Uber’s first-day share drop cost new investors a record US$617 million. Is the market losing its appetite for serial loss-makers?

By David Walker

Posted on May 13, 2019

It may be a global household name, but ride-hailing company Uber showed on Friday that household names can create huge day-one losses for investors.

Uber shares closed their first day of trade at US$41.57, down nearly eight per cent from their US$45 per share initial public offering price.

The rare first-day price drop created huge losses for new investors. After tipping US$8.1 billion into the float, they ended Friday down US$617 million. University of Florida professor Jay Ritter, who maintains a database of IPOs, told media outlets he calculated that in raw dollar terms, new investors in Uber had suffered the largest first-day loss of any US IPO in history.

Uber’s float was the biggest US tech listing since Facebook.

On Thursday, the shares had been priced at the low end of their targeted range, in the hope that cheaper pricing would spare them a Friday drop.

The first day’s trade left Uber valued at US$69.7 billion, far lower than the US$120 billion that underwriters Morgan Stanley and Goldman Sachs Group touted last year as a possible valuation.

Uber followed in the footsteps of less famous rival Lyft, which went to the public markets at the end of March at US$72 a share but closed on Friday at just US$51.09 after a horror week of its own on the markets.

Lyft shares dropped around 19% over last week, propelled in part by Tuesday’s announcement of a US$1.1 billion March quarter loss. Uber had already announced a March quarter loss of around US$1 billion.

Uber’s float also had an element of bad timing.

Last week was Wall Street’s worst of the year so far, as US president Donald Trump seemed ready to restart a trade war with China.

The Financial Times quoted Dara Khosrowshahi, Uber’s CEO, as saying : “You can’t control the week in which you went public. We had a situation with the president and China that created a lot of volatility and uncertainty.”

The US$8.1 billion raised in the float would be an “important engine” for the company’s growth, he was reported as saying.

Both Uber and Lyft have been unprofitable their entire lives, and Uber’s revenue growth has slowed notably over the last two years.

The poor opening had some observers asking whether the markets may be past the peak of enthusiasm for loss-making stocks that cannot count on locking in consumers.

Unlike tech giants such as Amazon, Salesforce and Netflix, which all had years of losses or thin profits on the way to global leadership, Uber and Lyft lack even a clear path to profit. They are counting on the development of self-driving technology to eventually make their core ride-hailing businesses profitable.

Those analysts who value the companies most highly say they could become global transportation giants in a future where most people hail rides in autonomous cars rather than owning cars themselves.

But ride-hailing customers can switch to a rival company just by downloading a new app, and neither Uber nor Lyft has shown it can dominate the next era of ride-sharing.

Uber and Lyft are also seen as having little scope to ring further cost cuts from their low-paid drivers.