Investors have been waiting for ride-hailing companies Lyft (NASDAQ: LYFT) and Uber (NYSE: UBER) to go public for years.
Both companies have become very popular in a short period of time, and their apps that are used to hail rides have become a go-to resource for many people.
On the surface, both of these companies seem like they have everything to gain and are on the path to a bright future. But now that they’ve decided to become publicly traded companies, they have even more people watching their every move.
Because now every move they make will have an impact not only on the company but also on investors.
Uber and Lyft Drivers Call a Strike Before Uber IPOs
Last Wednesday, a few days before Uber’s public offering, Uber, Lyft, and other ride-hailing companies went on strike. Drivers in 10 cities across America wanted to draw the public’s attention to these giant companies that have been exploiting their drivers and benefiting from that exploitation. After all, the people who drive for these companies are their backbone. No drivers or a reduced amount of drivers on the road would greatly impact the business model and ultimately revenue.
Drivers for these companies aren’t getting the job security they are hoping for. One Uber driver, Nabila Nusrat, has been working for Uber for three years in New York and had this to say about working for Uber: “Kinda like the big fish making all the money, and we being individuals, I’m at the bottom of the chain so I’m getting pressed.”
Drivers want an hourly minimum pay and fare breakdowns on passenger receipts that show the companies’ share. Uber considers its drivers independent contractors and not employees, which helps the company justify why it doesn’t have to pay them a minimum hourly pay.
In a recent statement to the Associated Press, Uber said:
Drivers are at the heart of our service — we can’t succeed without them — and thousands of people come into work at Uber every day focused on how to make their experience better, on and off the road. Whether it’s more consistent earnings, stronger insurance protections or fully-funded four-year degrees for drivers or their families, we’ll continue working to improve the experience for and with drivers.
Drivers decided to strike ahead of Uber going public because they wanted to make an impact on the company’s market debut. They wanted to bring attention to an IPO that is going to make the company and the executives billions, while the drivers, or “the heart” of the business, won’t be affected by the IPO.
It was the classic scenario of the rich getting richer, and drivers were hoping a strike would bring attention to potential investors and to the public. Uber has been valued at more than $80 billion, and with its IPO, that valuation was only going to get higher.
Well, when Uber’s IPO finally happened last Friday, May 3, it didn’t go as most of its investors and executives thought it would.
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Uber Saw the Biggest First-Day Dollar Loss in U.S. IPO History
Investors in Uber’s IPO have lost $655 million, and investors from 2016 and 2018 have lost a combined $2.27 billion. At market close on Friday, May 3, Uber shares were at $41.57. In just a few hours of trading, it had already lost 7%. It priced its offer at $45 per share. A $45 per share IPO would give the company a market capitalization of $75.5 billion, significantly below the original $120 billion valuation it was touting.
As I’m writing this, shares are still trading around $36. This wasn’t the public offering Uber was planning or even expecting. However, seeing Lyft’s shares drop since it IPO’d at the end of March did convinced Uber to put a realistic offer price on its shares. But even its modest approach wasn’t good enough for investors.
According to an analysis from Jay Ritter, a professor at the University of Florida, Uber had experienced the biggest first-day dollar loss in U.S. IPO history. The last company that experienced the biggest first-day dollar loss was two decades ago during the dot-com bubble. The company was Genuity, an internet company that was spun out of Verizon and lost $277 million its first day.
Uber’s IPO was far from a success story, and it’s still struggling to maintain trading near its IPO price on Monday, May 13. Market conditions aren’t the best as of right now, especially since President Trump escalated a trade war with China. But I don’t think that market volatility should be totally to blame for Uber shares tanking.
Uber Is Falling After its IPO Last Week
Uber’s shares opened up on Monday, May 13, at $38.79 — a 13.8% decrease from its offer price. The losses have continued into the new week, and it’s difficult to feel any optimism for the rest of the week.
Nicholas Colas, co-founder of DataTrek Research, wrote to his clients on Monday about Uber and Lyft:
While it might be easy to call out ‘market conditions’ for these failings, the unvarnished truth is that these declines represent a fundamental disconnect between public and private valuations.
Yes, there is a lot going on in the market right now with trade wars, but should that be affecting Uber’s shares this much? Would that really cause Uber to become the biggest first-day dollar loss in U.S. IPO history? I don’t think so. It’s obviously bigger and more rooted in the company and what it has to offer.
The company said it had a valuation of $120 billion back in October and then priced its IPO at $45 per share, which would give it a $75.5 billion valuation. And heck, it could actually be worth even less than that. Maybe that’s what we’re experiencing as shares continue to fall.
Uber’s week or even year could get a whole lot worse. The company will need to brainstorm ideas to become the company it’s been saying it is.
Until next time, Monica Savaglia Monica Savaglia is Wealth Daily’s IPO specialist. With passion and knowledge, she wants to open up the world of IPOs and their long-term potential to everyday investors. She does this through her newsletter IPO Authority, a one-stop resource for everything IPO. She also contributes regularly to the Wealth Daily e-letter. To learn more about Monica, click here.
