Uber, the minicab-booking app, went public last week. Uber is a loss-making company, with major question marks hanging over both its future growth rate and its prospects of ever turning a profit. The company has plenty of “blue sky” visions of running electric, robot car fleets and building up a trucking division and logistics empire. But for the moment, it’s really just a software platform that connects consumers with drivers, allowing both sides to skirt local taxi licensing laws while also dancing delicately around grey areas of employment law.
None of that should matter – least of all the fact that Uber lost $1.8bn last year – in an exuberant market. As James Mackintosh notes in The Wall Street Journal, during the golden era of the IPO (see box below) – the tech bubble days of 1999 – the average lossmaking tech IPO ended the day 81% higher than its listing price (according to data from Professor Jay Ritter at the University of Florida). Many such stocks were far more ephemeral than Uber, listing on nothing but hope and a mania for all things online. We’ve also seen other IPOs do well this year – online corkboard site Pinterest is up about 40% on IPO and video conferencing app Zoom has doubled.
Yet Uber’s much-anticipated IPO has been nothing short of a disaster. The company listed at $45 a share, then slid hard over the next two sessions, falling below the $40 a share mark. As a result, many investors who bought into Uber privately over the last three years – when it was still the best-known unicorn (a private company valued at more than $1bn) – are now sitting on loss-making positions.
At MoneyWeek, we’re generally sceptical of IPOs, for two main reasons. Firstly, there’s a knowledge gap which skews in favour of the seller – who knows the company better than its private owners? Secondly, IPOs tend to be done when markets are most receptive (for which, read “gullible”), so they are likely to be expensive on a “big picture” basis.
Yet the interesting lesson from Uber may not be what it tells us about public markets, but private ones. The US stockmarket is expensive on any traditional measure you care to use, but Uber could still only muster a valuation of about half its peak private valuation (around $120bn). If this is a sign of things to come for late-stage investors in private firms, then many of them could be sitting on stakes that are worth much less than they currently hope they are. That could be bad news for private equity funds and venture capitalists – not least Japanese tech and telecoms giant, SoftBank. If you are invested in funds that own stakes in unlisted firms, now might be a good time to look at those valuations and consider how realistic they really are.
I wish I knew what an IPO was, but I’m too embarrassed to ask
An initial public offering (IPO) represents the first time that a company sells shares in itself to institutional investors (such as pension funds) and often also to individuals (retail investors). This process is also known as “floating” or “going public”.
Companies go public for a wide range of reasons. They may want to raise funds for expansion, and choose to do so by selling part of the company rather than borrowing the money. Alternatively, the current owners – perhaps the original founders, or a private- equity fund – may wish to “exit” (ie, cash in on their investment).
An IPO is underwritten by one or more investment banks, which typically earn large fees from the process. A prospectus with details of the company and the offering is issued to potential buyers. The IPO price is typically based on expected demand from investors. If demand outstrips the number of shares on offer (the IPO is “oversubscribed”), then the underwriter will have to decide how to allocate the shares. If there aren’t enough buyers, then the underwriter agrees to purchase the surplus (hence the term “underwriter”).
A stock (Uber is a notable recent exception) will often enjoy a “bump” on the first day of trading. However, unless you are allocated shares before the company starts trading – which is unlikely with a “hot” stock – then you are unlikely to benefit from this initial jump in price.
Many studies suggest that IPOs underperform over the long run. But some are more attractive to private investors than others. Privatisations, for example, can represent good opportunities, because the seller is the government, and the last thing the government wants is for potential voters to buy into the much-hyped sale of a public utility, only to find that their investment collapses in value within a few months of the IPO. That said, while Royal Mail shares near- doubled within a few months of their 2013 IPO, they have since struggled badly.