What’s Next for Uber Stock?
For some, Uber’s initial public offering (IPO) has been a major disappointment so far. The ride-sharing company, which has disrupted the transportation industry, went public on May 10, 2019 and its stock price immediately began to fall. Here’s a look at what happened and some factors that may have caused Uber’s IPO tumble.
What Happened with Uber’s IPO?
On Thursday afternoon, Uber set its IPO price at $45 a share . At that price, the company had a projected value of $82.5 billion .
However, when the markets opened on Friday morning, the stock immediately began trading at 6.7% below the IPO price at $42 a share. By the end of trading, the stock was down 7.6% below , closing at $41.57. The company raised $8.1 billion in its IPO, which gave it an initial valuation of $76.5 billion .
The stock fared no better on its second day of trading. Prices slid another 11% , or $4.47, to end at $37.10, or 18% lower than the IPO price. And though the stock price had recovered a bit by the end of its third day of trading, closing at $39.96, that was still well below its opening share price on Friday.
What Were the Expectations?
Few IPOs from companies the size of Uber take a tumble like this the day they go public. In fact, since 2000, only 18 companies worth more than $1 billion have begun trading below their IPO price.
Declining prices the day of an IPO are also unusual because of the way IPOs are typically structured. Underwriters, often investment banks, are usually responsible for drumming up interest in the stock before it goes public. And they will do what they can to try and make sure there is enough interest on the first day for the IPO to be successful.
However, there is evidence that underwriters may have been worried about the possibility that Uber’s price would sink, deploying an unusual strategy known as a “naked short” to try and bolster the stock’s price. This is when underwriters attempt to sell shares in excess and then buy them back in the open market.
Uber was once thought to be worth up to $120 billion . However, expectations shifted over the last couple months—possibly due in part to a poor IPO from Lyft, Uber’s main competitor. Lyft went public at the end of March, and after trading slightly up its first day, stock prices slide and have yet to recover.
The poor performance raised questions over whether the company was overvalued. In the month or so leading up to its IPO, Uber reduced expectations for its valuation from about $100 billion to around $80 billion in an effort to head off some of the perceived problems associated with Lyft.
Reasons for the Tumble in Uber Share Price
There are likely a number of factors that had an effect on Uber’s IPO. As we mentioned, Lyft’s poor performance could have cast a long shadow on its rival. Lyft went public on March 29, and priced it’s shared at $72. By May 14, the stock had continued its downward slide, trading down more than 26% .
Investors worried that the company was overvalued, and the same might be true of Uber. These fears may be exacerbated by the fact that Uber is not yet profitable.
Last year, the company ultimately lost $1.8 billion . The year before, in 2017, the company lost $4.5 billion , and it may have already lost $1 billion before going public this year. These losses may be due in large part to the subsidies that Uber was offering to attract drivers and ridership.
What’s more, Uber’s spending and revenue may suggest that the company may not turn a profit any time soon. While company spending has been growing—$14.3 billion in 2018 —revenue has been slowing. Though revenue rose 43%, or $11.3 billion , from 2017 to 2018, it represents a slowdown from the 85% revenue grew the year before.
Finally, the week of May 10 may not have been the easiest week in which to go public. Markets were volatile amid an escalating trade war with China. The Trump Administration increased tariffs on $200 billion worth of Chinese goods on Friday, which may have had investors on edge. Volatility continued on Monday, as the Dow fell 600 points , which may have had a continued effect on Uber’s stock price.
What Happens Now?
What will actually shake out remains to be seen, and Uber’s first earnings report due out in June should give investors more clues about the company’s profitability and the direction it’s taking.
A poor IPO doesn’t necessarily spell the end of Uber. Tech giants have stumbled in the past during their early days and managed to turn their fortunes around. When Facebook went public, it initially traded up after it’s IPO, but quickly lost that gain. A year later it was down 31%. Shortly thereafter, however, it started trading above its IPO share price and currently trades at nearly five times that price.
That said, even companies that do well out of the starting gate don’t always keep up the pace. Consider Snapchat’s parent company, Snap, which went public in 2017. The stock debuted up 41% , but is now trading well below its IPO price.
What Does This Mean for the Average Investor?
There’s no crystal ball that can tell us whether Uber’s stock price will continue to sag or whether the company will turn its fortunes around.
It’s up to investors and their personal risk tolerance to decide whether or not to invest in Uber or any other single company. It is possible that Uber’s poor showing during its IPO may cause investor confidence to cool for future tech IPOs, especially the so-called unicorn companies worth over $1 billion.
When investing in a single stock, it’s important to consider it as part of a comprehensive financial plan that includes a balanced asset allocation and diversified portfolio. A properly diversified portfolio may help mitigate the risk of any one stock underperforming.
Investors can add stocks to their portfolios through brokerage accounts. Investors can also gain access to recently public companies through investments vehicles like exchange-traded funds (ETFs) and mutual funds.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC .
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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