ACCELERATED HYPE
Anticipated IPOs hinge on whether investors believe firms can stop burning money
Ride-hailing firms Lyft and Uber are expected to go public this year,
It’s probably about time for your favorite ride-hailing app to raise prices.
Both Uber Technologies and Lyft are expected to go public in 2019, after years of explosive growth that has laid waste to the traditional taxi industry. In time, they could also upend the current model of car ownership.
That’s the pitch they’ll be making, anyway. Investors can expect the hype around both to accelerate as they move closer to their initial public offerings in the weeks and months ahead. Uber’s most recent funding round in August valued it at $72 billion, but its bankers have floated the idea of an IPO at up to $120 billion. Lyft, its smaller rival, was valued at just over $15 billion last June.
Uber’s pitch will also likely focus on its global, diversified platform. Its rivals are mainly local players, and Uber is using its strong brand to grow quickly in adjacent areas such as food delivery and bike-sharing. Lyft’s pitch may be the opposite: that it offers focused expo- sure to North American ridehailing. It is also growing faster, in part by taking market share from Uber.
For both companies, the elephant in the room is their inability to turn a profit. Uber lost $1.07 billion on revenue of $2.95 billion in the quarter through September, while Lyft lost $254 million on revenue of $563 million. While negative margins are hardly a rarity in Silicon Valley, companies typically are expected to show a sustainable business model before they seek public capital.
Uber will likely point out that it is profitable in markets where it has a dominant position. Stripping out head-office costs, Uber in Australia and New Zealand reported a margin equivalent to 16% of bookings in the fourth quarter of 2017, according to documentation for its $2 billion bond issue last year. In Europe the margin was 13.5%, and in Latin America 10.3%. If Uber is on a path to achieving such numbers everywhere, investors can look forward to a gradual narrowing of losses.
Whether this scenario is re- alistic depends above all on the U.S, where both companies currently appear to subsidize rides in a brutal battle for market share. What could make them kick the habit?
The conventional solution would be a merger, which already has happened in many ride-hailing markets. Uber sold out to Didi Chuxing in China, Yandex in Russia and Grab in Southeast Asia, in each case in exchange for a minority stake in the combined operation. This can transform the industry’s gruesome economics: Yandex’s ride-hailing margin was -14% in the third quarter of 2018, compared to -275% in the same quarter of 2017, before the Uber deal.
However, a merger doesn’t look feasible in the U.S. Previous talks between Uber and Lyft broke down because of an- titrust concerns, and the monopolistic position of many Silicon Valley companies is growing more controversial.
That leaves the hope that the companies wind down subsidies independently. Paul Hudson, founder of Glade Brook Capital and an investor in both companies, thinks the IPOs will be the catalyst for more rational competitive behavior in the U.S., as well as further mergers overseas. Unlike many Silicon Valley giants, neither Uber nor Lyft are controlled by founder shareholders with special voting rights, so outside investors should be able to control strategy after the IPO. Stable duopolies have emerged in mature markets such as payments, dominated by Visa and Mastercard. The risk for investors considering an investment in Uber or Lyft is that this benign scenario takes a long time to play out in a fastermoving industry.
In food delivery, which has much in common with ridehailing, Delivery Hero and Takeaway.com were public companies for roughly 18 and 26 months respectively before they agreed in December to the investor-friendly option of merging their heavily lossmaking German operations. This seems a long time for investors to wait out a price war— and without the merger option, resolution may be more elusive.
Another hope is that driverless cars transform the economics of ride-hailing by eliminating the cost of the driver: Uber founder and former boss Travis Kalanick liked to call the technology “existential” for this reason.
But this is highly speculative: Driverless technology won’t work reliably for years, and when it does the benefits may accrue to the technology provider rather than the ride-hailing platform.
Capital markets have a ready answer to the risk that Uber and Lyft squander money for longer than hoped: a low-ball valuation. Investors could do well from the ride-hailing IPOs, but it will depend on keeping initial expectations low enough that the companies have a good chance of exceeding them. Get a cheap fare and it matters less if the driver takes you for a ride.
Companies typically are expected to show a sustainable business model before they seek public capital