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August 20, 2018

Why Uber May Have Already Missed the IPO Bus

The universal ride-hailing service Uber is hitting some speed bumps, just as it prepares for its long-awaited initial public offering (IPO). I examine what it all means for Uber and whether the company has waited too long to go public. I also show you smarter ways to invest in technology “disruptors” that can make investors rich.

First, let’s examine Uber’s latest headaches. The firm suffered a significant blow last week when the New York City Council voted to place a cap on the number of for-hire delivery and ride-hailing vehicles allowed on the streets of New York. This cap applies not only to Uber and Lyft but other ride-hailing apps like Juno and Via.

According to a study commissioned by the Taxi and Limousine Commission, roughly 80,000 drivers employed by these apps meander the city streets, awaiting a ride request. The number of drivers has grown six times since 2015 and dwarfed the city’s pool of 14,000 taxi drivers.

There are several justifications for the cap, which suspends the issuance of new licenses for 12 months. One is traffic congestion. Another is the slow demise of the traditional yellow cab taxi driver, whose livelihood has been undermined by the disruptive presence of Uber (see chart):

I’ve learned from first-hand experience the reasoning behind the cap. Just last weekend I was in New York City. I found myself in Washington Square desperately needing to get to Murray Hill in short order. The distance was not overbearing, but I could not be late so walking or taking my chances with the city’s ill-functioning subway system were not appetizing options.

With the swipe of a finger, I hailed an Uber. Imagine my frustration when the 10-minute published wait time extended to 15 minutes while five empty taxis (white lights blazing on their roofs) passed me.

The cap allows for the addition of wheelchair accessible vehicles, an option underserved by all ride-hailing and traditional taxi services, and does not restrict licenses in neighborhoods the commission deems as “underserved.”

New York is just one city and Uber is available in 400 cities and 60 countries. However, the Big Apple is one of the company’s most desirable markets.

European market regulators are much less friendly to ride-hailing services.

London revoked Uber’s operating license last year due to concerns about safety for drivers and passengers. Uber continues to operate there while it appeals the decision. Last winter the European Union’s highest court ruled that traditional taxi regulations should also govern Uber.

Regulators describe their moves as “growth control mechanisms” and Uber is fighting these rules tooth and nail. Of course, it’s impediments like these that make companies want to remain private. The problem for Uber is that its insiders want an exit strategy. That strategy is to take the company public in 2019.

Words like “growth control mechanisms” are murderous for a company preparing to market itself to new investors. They are particularly dangerous for Uber, which has already seen its private market valuation drop from $75 billion to $62 billion over the past six months.

Uber hasn’t entirely lost momentum. Recent disclosures to private investors show revenue growing at 67% year over year in the first quarter. This growth rate is enviable but lower than the 85% enjoyed in 2017.

Investors are more than happy to bestow outrageous valuations on money-losing stocks as long as their rate of revenue growth continues to expand. Once that growth rate slows down, even the most revered stock typically suffers a re-calibration of its valuation.

This slowdown for Uber occurred even before regulators slapped a cap on the New York City licenses. It appears that Uber should have hailed an IPO sooner. 
Courtesy of Linda McDonough, Investing Daily (More from Investing Daily Here
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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