber isn't within hailing distance of making money and continues to bleed more red ink than any start-up in history. By contrast, Facebook and Amazon were solidly cash-flow positive by their fifth year.”
Jessica Stillman wrote in Inc.com referencing Smith’s piece, “...more people using Uber doesn't make Uber more profitable, or a better deal for drivers, or really better in any way. In fact, all Uber has is its willingness to subsidize rides to get consumers to like it and the storytelling chops to convince people it will some have some magic profit-making pixie dust it can deploy. (The fact that drivers seem to be terrible at calculating their true costs and wages works in the company's favor too.)”
Okay, that last statement comes off a bit too condescending, but driver earnings has been a contentious issue with Uber. In the piece titled Uber is headed for a crash, Smith ends by saying, “Uber has succeeded in getting the business press to treat its popularity as the same as commercial success. A few tech reporters, like Eric Newcomer of Bloomberg, have politely pointed out that Uber’s results fall well short of other tech illuminati prior to going public. The pitch that dominance would produce profits is demonstrably false and Uber seems unable to come up with a new story. There’s every reason to think that investors, not local cab companies, will wind up being Uber’s biggest roadkill.”
Uber’s India connection
Smith’s lack of enthusiasm isn’t completely misplaced. One Moneycontrol report noted that while Uber’s valuation is primarily linked to how well it sold its vision and growth prospects to its investors so far - okay, in the same ballpark as Smith’s premise about Uber’s good PR - its gross billing which comes from the total number of rides it completes also matters. To increase that, says Moneycontrol, Uber will have to get more users to use its services more often.
One way Uber could improve is to focus on India – the only major market in Asia it still operates in. India is likely the only market where Uber can scale up quickly. It is present in 31 cities compared to rival Ola which operates in 110 cities.
Uber has around 41.8 million users Stateside, according to data from March 2018. It also has 17 million users in Brazil. China’s Didi entered that market recently, making life difficult for Uber. That puts Uber’s India operations under the spotlight. India is currently the third largest market for Uber, after the US and Brazil, accounting for around 11 percent of its total trips. While Uber has 7.5 lakh drivers in the US, it has just 3 lakh active drivers in India. Those 3 lakh drivers complete around 10 million trips per week. CEO Dara Khosrowshahi said over the next 10 years, he wants to see that number rise by 5-10 times.
He had also said that India was the healthiest market for Uber in terms of growth rates. Which is hard to believe given that everybody seems to complain about the lack of cabs most evenings. And the statistics seem to indicate a decline in total trips: according to market intelligence firm KalaGato, Uber’s market share dropped to 39.6 percent in December 2017 from a much healthier 42 percent in July 2017. In April 2018, the company was clocking 10 million trips a week, up 6.4 percent from July 2017 but the growth in July 2017 over 11 months ago was 67 percent.
Moneycontrol noted that, after exiting eight markets including China, Uber has little choice but to double down on its India bet if it wants to drive growth. Even if such growth is unlikely to yield much profit. India has the consumer base to expand Uber’s scale, and the company has already announced its plans to expand its technology headcount in Bengaluru and Hyderabad. Khosrowshahi had also claimed that Uber considers India the laboratory for the next six billion consumers that it aims to attract with different services. That makes India a core market for Uber. Take, for instance, Uber Eats. The food delivery service has experienced a seven fold growth in the last four months, and now has approximately 20 percent market share.What I’m getting at it is this - with the all important IPO coming up sometime in 2019, Uber’s success in India is crucial for the company’s growth and a successful IPO. As the Moneycontrol report noted, if Uber fails in India, its local rival Ola, which is backed by its investor Softbank, could emerge as an acquirer. That could lead to a redux of what Uber went through in China when it had to sell its operations to Didi.