Uber IPO Was A Record Flop

Uber IPO - Stocks Recover On Friday After Positive Trade Talks

Before getting into Uber IPO, let's review trade news. There seems to be a pattern with trade talks. President Trump seems to talk tough on trade when Chinese markets are open, to send them lower. And then talks positive on trade when American markets are open, to prevent them from falling. 

This strategy worked on Friday as the stock market staged a huge comeback. From its low on the day at 11:50AM, the S&P 500 increased 1.91%. It was up 0.37% on the day. Nasdaq increased 8 basis points and Russell 2000 increased 0.19%. Since the Dow increased 0.44% which was more than the Russell 2000, you know it was a good day for trade.

On the trade negotiations which ended Friday, Treasury Secretary Steve Mnuchin stated, "They were constructive discussions between both parties, that's all we're going to say. Thank you.” 

Steve is usually positive on trade as compared to trade representative Lighthizer. It’s no surprise he said the talks went well. He would never say they didn’t go well because he participated in them. He’d look bad if he said the talks went badly. 

President Trump tweeted, “The relationship between President Xi and myself remains a very strong one, and conversations into the future will continue.” I’m reviewing the positive aspects to explain why the market rallied.

The Market’s Interpretation Of The News

Uber IPO - The rally was interesting because I’d argue the situation doesn’t look much better than it did on Thursday. I don’t think the news was positive because Trump still plans to forge ahead with the tariff rate increase and there are plans to add to the amount of goods being taxed. 

President Trump stated, “The process has begun to place additional Tariffs at 25% on the remaining 325 Billion Dollars.” There was no promise to potentially end the tariffs and the in person meetings are now over.

Obviously, it’s possible to negotiate, while not being in the same room. I’m just saying the meetings this week weren’t a big success. Ever since May 5th when Trump tweeted that China tried to re-negotiate the deal, the situation has been ‘up in the air.’ Trump might be confident in his negotiation tactics, but in the meantime the economy will be hurt and there’s no sign of a truce. 

When China announces its specific response to this new round of tariffs, the stock market could sell off further.

VIX Craters

Uber IPO - We’ve recently seen VIX fall on down days. So it’s no surprise that the VIX crashed on Friday with the market rallying. VIX fell 16.02% to 16.04. I don’t think the potential for a trade catalyzed volatility spike is over. 

Plus, we continue to see weak economic reports, so there are plenty of ways to win by betting on an increase in the VIX. With the stock market increasing, the CNN fear and greed index increased 4 points to 44 which still signals fear.

Every sector, but one rose on Friday. The healthcare sector fell 7 basis points. The utilities, materials, and consumer staples were the biggest winners. They increased 1.73%, 1.27%, and 1.17%. 

As you can see from the chart below, the consumer discretionary, industrials, tech, and materials sectors were the most negative on trade on their conference calls as of February. The consumer staples and utilities are the least effected by a trade war.

Uber IPO Was A Huge Flop

To be clear, I’ve never been a fan of Uber or Lyft as long term investments. However, I was completely wrong to expect Uber to be a good IPO. The stock cratered 7.62% from its IPO price of $45 which was near the low end of its expected range. 

Unlike Lyft, which at least cratered after its first day of trading, Uber crashed immediately. The demand isn’t there for these money losing giant ridesharing companies. Lyft stock fell 7.41% to a new all time low. It is down 34.47% from its first close.

As you can see from the chart below, Uber’s decline was the 4th worst this decade. 

Its losses in dollar terms were the worst in stock market history. In other words, there has never been this big of an IPO that has seen its stock fall by this much. This was a disaster of epic proportions. It even happened on an up day for the stock market.  

Looking at the fundamentals, Uber is a growth company with a huge market share in a business that loses gobs of money. No, this isn’t the next Amazon. Uber is seeing declining margins. 

Uber IPO - This wasn’t the right time to go public.

As you can see from the chart below, the number of monthly active platform customers has steadily increased. In Q4, its yearly growth was 33.8% which is impressive. Similarly, total trips using its family of apps, which include, the main ridesharing app, Uber Eats, and Jump Bikes...are growing. 

In Q4 2018, there were 1.493 billion trips which is up from 1.088 billion in Q4 2017. That’s yearly growth of 37% which is impressive. To be clear, the mobility division is small. 81% of gross bookings were from rideshare and 18% were from Uber Eats.

Uber IPO - Problems arise with adjusted net revenues and core platform contribution margins. Its adjusted net revenues were $2.507 billion which is down sequentially and only shows growth of 11.7% yearly. Business is extremely competitive and Uber Eats is tougher than ridesharing because the firm needs to pay drivers and restaurants. 

The chart below shows why the stock fell and why I said this was a bad time to go public. As you can see, the core platform contribution margin fell from 9% to -3% in Q4 2018. It would have made more sense to go public last year when platform margins were positive.

Both Uber and Lyft are money losing companies which are headed in the wrong direction. I think the ridesharing hype needs to die down, so the competition subsides and allows for profitability. These firms were hyped to such ridiculous proportions which allowed losses to go on for this long. These valuations need to fall much more and margins need to improve before I’d consider investing in them.  

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