About IPOs or why you should not care that UBER wiped off $15bn in 2 days
“Capitalism desacralizes everything, robs the world of wonder, and leaves it as nothing more than a vulgar market. The fastest way to cheapen anything — be it a woman, a favor, or a work of art — is to put a price tag on it” (Chaos Monkeys)
Lyft, Zoom, Pinterest and now Uber — everyone seems to be IPO-ing these days. And you will rarely see more press about a company than around the IPO date. Uber is the last example of that with extensive coverage of thousand reasons it closed in minus on the first day. But what are IPOs, why companies do them, and what does a bad start mean?
IP…what?
“On the IPO day, Uber sold 180m shares at $45 each on Thursday, raising $8.1bn in fresh capital and valuing the company at $82.2bn on a fully diluted basis.“ Let’s digest that sentence!
First of all, by IPO, it’s meant an Initial Public Offering, or in simpler terms, the company got listed on a stock exchange. From that day on, anyone with a trading account can buy or sell stocks. This is an especially big day for employees and management who earned stocks in the company and can finally cash it out. Ryan Graves can now finally cash out $1.4bn and win the prize for the highest value tweet in history.
Secondly, in this process the company fundraised $8bn of capital. It all happened without long negotiations and contract signing, unlike in a traditional VC round. In the hectic hours of post-IPO price volatility the world seems to be forgetting about the fundraising part, but it’s an important one and we’ll get back to that.
Thirdly, being a listed company is an entirely different animal than staying private. When the stocks are available for purchase to your uncle & aunt, the regulator (SEC in this case) becomes more vigilant and requires a lot more transparency. Being a listed company can be a hassle for a smaller company or a extrovert techie CEO (aka Elon), but the same rules followed by Coca Cola, Nike or Chevron will apply to them. Another perk or curse comes from the simple formula “share price x nr of share=market cap”. Anyone can at anytime calculate the “market value” of your company, which can be good if everything runs smoothly, but can attract a lot of troubles in bad times (hostile takeover is a good example).
Bad start?
Speaking of bad days… It looks like Uber had a really bad start in the new “school”. The company lost close to $15bn market value in 2 days — which is more than what it has raised. Sound like a pretty disastrous start, right?!
Well, if you were one of the investors in the IPO, hoping to make a quick buck, you are not happy, but here is why this is not necessarily the end of the world for Uber.
Let’s get back to the fundraising discussion: Uber raised $8bn in cash. Period! The company value on the market can go up and down, we might even get another dot-com bubble (fun fact: see how Google’s funding rounds were conveniently timed just before the dot-com bust), but Uber will have this cash in their vaults regardless.
Also, dont forget that Uber sold those $8bn-worth of stocks at $45 a share, which is better than any trader so far. Had they IPOd at a more “correct value” of $37 a share, it would have led to $1.4bn less in funding. So think of that before you start trashing them for a mistimed or misthougth IPO.
One more thing to be said is: IPO syndicate underwriters. I know, too many long words in a row. Long story short: all those $8bn-worth of stock at $45 a share were underwritten (read: bought in advance) by banks who passed them onto institutional investors. Those are the losers of first post-IPO days.
What’s next: A Facebook or a Snapchat?
Ironically, the Facebook’s public market history started almost in the similar way, with a market bloodbath. And the short term conclusions were quite similar. The question is what happens over long term?!
Here IPO details are less of use and this is when you focus on fundamentals. Few could predict that Facebook would execute the shift to mobile so flawlessly, as well as become an ad platform. Fast forward to 2019 and the company is worth almost 3 times more, even with the largest user data privacy scandal in history.
There is also the story of Snapchat, that never quite recovered from last year’s price slide. The reason is again more fundamental than technical: Snapchat failed to show both solid user or revenue growth.
And here comes my question to you: on which Wall Street path do you see for Uber going in the future?
Is it a Facebook of 2013 with all the right moves? Or maybe a Snapchat of 2018 failing to beat Instagram? Could it follow the path of Amazon, managing to grow every year despite all analysts’ expectations? Only time will tell and in the meantime we’ll just have to wait and see.
