Equity Shot transcribed: Judging Uber’s less-than-grand opening day

Another day, another episode of Equity. This time it was an emergency episode, because Uber (finally) went public and a lot of financial folks were quite looking forward to how it would perform on opening day. Turns out it didn’t do so well.

Kate and Alex had a lot of questions about why? Was it the company’s fault? Was it simply the macro market? Was it something else altogether? And then there was the fact that it wasn’t a great week for the stock market or U.S.-China trade relations.

But don’t cry for Uber. As Kate Clark reported, the ride-hailing company still has $8.1 billion to play with to grow itself into a more profitable company.

And now we watch as Uber navigates the public markets.

Kate: Uber was a different story [than Lyft]. I think we expected a really similar pricing scheme, but we saw Uber set a price range of 44 to $50 per share. And they ultimately priced at $45 per share only to sink pretty significantly right off the bat. They began trading this morning at $42 a share and now they’re-

Alex: Shocking.

Kate: Yeah. Now they’re, what? Floating at around $41. So they’re dropping. I think everybody is a little bit surprised by that.

Alex: Yeah. So the reason why we thought they were going to raise their range was because it felt a bit conservative. The 44 to $50 per share IPO target range for Uber felt like almost a mulligan. Like, “We’ll put it out there. We’ll get 3X demanded at the top end. We’ll raise the range four or five bucks a share, price it towards the top into that, get the valuation where we want it.”

Alex: And to see them price it 45 is shocking.

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Kate: Hello, and welcome back to Equity, the podcast where we talk about venture capital and tech. I’m here again with Alex Wilhelm of Crunchbase News, and we’re ready to tell you all about Uber’s first day on the markets.

Alex: I wanted to just point out there … in the script, there’s a lot more exclamation points than I just got from you there. Because I’m hyped! This is a day we’ve been waiting for for-

Kate: I think I sound hyped.

Alex: Okay, well, you know what? It is a Friday afternoon. And we are hyped … Uber not so much. Kind of a rougher day overall than we thought it was going to be. I’m surprised, is my first reaction.

Kate: Yeah. I was definitely surprised and I want to talk about all the details of Uber’s first day on the New York Stock Exchange. But first, let’s take a step back and talk about the lead up to Uber’s IPO.

Alex: Yeah. If you go back to December … which I know feels like three years ago, but was just about half a year ago now … both companies filed private S-1s I believe within about a day of each other. Lyft went first, then Uber dropped its. And so we kind of knew that these two IPOs were going to be coming if not in Q1 and Q2, and probably in kind of a competitive landscape.

Alex: There was discussion back then about who would go first and if that would be an advantage or a disadvantage on that player. And Lyft did go first. There was notes about the pricing situation there, Kate. Because if I recall, Lyft raised its range once and then priced up at the top. So the numbers were an initial IPO target range of 62 to 68. They raised that to 70 to 72 and then priced at 70 to a share.

Alex: So my read was that was a pretty positive run and showed a lot of strong market demand.

Kate: Yeah, it was. And you know, as usual we saw a really nice IPO pop with Lyft. The first day of trading, they went up to $87 a share. Everybody was debating whether that was good price given that they did pop so much. It was a very successful IPO.

Kate: Uber was a different story. I think we expected a really similar pricing scheme, but we saw Uber set a price range of 44 to $50 per share. And they ultimately priced at $45 per share only to sink pretty significantly right off the bat. They began trading this morning at $42 a share and now they’re-

Alex: Shocking.

Kate: Yeah. Now they’re, what? Floating at around $41. So they’re dropping. I think everybody is a little bit surprised by that.

Alex: Yeah. So the reason why we thought they were going to raise their range was because it felt a bit conservative. The 44 to $50 per share IPO target range for Uber felt like almost a mulligan. Like, “We’ll put it out there. We’ll get 3X demanded at the top end. We’ll raise the range four or five bucks a share, price it towards the top into that, get the valuation where we want it.”

Alex: And to see them price it 45 is shocking. If you’ve tracked the news very carefully, every time a company is getting close to pricing, there’s a new story on CNBC that says, “It’s 3X Oversubscribed,” or, “20X Oversubscribed.”

Alex: Uber had far less of that sort of coverage than Lyft did. I think it goes to show that demand must have been quite a lot softer, especially at the upper end of that first range. And so 45 feels like the second to worst possible number … because 44, I guess. But it’s not good.

Kate: Right. And I think we talked about this quite a bit on previous episodes, but there was a lot of debate around whether or not it mattered who went out first. Whether it was Lyft or Uber. And I think one of the conclusions that I’d come to was it would matter a lot more for Lyft it didn’t go out first, but for Uber given that it’s such a behemoth and monstrous company with this $7 billion evaluation before it IPOed … it didn’t seem like it would really matter much if Lyft, which is mostly domestic play for ride hailing, went out first.

