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The FTSE 100 slipped four points going into the weekend to close at 7,203; the FTSE 250 rose Uber, a company whose business model is built on regulatory arbitrage with a side-helping of modern software, was one of the best-known “unicorns”.
A unicorn is a private company that achieves a valuation of at least $1bn in private markets. In its most recent private valuation round, Uber had been valued $76bn.
On Friday, Uber went public. It flopped. By the day’s end, the company was valued at just under $70bn.
As a result, notes Matt Levine on Bloomberg, it has now become one of the best-known “undercorns” – a unicorn that goes public below its last private market valuation.
So what does this say – if anything – about the wider market?
Platform companies are as much about skirting rules as cutting edge tech
Uber is a minicab-booking service. I don’t tend to use taxis much, so I’ve never used it.
It’s a “platform” company. It allows people who need a lift to connect with drivers, using their smartphones.
At heart, Uber is a minicab company that is able to avoid taxi licensing rules and employment laws, and thus offer a cheaper service to customers.
Uber is not alone in this. You can argue that AirBnB, for example, is a hotel company that doesn’t have to own any property, abide by any health and safety rules, or worry about things like town planning. Or that Amazon is a shop that doesn’t have to pay rent or local sales taxes.
There is nothing necessarily wrong with this, by the way. Technological advances often leave regulations looking outdated, or create new grey areas that drive the need to rethink the purpose of the rules.
The trickier point for investors is that the platform model very much depends on dominating the chosen sector – it’s all about the “network effect”.
For example, why is anyone on social media website Facebook, when it’s plainly such a toxic, duplicitous company? The simple answer is “because everyone else is on Facebook”. A network’s value is dictated by the number of connections within it, which is mostly a function of its size.
Once a platform reaches a certain critical mass – or so the argument goes – it’s hard for it to lose its leading position, because it’s where everyone else is. It’s the ultimate “moat”. You create a monopoly (or something close to it) simply because unless everyone uses your product, it doesn’t work.
Now, I’m not sure that this business model is as new or as impregnable as lots of people seem to think it is. VHS vs Betamax, Microsoft vs Apple – we’ve seen platform companies come and go in the past. Your platform can dominate, but only until an entirely new idea comes along.
But let’s skip that for the moment. The other big problem with these platform companies is that building the network is expensive. In order to dominate, you have to be cheap. Which is why most of these companies are loss-making.
It’s the Field of Dreams business model. “If you build it, they will come”.
Which brings us to Uber.
Uber’s big problem: growing its network while making money
The long-term hope for Uber is that one day, it (and competitors such as Lyft) might be running fleets of self-driving electric vehicles which we all pay a monthly subscription for, and hail from our smartphones every time we need to drive anywhere.
But that’s a long way off. For now, it’s a cab company. And it’s a cab company that doesn’t make any money. Which might go some way to explaining its lukewarm welcome to the stockmarket.
Uber’s shares were listed at $45 on Friday. That was already disappointing. Then they opened at $42. That was disappointing too. And then they fell a bit further. So in all, the stock lost nearly 8% on its first day of trading.
And anyone who bought in to this hot unicorn when it was still private over the past three years or so (including Saudi Arabia’s sovereign wealth fund) has lost a chunk of money.
According to the Financial Times, Uber’s first-day IPO performance is now in the top ten of all-time duffers, when compared to other $1bn-plus IPOs.
The market backdrop was admittedly grim. If Donald Trump hadn’t decided to change his mind on a China deal, it’s quite likely that Uber would have performed better against a stronger market backdrop.
But maybe it also shows that investors simply aren’t quite as intoxicated as they need to be to buy into a loss-making company – one that also seems to be struggling with a serious problem.
CEO Dara Khosrowshahi has tried to make the case that Uber is like Amazon. Amazon was loss-making when it listed in 1997. He’s also arguing that Uber has lots of potential growth areas – food delivery, bike hire, and logistics (trucks, basically).
But at the moment, the important bit is the taxi bit. And there, as Matt Rosoff puts it on CNBC, Uber faces a fundamental challenge to its business model: “how to keep prices low enough to attract riders while paying drivers enough to keep them from defecting – and still make a profit.”
As Rosoff notes, the profitability of this core business slid over the past year and turned negative in the final quarter as Uber grapples with this aforementioned problem. In short, notes Rosoff, Uber “is becoming less profitable as it gets more customers and books more total revenue”.
Uber suggests that investors are still not quite over-excited enough
OK – so we probably don’t fancy investing in Uber ourselves. What does its welcome say about the wider market?
There’s no doubt that US markets are expensive. And a high-profile IPO like Uber is quite striking – it’s the sort of thing that often screams “top of the market”. But the weak performance also suggests that there isn’t that peak exuberance in the market quite yet to give us a satisfying collapse.
Indeed, all that the Uber IPO might be telling us is that the “unicorn bubble” peaked a couple of years ago.
I’ll look at this in more detail in MoneyWeek magazine this week (get your first six issues free here). But for now, despite its expense, I suspect that concerns over trade are holding the market back from getting truly over-excited.