Rideshare company Uber’s initial public offering (IPO) didn’t go as planned, and many investors may want to know why.
After plenty of hype, suggesting Uber’s IPO would be one of the largest in a decade, the company’s stock fell 7% from its offering price of $45 on its first day of trading on May 10, 2019.
It is trading at about 9% below its opening price as of Wednesday, May 15.
And that’s not all. By the end of its first trading day, Uber’s valuation stood at $76 billion, far below its initial estimate that it could reach as high as $120 billion, according to reports.
In that regard, what’s going on with Uber is similar to what happened to its rival Lyft after its own IPO. Lyft’s stock price is currently 26% below the high range of its opening price of $72 since the end of March. And it’s current valuation of $15 billion is about a third lower than the valuation Lyft sought at the time of its IPO.
It’s unusual for a company to stumble on its first day of trading, according to the New York Times. In the last 20 years, only 18 companies have seen their stock price fall in their public offerings.
Uber’s value may have been set too high, according to multiple reports. Uber spent more than a decade as a private company, with a value set by a small group of investors, and it never had to face the scrutiny of public markets.
Another theory is that Uber may have waited too long before going public, diminishing investor enthusiasm about the stock. Uber was founded by Travis Kalanick and Garrett Camp in 2009. It started out as UberCab in San Francisco, and then quickly moved on to other cities and countries, dropping “Cab” from its name in the process.
Over the last decade, the company has raised more than $24 billion in 22 rounds from venture capitalists.
The company, which allows customers to hail a ride by using an app that matches consumers with nearby drivers, is the dominant player in the ridesharing industry with about 70% of the market.
And there are other potential reasons for its stumble.
IPOs can be volatile
When a company has an IPO, it’s typical for a newly issued stock to be subject to significant increases and decreases, at least in the short run. That’s known as volatility. Volatility for the stock can be especially high in the first few months following an IPO, and so can the potential for short-term losses as a result.
Why? Investors, analysts, and other stock market participants are often uncertain about the prospects of a newly public company, and that can all factor into the share price. For example, investors typically want to know if a company is worth the valuation it achieved at the time of its IPO. They may also want to know if a company will be profitable in the years to come, or whether it will continue to have losses.
In Uber’s case, it had revenue of $11 billion for 2018, an increase of more than 40% compared to 2017. But Uber lost $1.8 billion in 2018, and it has reported operational losses of more than $13 billion since 2015.
Uber also listed in its summary of risk factors that expenses for operations were expected to increase considerably in the future, and that the company may never make a profit.
After an IPO, prices may fluctuate due to the expiration of something called a lock-up period, where company insiders such as employees sign an agreement that prohibits them from selling shares for a specified period of time. (In Uber’s case, the lock-up is 180 days.) When lock-up periods expire, insiders can tend to sell their stock in order to realize profit, depressing the stock price in the process.
Do your homework
It’s important for investors to carefully examine any company whose stock they plan to buy. Remember, as a public company Uber is required to file paperwork with the Securities and Exchange Commission (SEC) on a regular basis, detailing its financial performance and providing other critical information about the company that investors will want to know about.
That information, which includes a company’s revenue, profits, and losses is available to the general public—meaning anyone can look at it.
You can find out more about the Uber’s lock-up period and other information about Uber by looking at its prospectus, a publicly available document on the Securities and Exchange Commission’s website EDGAR.
Follow the Stash Way!
Stash recommends following the Stash Way, which includes regular investing, diversification, and investing for the long term.
Investing for the long term can help insure that you aren’t locking in your losses due to short term fluctuations in the price of a stock.
And remember: All investing involves risk. It’s possible for stocks, bonds, and other securities to lose their value due to changing market conditions.