Why Uber Might Stalk an IPO Sooner Rather Than Later
A big factor: the likelihood that revenue growth will soon slow significantly, if it hasn’t already
Uber Technologies Inc.’s recent sale of its China business for $1 billion while acquiring about 20% of rival Didi Chuxing Technology Co. has been widely hailed as a potential step toward an initial public offering.
That is true. Uber Chief Executive Travis Kalanick has said the company was losing $1 billion a year in China; eliminating those losses makes an IPO more likely.
But it also masks much of Uber’s motivation to go public in the next 18 months. Here’s another factor: the likelihood that Uber’s revenue growth will soon slow significantly, if it hasn’t already.
Since Uber’s shareholders aim to fetch the highest possible price for the company, it is better for Uber, which remains unprofitable, to go public before its growth slows too much. If Uber times it right, it can make investors in public markets believe it is a good buy—even at a valuation greater than its most recent $68 billion.
“The challenge from an IPO perspective is, Uber is going out at something above $65 billion, so it’s hard to pitch that as a growth story,” says Anand Sanwal, chief executive of CB Insights.
This isn’t just about the law of large numbers. There are reasons to think Uber’s growth has slowed or will soon slow.
First, Uber may be close to saturating the U.S. market for its primary ride-sharing service. Market researcher eMarketer predicted in May that the rate of growth in the number of Americans who use a ride-sharing service will shrink to 7.2% in 2018, from a projected 13.3% in 2017.
Of course, existing riders may use the service more often. But that alone might not be enough to justify Uber’s current valuation.
Uber touts a recent Pew finding that 15% of Americans have used either Uber or rival Lyft Inc., suggesting both companies have much room to grow. But the same study found that Uber’s core ridership is a narrow slice of the U.S.: young, urban and wealthy, with access to mass transit, taxis, car-sharing services like Zipcar and amenities within walking or biking distance.
The upshot: Uber’s explosive growth to date is effectively the low-hanging fruit of the ride-sharing market, in both revenue and profit. To continue growing at its current pace, Uber will need to penetrate suburbs and second-tier cities. Residents there are sparser and have fewer complementary transportation options, meaning they won’t yield as much revenue or as many per-capita rides as bigger, denser cities.
Arun Sundararajan, a professor at NYU Leonard N. Stern School of Business who has studied ride sharing, estimates that roughly half of Americans live in areas that aren’t dense enough to support ride sharing.
At the same time, Uber will face increasing pressure from competitors and its own drivers to shrink its margins in the U.S. “Ride sharing is a commodity business in the long run, so there’s plenty of room for multiple players,” Mr. Sundararajan says.
Conventional wisdom holds that ride sharing is a winner-take-all market. But Uber’s many domestic competitors, and the ease with which it has been copied overseas, suggest the barriers to entry are less about technology and more about access to capital.
A second avenue for Uber to grow is outside the U.S., where the company already is in more than 400 cities and in 72 countries. China is now closed off, but a person familiar with Uber’s plans says that the company is redirecting resources, including 150 engineers who worked exclusively on China, to other markets, including Latin America and Southeast Asia.
The person also said China had accounted for almost 40% of Uber’s trips, but 15% of its revenue. That illustrates a big issue Uber, and others like Facebook Inc., face overseas: Markets outside the developed world are far less lucrative.
In the first six months of this year, Uber said it completed a billion rides, doubling its lifetime total to two billion since March 2009. To the extent that growth is mostly outside the U.S., it adds little to revenue and, by the company’s own account, subtracts from profit.
Uber has also talked about arranging for delivery of goods, as well as people. But here, too, Uber doesn’t appear to have any special advantage, and faces big, sophisticated competitors, including Amazon.com Inc.
Then, there is technology. But the company’s much-touted aspirations to replace drivers with self-driving cars will likely bear fruit only for investors willing to wait decades.
Mr. Kalanick has said that Uber will plan an IPO “as late as possible,” but has declined to specify when that might be. The company is sitting on about $13 billion in cash and available credit and debt, according to the person familiar with the company’s plans. That means Uber doesn’t need to go public to fund its current business.
But investors, some of whom are board members, helped propel the sale of Uber China to Didi Chuxing. Those investors understand the logic of taking Uber public before its revenue growth stalls.
It is also important to remember that an IPO is the beginning of a journey, not the end. Consider Facebook, which went public in 2012 at a then-record valuation of $104 billion. The early days were ugly; in three months, the shares lost roughly half their value. Today, though, Facebook is valued at more than $350 billion. Uber investors wouldn’t complain about such an outcome.