Shares in ride-sharing firm Uber (UBER) plunged a further 9% as the US stock market opened on Monday, following on from a disastrous debut.
Uber’s near-8% slide on its first day of trading on Friday, May 10, offers a timely reminder of the difficulties faced by investors in tech unicorns. The ride-sharing firm’s misfortune was to be one of the most hotly anticipated listings since Facebook (FB) during a time of high stock market volatility and the firm carried a weight of expectations after a strong run for US stocks in recent months.
Uber's share price is now below the IPO price of $45 – a price that was already at the lower end of a range that could have reached $50 per share in more benign market conditions.
Uber’s float follows that of Lyft (LYFT), which launched at just over $78 and is now trading just below $50 per share. Uber was expected to be valued at around $100 billion on flotation but this valuation has been revised down to below $70 billion after a Friday to forget for its investors.
Yet despite the cautious valuation, shares have disappointed in their first days of trading. Jake Robbins, manager of the three-star rated Premier Global Alpha Growth fund, says: "Ultimately Uber's long-term share price will be driven by its ability to take large market shares around the world and eventually turn that dominant position into a profit."
However, he cautions that with such "intense competition" it could be "many years" before the winners in the field emerge. Robbins adds: "Uber shares are likely to be wildly volatile as sentiment swings about."
Many analysts, however, are quick to warn that a first day or days’ trading cannot accurately measure a company’s prospects – after all Twitter (TWTR) surged over 70% on its first day but is still below its IPO price more than five years later, while Lyft was up over a quarter in the first few hours of trading in New York.
A recent article on Morningstar.co.uk looked at the long-term performance of IPOs over 40 years. According to data run by UBS, the average float saw the share price rise by around 18% on the first day of trading, but subsequent performance of shares didn’t match the first day’s exuberance.
Mark Hargreaves, head of global equities at Axa Framlington, says investors need to be patient when investing at IPO. He says: "While being an early investor can offer some initial or short-term upside, not all opportunities will be profitable. By waiting to see how well a company can translate innovation into a commercially viable business model and ultimately into profits, you can potentially separate the winners from the losers in any given area.”
The Morningstar View
Morningstar analyst Ali Mogharabi initiated coverage of Uber with a fair value estimate of $58 per share last week. After rival Lyft debut in March, he said Uber's initial pricing looked to be on the "conservative side".
Mogharabi says: "The IPO price [was] more than 22% below our fair value estimate and we recommend allocating capital to this name if Uber’s stock trades at the $45 IPO price or lower."
The analyst believes the firm, which benefits from first-mover advantage in its field, could become profitable and generate excess returns on invested capital in the future. He expects it to maintain around a 30% share of the ride-sharing market over the next 10 years. The business has also quicky grabbed market share in the food delivery industry with the advent of its UberEats app, an area he believes "there is strong growth potential".
Mogharabi adds: "We expect Uber's total net revenue to grow at a 19% 10-year compound annual growth rate to over $64 billion by 2028. Also, we expect Uber to become sustainably profitable by 2024."