Kate: But I think what we’re seeing is that it does matter. It’s kind of screwed Uber over a little bit by not getting out on the markets before Lyft.

Alex: We talked about that in the context of what if one company goes out first and sets a weird revenue multiple, for example. Or what if one company goes out first and then the second one cuts prices, eats their market share, and goes public later?

Alex: What happened instead was Lyft reported earnings earlier this week, if you can still believe that that this week. They lost … oh my gosh, 10, 11% the next day. And then Uber had to price. So it was the worst possible squeeze of Uber trying to get out on the public markets.

Alex: This is a weird comment, but I felt bad for them. That’s a-

Kate: Really?

Alex: Yeah.

Kate: Who’d you feel bad for? Just the-

Alex: The Uber employees who wanted to buy a house.

Kate: Okay, yeah.

Alex: You know? I don’t feel bad for their rich people, but …

Kate: Yeah. I mean, a lot of those people are still getting really rich so I don’t know if I feel bad for them.

Alex: Yeah.

Kate: Right.

Alex: But it’s a tough situation.

Kate: I get it, I get it. Yeah.

Kate: And I was just thinking the exact same thing. So Lyft posted earnings on Tuesday, two days before Uber priced. I think ideally, Uber would have gone out … I mean, geez. Before Lyft went out but then also before Lyft posted their first earnings, which they lost $1.4 billion in Q1 2019. I mean, a massive amount of money mostly because of their IPO.

Kate: We talked about this on the episode that came out this morning. But it’s incredibly bad timing on Uber’s part. And then … we’ll get to this, but the stock markets were also performing terribly this week.

Alex: Yes. So if you think about the broader macro context, we have … whatever your politics are, a not great situation between the U.S. government and the Chinese government. They are beefing, as they say. There’s no kind of conclusion in sight.

Alex: And this morning, the overall market was down so sharply. Notably, the market recovered today and the DOW ended up in the green. Uber actually declined in the afternoon as the market improved. It’s not entirely the market’s fault, but certainly it was a really rough time to go out there and say, “Hey, we lose a ton of money and our growth has slowed. But buy our shares.”

Alex: It’s a pitchy one to make when thinks are buoyant and people are optimistic.

Kate: So at this point Uber is, like we said, trading around $41 a share. Lyft is still trading around $50 a share. Lyft’s stock at this point is more expensive than Uber, but Lyft is looking at a market cap of about $15 billion. Uber is looking at a market cap of, like, $80 billion.

Alex: So remind me … Lyft’s last private evaluation was $15.1 billion, I think?

Kate: From VCs?

Alex: Yes.

Kate: I’m going to look that up while we keep talking, because I think that’s about right. So it’s exactly what it is.

Alex: According to Google Finance and [00:06:51 Caveat], 14.6 billion is their current public value. Which means that they’ve actually-

Kate: You’re right.

Alex: … grown substantially and they’ve shrunk in value. This is not a great corollary, but Dropbox, which went public earlier, is now worth just a little bit less that it’s last private evaluation. So we’re kind of seeing again a very valuable company get out, in Lyft’s case. But then it’s discount to its last private evaluation, which is a repricing by the public markets.

Kate: Yeah.

Alex: And Uber in that context doesn’t seem that surprising.

Kate: Right. So I just pulled up the article. Lyft raised $600 million 11 months ago at a $15.1 billion evaluation. I don’t know if you saw, but there was a really interesting story by Shira Ovide-

Alex: Shira’s amazing.

Kate: Yeah, she is. And that came out today essentially just saying, “Is it possible that Uber and Lyft have already kind grown as much as they can?” And she cited some interesting examples. Like, Uber’s been selling stocks in the secondary markets for years. At one point, it was sharing for them for $49 a share. Higher than it is now. And that was like … this was a couple years ago.

Alex: Yeah.

Kate: And so the chart that she showed … it showed a peak a couple years back, and it shows them dropping down in value. So that’s really interesting, but trend will probably start seeing when companies are so well capitalized and so mature. And I think the headline of the story was, “Uber is incredibly mature but also so immature at the same time.”

Alex: It’s a really good point. It’s revenue generation, and it’s very mature. But its ability to make money off of that is really, really unproven.

Alex: If you’re going to go out there and try to get people to bid up your shares, you want to do that when people are optimistic. Not when they’re terrified about … I don’t know, the debt.

Kate: Right. So do you think it would have been a better outcome if Uber had gone public in, say, 2016? When it was maybe seven years old.

Alex: Oh gosh.

Kate: Or six years old.

Alex: 2016 … I wish I had pulled up its revenue beforehand. No? No, I don’t think so.

Kate: You don’t think they waited too long? That’s more what I’m asking. Not 2016 specifically, but-

Alex: I don’t know if their business model works, Kate. I don’t know if it actually would have been better to go in ’16, ’17, ’18, or 2020. They could have actually held on for another couple of quarters without going public. But I don’t-

Kate: Well, I see why they went out when they did. Obviously it was a good time for these unicorn IPOs. They just picked a really bad week.

