Last week Uber kind of, sort of announced it was going to go public in early 2019 at a valuation of about $120 billion.
It wasn’t Uber directly saying that. It was a Wall Street Journal story that more than likely came from sources at the company.
We can assume the news really came from Uber, because the $120 billion valuation number was based on talks Uber had with potential lead underwriters The Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS). And they wouldn’t have leaked that to the Journal. That number would have had to come from Uber itself.
And WOW, what a number. Uber’s worth $120 billion?
The questions you should be asking are:
- Why is Uber kind of, sort of now pushing for early 2019 IPO?
- Why has it taken the nine-year-old company this long to go public?
- How does the company figure it’s worth $120 billion?
- And, should you invest in it?
Growth Begets Greed
One reason Uber wants to push its IPO in early 2019 is that its U.S. competitor, Lyft, announced a day before the Uber news hit that it was doing an IPO in early 2019.
Uber’s CEO Dara Khosrowshahi, who was just brought in this summer, rolled into the C-suite talking about preparing the company for an IPO in 2019. So, everyone knew it was finally going to happen. But, the anticipation was for late 2019, not early 2019.
The reason Khosrowshahi teased the prospect of an IPO is because investors in Uber were getting anxious about the company’s management, its future, and their investment. In other words, a lot of those investors wanted to cash out.
Besides early investors, later-to-the-game investors like Fidelity and Softbank Group Corp. (OTC:SFTBF)’s Vision Fund, are itching to book some real profits on their bet, or at least have some liquidity and an avenue to exit.
Softbank has a 15% stake in the company, a position it acquired in a late round financing and from other investors paring down their stakes, yes, cashing in some of their chips.
Softbank’s deal, putting up money in a late financing round (meaning it paid more than early investors did for its stake), came with a perk. The perk Softbank wrangled from Uber is if there isn’t an IPO in 2019, investors with at least $100 million in the company, or who’ve had money in for more than five years, can sell their shares in the private secondary market.
That’s a very dangerous position to put Uber in. If Uber shares in the secondary market aren’t bid up, but rather sell at lower and lower prices, the valuation of the company starts heading down and that would really depress the prospects for a successful IPO.
That motivated the meandering unicorn to announce it would IPO in 2019.
It’s now happening in early 2019 because Uber doesn’t want to come up lame in the IPO sweepstakes race with Lyft. If Lyft’s IPO is before Uber’s and it bombs, Uber’s valuation will tumble before it debuts, making its post-IPO trading a crapshoot.
Why did it take Uber so long to go public?
Growth begets greed, which is good, sometimes.
As Uber grew its brand, its reach, revenues, and valuation grew.
The company’s revenue for 2018 is expected to be between $10 to $11 billion. On the high end, that’s $3.22 billion or 41% more than Uber’s 2017 revenue.
Late-stage investors have to pay up for their stakes in a growing company. And Uber’s no exception.
There’s a trick to paying up for your late-stage investment in a company like Uber.
The more new investors have to pay, the higher they make the valuation. But the trick isn’t foolproof.
It works like this. Founders, friends, and family capitalize start-ups. Then usually come angel investors, venture capital investors, and then other investors – including big institutional investors if the company looks like it’s a winner. Each time a company gets another round of financing, the valuation of the company can change.
Uber’s Stock Won’t Be for the Faint of Heart
There are up-rounds, down-rounds, and merry-go-rounds.
If new money coming in increases the value of the company, that’s an up-round.
If the new money coming in decreases the valuation of the whole company, that’s a down-round. A down-round happens because the company needs money, but the value of the company’s going down for different possible reasons. One of those reasons being that new money coming in gets more bang for their buck, which, by itself, lowers the value of the company.
There’s no such thing as merry-go-rounds; that’s just what I call it when money comes in and the valuation of the company doesn’t change.
While they come in different and complicated versions, generally the last investor(s) coming in gets less for their investment than early investors do. Why? Because the company is supposedly worth more if it’s growing, and you have to pay up to get in when you know the valuation is going up.
But, here’s the trick. If I’m the investor putting in the last round, when I do pay up, it inflates the valuation of the company. It’s fine with me if I overpay, because I’ve fattened up the valuation of the company.
That’s an especially good trick if it’s right before the company has its IPO.
Now everybody will look at the higher valuation and think this is going to be a winner of a stock because the valuation has always gone up.
Uber’s played that game beautifully.
In fact, it’s played that game so well, the lead underwriters, salivating at the bankers’ banquet of fees they’re looking at, are now telling the company they think their coming out cake should have 120 billion candles on it.
One hundred twenty billion dollars?
That’s twice what Uber was valued at two months ago.
And they’re losing money hand over fist.
Based on bond indenture documents from Uber’s last issuance, the company said it expects to lose money for another three years.
Based on the capital invested in Uber, which amounts to $16 billion, the IPO valuation at $120 billion means it would be trading at 17 times capital.
Lyft’s coming to market at about a $15 billion valuation with $5.1 billion invested, meaning it will trade at about 2.9 times invested capital.
Talk about unicorns flying too close to the sun.
Uber’s stock won’t be for the faint of heart.
And it certainly won’t be for me.
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