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Don’t Hop Into A Ride-Hail IPO

With the recent announcement of Lyft’s initial public offering and Uber’s IPO expected to follow sometime this year, many investors are lining up to climb aboard. But investors should not be too hasty to jump into ride-hailing services.

Lyft Inc. has filed paperwork that indicates the company will raise as much as $100 million in its IPO. The company’s revenue reached $2.2 billion in 2018, but its losses climbed too, to $911 million. CNN reported that Lyft has opted for a dual-class share structure that concentrates power with the company’s co-founders, giving new investors less say in how the company will be run. Many observers suspect that the details of Lyft’s IPO will foreshadow Uber Technologies Inc.’s forthcoming offering.

While I have never used Lyft myself, I am a regular Uber customer. Ride-hailing apps have made ground transportation easier, both when you’re away from home and in situations where driving yourself is impractical or impossible. However, it is important to separate how you feel about the company’s service or product as a customer from how you view it as a potential investor.

Uber’s share price is almost certain to start high. Its potential IPO valuation has been projected as high as $120 billion, The Wall Street Journal reported. Many IPOs are priced with an intentional built-in “pop”: a significant jump in price immediately after the shares go public. As I have observed in the past, however, such a pop does not represent free money. It arises from companies deliberately leaving money on the table when they go public. Whether Uber (or Lyft) will follow this convention remains to be seen.

Yet the real concern for investors should not be an IPO pop or lack thereof. Instead, they should focus on the company’s long-term prospects.

Like many other tech startups, Uber has long emphasized growth over profits. Data the company voluntarily released in February indicates that Uber lost $1.8 billion last year; excluding a one-time gain from the sale of unprofitable businesses in Russia and Southeast Asia, that loss grows to $3.3 billion. While Uber could be profitable someday, it is not at all clear if or when that will happen. As Shira Ovide wrote in an opinion column for Bloomberg, “Lyft and Uber can be widely popular and transportation-changing phenomenons but still might not be financially sustainable.”

While Uber’s appeal to customers is obvious, its risks to investors are equally so. Although Uber is the dominant player in the ride-hailing space, it still faces serious competition, primarily from Lyft. Traditional taxis still trail both, but they are making moves to catch up in many places. Some have launched their own apps, while others work with services like Curb, which connect riders to traditional taxi services rather than individual drivers. Uber remains the market leader by far, but its position is not unassailable. People also have the option of not taking rides at all; given how relatively new ride-hailing services are, we have yet to see how they perform in an economic downturn, for instance.

Uber seems eager to set itself apart from the competition through technology, especially self-driving cars. While Lyft and others are also pursuing this goal, Uber has tried to get out in front where autonomous vehicles are concerned. Uber CEO Dara Khosrowshahi has said that the company wants to be “the Amazon of transportation,” moving people and things from point A to point B through a variety of means (potentially including flying cars). Autonomous vehicles, though, are the most probable next step, and Uber has invested heavily in development and testing.

It seems likely that self-driving cars are coming to the roads one day, but how close are we? Uber faced a major backlash after an autonomous vehicle struck and killed a pedestrian in Arizona in March 2018. In December, Uber quietly resumed road tests in Pittsburgh, with potential testing in San Francisco and Toronto to follow. Even the CEO of Waymo, currently the leader in self-driving car development, recently conceded that we are decades away from widespread self-driving cars and that they are unlikely to perform under all weather conditions. This doesn’t mean that Uber’s interest in technology is inherently a problem, but it does mean that it is unlikely to prove the key to near-term profitability.

The biggest issue that should give investors pause is Uber’s existing business model. Part of the reason Uber has dominated until now is that it has subsidized prices in pursuit of market share. Uber’s leaders have always been open about the fact that its low prices were intended to be temporary. Yet it is not at all clear why riders will stick with Uber if those low prices go away. In a place like an airport, with many ride-hailing companies and taxi services to choose from, Uber’s low fares currently give it an edge. But if Uber removes its subsidized prices, will customers stay loyal to the service? And if Uber continues subsidizing prices to keep customers, how will the company become profitable?

I am not suggesting that Uber, or Lyft, is necessarily a bad investment. Either company, or both, may work out how to thrive. But I am saying that most individual investors should be wary of jumping into an IPO, even for a company whose services they like, when the road to profitability is not at all clear.

Vice President and Chief Investment Officer Paul Jacobs, of our Atlanta office, contributed several chapters to our firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 12, “Retirement Plans;” Chapter 15, “Investment Approaches and Philosophy;” and Chapter 19, “A Second Act: Starting a New Venture.”

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