Alex: I think their growth was lower than expected, their losses were higher than expected, and those two things … I think they almost brought it upon themselves. I don’t want to be unkind again because I’m trying to be a nicer person actually. That’s my core thought here. The numbers are tough.

Alex: I mean, Lyft grew … it was like 95% last year. Uber grew like 30% last year. Lyft has much better sequential quarterly revenue growth and it had, I think, a clear path to profitability in the short term.

Alex: Uber wanted to have revenue multiple premium, if I recall the calculations correctly. That’s really hard. Maybe we’re actually over-indexing on the trade risks and the macro problems than market changes. Maybe it’s just Uber itself and the core figure. But who knows?

Kate: Maybe. I mean, it’ll be interesting to sit back and watch how Uber and Lyft perform in the next few weeks and really over the next couple of years. And see if they kind of pull a Facebook, which took like a year for the stock to really start accumulating value. But yeah.

Kate: I just don’t know. And I’m not going to make any predictions about that.

Alex: No. We’ve learned our lesson about this [inaudible 00:10:02] predictions. But we were talking before the show about what this IPO accomplished, and we’ve been playing a lot of theory craft around the numbers, and the pop, and money on the table, et cetera.

Alex: Uber raised like eight billion dollars. It is a capitalized company now. It has plenty of money in the bank to prove its model, if you will. And so if an IPO is a fundraising event in this case, it was dramatically successful. I mean, it’s a huge IPO.

Kate: Mm-hmm.

Alex: I can not … And we did some really bad math before we hit record. Uber probably has around 14, 15 billion dollars in cash. It can run billion-dollar quarterly deficits for years now.

Kate: Right.

Alex: Which is impressive. But before we go, there are some other companies that are watching this including Postmates. What’s going on over there?

Kate: Yeah, so apparently Postmates has been keeping a close eye on Uber’s IPO. I mean, they’re both on-demand economy businesses that rely on gig workers and things like that. So I guess it’s looking at Uber as sort of a, “Hm, let me just see how Uber does and then I’ll decide when I’m going to go.”

Kate: Rumors are that Postmates, I think, is expected to IPO second half of this year.

Alex: Sounds right.

Kate: They filed paperwork already, so they’re well on their way. It’s kind of like, well … to me, it’s like, “Sure, if Uber doesn’t do well … But what are you going to do if it’s not? Are you just going to wait for an acquisition deal?” You can’t just hang out forever.

Alex: From who?

Kate: Right. And I don’t know what Postmates last evaluation was off the top of my head.

Alex: I’ll look it up.

Kate: Obviously it’s not something comparable to Uber or Lyft, but it’s still a billion-dollar business that needs to eventually provide liquidity to its stockholders. So yeah. I guess waiting and watching how Uber does will be interesting and they’ll certainly learn a lot from it.

Kate: But regardless, they’re going to have to exit at some point.

Alex: After series F which was landed in January 10th of this year, they were with 1.9 billion post money, 1.8 billion pre.

Kate: Okay, yeah. I mean that’s an IPO of a much different scale. Though I assume they still will go public later this year. I’m curious … I would love to sit down with the Postmates executive team and hear what they got out of waiting and watching Uber. And what lessons learned.

Alex: I think there are a lot of lessons. But there’s also more companies in this space. I mean, DoorDash has raised an epic pile of money from a number of investors.

Kate: Right. And it has a much larger evaluation.

Alex: A much larger evaluation. And today, one thing that people like Dan Primack were keeping tabs on is how well did Grubhub’s stock perform because a large chunk of Uber’s gross bookings, and net rev, and their property margins come from through delivery.

Alex: And so these other companies that specialize in that sort of thing are definitely comps to some degree, and so they can be stoked. If Uber had gone up 10% today they would be, I presume, a lot happier. So it’s not a great moment for unicorns.

Kate: But man, if I’m Postmates I’m looking at Uber. I’m looking at Blue Apron, which is like a subscription meal delivery company.

Kate: That’s just not really motivating me to IPO.

Alex: Okay. But then theory craft one more time, then what? What will these companies do if they don’t go public? Who wants to buy them?

Kate: That’s what I’m saying. Exactly. They don’t have a choice, so … it’ll happen.

Alex: Yeah. Well, we will have more on the Uber IPO as it kind of continues along. But in the meantime, happy Uber IPO day everyone. We can finally drop this topic and talk about something else.

Kate: Finally!

Alex: Yes! Uber’s been the biggest topic on the show since its very first episode.

Kate: It’s still going to be a big topic.

Alex: Less though. It’s public now.

Kate: Yeah, you’re right. But it’s going to be weird. Okay, well …

Alex: It’s like a weird friend-

Kate: I’m happy.

Alex: … moving out of town. We’ll be back next week. Kate, lovely to see you.

Kate: You too.