The response to Uber's IPO reveals a trend at stake in technology investments

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A Uber banner adorns the façade of the New York Stock Exchange before the IPO of the tour sharing company, on May 10, 2019, in New York.

DON EMMERT / Getty Images

When the shares of Uber Technologies Inc. began to be traded last week following a much awaited initial public offering, the company that greets the race joined the list of unprofitable companies that debuted on the stock market this & # 39; year, making comparisons with the dizzying peak of the dot-com. was.

The fact that Uber's shares fell by 17.6% in the first two days of trading only compounded concerns over the buoyant market conditions and the need for a showdown for growth-chasing companies to the detriment of profits .

But wait: is profitability really so important for relatively young companies that have many opportunities ahead of them? Given the success of companies like Amazon.com Inc., Netflix Inc., Shopify Inc. based in Ottawa and others, maybe not.

The story continues under the publicity

IPOs are clearly not for everyone. Young companies can be volatile. Investment bankers may be eager to generate commissions rather than offering new investors a great deal in a fantastic society. And companies tend to make their IPOs exploit an enthusiastic market and high ratings.

Academic research suggests that IPOs tend to underperform the stock market over time. The Renaissance IPO ETF, which replicates the performance of newly-listed US companies, lags behind the S&P 500 by almost three percentage points, on an annual average basis, over the past five years (until the end of April) .

So why do IPOs attract so much attention? Simple: choose the right one and your return can be staggering.

Since Amazon.com Inc. became public in 1997, the shares have increased more than 100 times. Facebook Inc. became public in 2012 at US $ 38 per share. The shares are now trading at USD186.32, with a gain of 390%.

Netflix Inc. has increased 23 times since its IPO in 2002. Tesla Inc. has increased 13 times since its IPO in 2010. Google (now Alphabet Inc.) has increased 27 times since its IPO in 2004. And among the shares Canadians, Shopify Inc. has increased more than 15 times from its IPO price of US $ 17 in 2015.

Yes, these are successful success stories that stand out from over 1,300 technology IPOs in the United States over the past 20 years.

But they have several things in common. Companies have emerged with competitive advantages: Facebook, for example, enjoyed a near-monopoly. They adapted to the changes: Netflix started as a DVD rental service. And everyone debuted with low profitability or substantial losses, luring investors into a history of growth rather than maturity.

Can Uber join this elite group?

There are certainly many things to worry about. Uber's revenue growth was only 2% in the fourth quarter, which raises doubts about the company's ability to discontinue automobile transportation. He lowered tariffs in Latin America to repel competition and his battle for market share with rival Lyft Inc. – which completed its listing on the stock exchange in March – weighed on US margins.

And yes, Uber is losing a lot of money – US $ 1.8 billion in 2018 alone.

This fits into a worrying trend. According to Jay Ritter, university professor at the University of Florida following the IPOs, only 16% of the technological IPOs in 2018 were profitable companies. This marks the lowest percentage since the peak of the dot-com bubble in 1999 and 2000.

There is no doubt, therefore, that Uber is probably not suitable for risk-averse investors.

But it's a bullish case here. First, comparisons with the dot-com bubble are only nowhere near. Twenty years ago, a fragile concept was enough to attract a huge attention in the stock market, as evidenced by the fact that in 1999 alone there were 370 technological IPOs in the United States, according to Mr. Ritter's data. In 2018 there were only 38 technological IPOs.

The story continues under the publicity

In terms of valuations, the newly quoted shares debuted in 1999 with an average price / sales ratio of 43. In 2018, the average ratio was 11.3 (and the Uber IPO set the stock price about six times last week).

Furthermore, Uber is at the center of one of the most exciting developments in the transport sector. Although the company is best known for its disruptive influence on the taxi industry, it could revolutionize our approach to car ownership if autonomous electric vehicles take over and commuters start using Uber services.

Does this make Uber a crash? It's not way. But if you wait for the company to be profitable, then – like Facebook, Amazon.com and Google – the big gains will be in the past performance rankings rather than in your portfolio.

Meanwhile, Uber's share price is returning: it has gathered almost 12% in the last two days.

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