Life in Uber despite frosty IPO reception

Emma Rapaport with Reuters | 14 May 2019

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Uber’s conservative IPO approach failed to keep its shares from sinking on debut, but Morningstar analyst Ali Mogharabi says the world’s largest ride-hailing company, which traces its origins back to one snowy cabless night, still has a path to profitability.

Shares in Uber Technologies fell 10.86 per cent overnight to US$37.10 amid widespread losses on US markets. This comes after the company ended last Friday down 7.6 per cent at US$41.57, even as the S&P 500 reversed losses to end in positive territory.

Only about a fifth of IPOs have ended their first day of trading in the red in the past two years, according to US analytics firm Dealogic data.

Uber priced its IPO on Thursday at the low end of its targeted US$44-US$50 range at $45 share, hoping that approach would spare it the trading plunge suffered by smaller rival Lyft Inc since its debut in March and increasing volatility in the equity market, Mogharabi said.

Mogharabi remains bullish on Uber, recommending investors allocate capital with the stock now trading at a 12 per cent discount to its fair value at US$41.67. Uber's IPO was priced 22 per cent below Morningstar's US$58 fair value estimate.

"We recommend allocating capital to this name if Uber’s stock trades at the reported $45 IPO price or lower," Mogharabi said ahead of the IPO.

Other market experts have struggled to find value in a company that has consistently posted losses and warned that it may never be profitable. Other cautious analysts have cited competition in the ride-hailing space, and low barriers to entry.

Uber Eats has appetite for growth

Mogharabi has applied a narrow-moat rating to Uber's core business – the ride sharing platform - saying the company has displayed some moat sources such as network effects and intangible assets.

He says this could position the firm to become profitable and generate excess returns on invested capital in the future.

"We find evidence of Uber's network effect in New York City, where the number of daily rides provided by Uber in NYC grew at an average of 37 per cent per year from 2015 to 2017. In addition, more drivers headed to provide service for Uber," he says.

As well as ride-sharing, Uber pairs hungry people with restaurants via its Uber Eats platform, which launched in 2014.

Mogharabi says Uber has gained market share in food delivery faster than expected and the strong growth potential remains.

"Uber Eats, the firm’s food delivery service, will be one of the main revenue growth drivers for the firm as it will benefit from cross-selling to its large ride-sharing user base. Further utilisation of Uber’s overall on-demand platform can also help the firm progress toward profitability, in our view," he says.

Uber Eats serves more than 220,000 restaurants in more than 500 cities globally in what Mogharabi estimates will be a US$191 billion market by 2023.

And by 2023, the company is tipped to grow its 11 per cent market share to 25 per cent, says Mogharabi.

Uber’s on-demand technology platform could eventually be used for additional products and services, such as autonomous vehicles, delivery via drones, and Uber Elevate, which, as the firm refers to it, provides "aerial ride-sharing."

Uber does however carry a high uncertainty rating because of regulatory and legal matters.

Uber draws retail investors

Uber had considered going public for at least four years. But the IPO date coincided with market turbulence fuelled by escalating US-China trade tensions.

The world’s largest ride-hailing company appeared to generate more interest from mum-and-dad investors than Lyft. Retail investors at TD Ameritrade executed more trades in the first ten minutes of Uber’s debut than in Lyft’s first 2½ hours.

Lyft Inc’s shares surged on their first day of trading, closing up over 8 per cent at $78.29, but then fell below its IPO price during its second day of trading. Overnight the stock fell 5.85 per cent and is now trading 33 per cent below its US$72 IPO price after the company reported a loss for its first quarterly earnings report as a public company Friday.

Australian investors were similarly attracted to Uber’s listing. Stake, an Australian-based US trading platform with more than 30,000 retail users, told Morningstar it saw tremendous interest from its Australian customer base in the IPO.

"Stake customers executed more trades on day one of Uber's listing than they did in the first five days of trading in Dropbox, which was one of 2018's most anticipated IPOs," Stake head of product Matt Jones said.

IPO marred by scandal

Uber's road to IPO was marred by several hurdles including increased regulation in several countries and fights with its drivers over wages.

Uber has also weathered controversies including revelations of a culture of sexism and bullying at Uber and US Department of Justice investigations. After a series of embarrassments, Kalanick was forced to resign in 2017 by a group of investors. Uber then hired Khosrowshahi to lead the company.

Uber has said it has the potential to grow not just in the cab hailing business, but also as a “super app” to provide logistic services, such as grocery and food delivery, organizing freight transportation, and even financial services, much like Grab, its Southeast Asian counterpart.

Founded in 2009 and headquartered in San Francisco, Uber Technologies, initially known as Ubercab, has become the largest on-demand ride-sharing provider outside of China.

Since 2016, the company has completed more than 10 billion trips in 63 countries. At the end of 2018, Uber had 91 million users who used the firm's ride-sharing or food delivery services at least once a month.

The IPO was a watershed moment for the decade-old company, which was started after its founders struggled to find a cab on a snowy night in Paris in 2008.

Additional reporting: Reuters

This report appeared on www.morningstar.com.au 2019 Morningstar Australasia Pty Limited

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