Uber’s IPO is the most hotly anticipated since Facebook’s IPO in 2012. Are you up for the ride?
Think carefully before you decide to hop onboard. In recent months, financial experts have been listing the issues retail investors, especially newcomers to IPOs, should be aware of. Chief among them: Uber is losing money. Buckle up: In 2018, Uber UBER, -1.00% reported an operating loss of $3 billion on revenue of $11.3 billion, and its accumulated deficit reached nearly $8 billion at the end of last year.
1. Investing in Uber sounds like a no-brainer, right? Wrong
That may take the shine off this IPO as a sure thing for many first-time investors. MarketWatch columnist Howard Gold advises caution: “For individual investors who may be tempted by these shiny objects in hopes they’ll be the next Amazon AMZN, -1.38% or Alphabet GOOG, -0.62% I have one word of advice: Don’t. Most of these new companies are bleeding red ink by the billions. It will take years for them to get into the black — if they ever become profitable at all.”
Uber’s shares will be priced at $45. Consider this: Shares of Uber’s rideshare competitor Lyft LYFT, -3.61% are down almost 30% since the company went public in March. Uber plans to raise more than $8 billion, and that would make it the biggest U.S. IPO since Facebook FB, -0.81% which raised $16 billion in an IPO in 2012. The Chinese e-commerce conglomerate, Alibaba BABA, -1.59% had the biggest IPO ever in 2010, initially raising $21.8 billion in 2014, increasing to $25 billion after issuing an additional 48 million shares.
2. Many investors believe they should invest in what they know
Some novice investors may think they know Uber. Actually, they don’t. Knowing the brand and knowing the investment risks and rewards are two different things, said Monica Dwyer, vice president, wealth advisor at Harvest Financial Advisors in West Chester, Ohio. “People will invest in the things they know,” she said. But familiarity with the brand and emotion are not the best reasons to make an investment, she said.
Dwyer said her firm never invests client money in IPOs. Advisers at her firm would give it at least three years before putting money in a new company, and even then it’s not likely, she said. “For IPOs, you’re flying blind.” Eric Walters, the managing partner and founder at SilverCrest Wealth Planning in Greenwood Village, Colo., advises waiting one year. Of course, some IPOs take off. Facebook’s stock has soared in the seven years its been a public company and Beyond Meat BYND, -2.15% shares have increased 240% since the company’s IPO earlier this month.
3. The smartest investors have already made the big bucks
Friday likely won’t be your pay day, said T.J. van Gerven, the founder of Modern Wealth Builders in Woburn, Mass. He said people planning to invest in Uber on Friday should temper their expectations. Those who are most likely to make oodles of cash, should the IPO be successful, are the venture capital investors, executives and financial institutions who have already gotten in on the ground floor, investing in Uber when it was a public company.
It’s unlikely to work out that way for everyone else. “If you think you’ll buy Uber and Lyft and hold it, get ready for an extremely bumpy ride,” he said. Likewise, Walters said the first year is typically tough for companies that are fresh to the financial markets. “Historically, most IPOs do poorly in their first 12 months because of the significant selling pressure from corporate insiders, venture capital, and private equity investors who are looking to liquidate their illiquid holdings,” he said.
4. It’s hard for retail investors to buy shares at the IPO price
While smaller or individual investors are finding it easier to buy IPO shares through online brokerage firms, they may still find it difficult to buy IPO shares, according to the Securities and Exchange Commission. “Most underwriters target institutional or wealthy investors in IPO distributions,” it says. “Underwriters believe that institutional and wealthy investors are better able to buy large blocks of IPO shares, assume the financial risk, and hold the investment for the long term.”
“When an IPO is ‘hot,’ appealing to many investors, the demand for the securities far exceeds the supply of shares. The excess demand can only be satisfied once trading in the IPO shares begins. It is unclear how ‘hot’ the offering will be until close to the time when the shares start trading. Since ‘hot’ IPOs are in high demand, underwriters usually offer those shares to their most valued clients, the SEC adds. It describes IPOs as “risky and speculative.”
5. Unhappy taxi and rideshare workers can easily drop tools
Two days before Ubers IPO, thousands of rideshare drivers across America embarked on a day of strikes and rallies to protest their slim pay as the company’s founders, executives and investors are poised to make loads of money going public. But these drivers are bucking 50-year trend: The Bureau of Labor Statistics has long been counting work stoppages, which include strikes and lock outs. In 1969, there were 412 work stoppages involving at least 1,000 workers, the agency said. In 2018, there were just 20 — and that was a jump from 7 stoppages the year before.
Some argue that the biggest risk for Uber investors is the political clout of labor unions representing drivers. “Uber’s biggest obstacle has been politicians beholden to labor unions and industry incumbents,” according to an editorial in The Wall Street Journal published Thursday. “Taxi cartels have pushed local governments to restrain Uber. Members of San Francisco’s Board of Supervisors recently proposed a surcharge on ride-sharing trips. New York City has capped new licenses for on-demand cars. Seattle tried to let drivers collectively bargain but was blocked in court.”
If you don’t invest in Uber, what should you be doing with your money instead? Eat your veggies. Van Gerven likens investment choices to the food pyramid that advises a steady diet of whole grains and vegetables, with a sparing amount of fats and sweets at the top. Similarly, retail investors should focus on low-cost, diversified mutual funds and ETFs, he said. Take advantage of your employer’s 401(k) match if you are fortunate enough to have one. Stock picking is like dessert, he said. “If you want to speculate a little, that’s fine,” he said. But cover your basics.
(Quentin Fottrell contributed to this story.)
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