You may be wondering if this is a great opportunity to get into the Uber stock “at the ground floor”.
After all, Uber is an unicorn company. Perhaps this is the best chance to get into the stock.
I spent some time answering calls from many investors last week. This is a good time to put down my thoughts so you and other investors can benefit too.
Why do You Want to Buy the Uber IPO?
You may have one of many answers to this question.
Perhaps, your answer is:
- To make money, or,
- I believe in the company and its future prospects and you want to participate in its value creation, or,
- I think the stock is deeply undervalued at $45/share that it is being offered at, or,
- I don’t know. My friends are excited and told me it is a great idea
Let’s take each of these possible reasons and dive into it.
1. To Make Money
Did you know that investing in IPO is a terrible way to make money?
According to a UBS analysis with University of Florida data, 60% of the IPOs out of over 7000 IPOs between 1975 and 2011 had negative returns after 5 years.
Only about 20% of the IPOs go on to return better than the average market index. Almost half of all IPOs end up losing half their value in 5 years.
Are you going to bet that this is one of the rare IPOs that will give you multi-bagger returns?
You may say, “I am not looking for a 5 year investment. I just want to get in and get out quickly after the stock pops”.
The line of people trying this “strategy” is long indeed.
There 3 kind of people who tend to make money in an IPO
- The company insiders who are selling their stock in the IPO
- The underwriters who are the middlemen between the company and the selling shareholders and the buyers in the secondary market
- Possibly those lucky investors (with significant assets) who receive an allocation from their financial institution
Of these, the company insiders may hold their stock at a very little cost basis. The underwriters have purchased the stock well below the IPO offer price. They will make money on the spread, and of course, in the fees. The lucky investors who received an allocation will receive the Uber stock pre-ipo at $45. Their ability to make money lies in the possibility that the stock price will rise in the initial days, and the investor demand will give them a window to sell.
Most of the investors buying the IPO will end up purchasing in the secondary market. Whether they make money or not depends on how the stock behaves.
Keep in mind that no one wants to be left holding the door when the party ends. Will you be quicker to sell (at profit) then most other investors?
2. I believe in the company and its future prospects and want to participate in its value creation
How much do you know about the company to form this belief?
The company was not required to reveal any financial data while it was private. There is some data in the IPO prospectus, but we have not seen how the company executes. Taking a few Uber rides doesn’t tell us much.
Is this a viable long term business? – Uber’s ride sharing business is flat-lining and growth has slowed
Is their competition? – Yes – And Lyft is not doing that well financially
What exactly is their competitive advantage? – Not really sure. The company talks about the network effects, but the barrier to entry is low, and the switching costs are minimal.
The company is unprofitable and lost about a $1 billion in the most recent quarter.
3. I think the stock is deeply undervalued at $45/share that it is being offered at
I actually do not have enough data to make a valuation call at this time.
After a few quarters of public financials, perhaps we can revisit.
But I will say this.
When a company IPOs, the following 2 conditions hold
- The company and the insiders have more information about the true health of the company then you and I. The information asymmetry is huge, and it is a risk that you should consider.
- The company, the insiders, and the underwriters, all have a singular goal during the IPO. Raise as much money as possible by issuing as little stock as possible. Pretty much they are running through all the reasons they can muster to convince you to pay top dollar.
At the time of the IPO, I would not consider any stock to be undervalued.
Can they go on to grow and increase their stock price in the future? Sure. But there is no data as of today that gives me any reason to make this judgement.
4. I don’t know. My friends are excited and told me it is a great idea
Herding behavior is common place in investing, but nowhere it is as obvious as it is during an IPO. Of course, the results of doing what everyone else is doing will obviously be the same as what everyone else gets.
Or in other words, average.
If you were to allocate some capital to the Uber IPO to keep up with the Joneses, please realize that it is not a well considered investment. It is speculation. Do not use serious investment money for this. If you do have some play money lying around that you do not need any more, sure, go ahead and “invest”.
FOMO, or the Fear of Missing Out, drives the IPO market. Smart investors choose to avoid IPOs.
Where is the Value in Uber IPO?
As a value investor, I look for values that are too good to pass up. For me, and other value investors, these values are tangible. Not pie in the sky projections and estimates. Without the benefit of observing the company and its historical performance, we do not have enough information to estimate the value and therefore we cannot judge the stock to be undervalued.
Besides, we like to keep a margin of safety. I don’t see any here or in any IPO.
Will I miss out on the Uber IPO? I will avoid it for sure – but missing out implies there is a severe dearth of opportunities out there. I don’t think this is true.
What do you think? Are you investing in the Uber IPO? Let us know in the comments below
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