Uber (UBER - Free Report) shares plummeted to a new low today as pre-IPO investors were allowed to sell the stock for the first time since its public debut. The ride sharing company’s shares were down more than 8% at one point in intraday trading, as roughly 90% of Uber’s stock is available for sale for the first time today.
This rough patch for the young company comes after hitting a previous low on Tuesday after it reported its third quarter results that left Wall Street unamused. Volatility has plagued Uber since its May IPO, which has many investors wondering when and if things will ever turnaround.
Lockout Expiration Complicates Things Further
On Tuesday, UBER dropped over 10% after failing to provide third quarter results that assured investors, and with the lockout period ending for pre-IPO investors, Uber’s stock continues to get pummeled. Despite reporting top and bottom-lines that beat estimates, Uber’s stock took a hit as the company reported over $1 billion in net losses. Uber shares closed at $28.02 Tuesday, down nearly 40% since the IPO, as slower growth on several key metrics including bookings and user growth hurt investor confidence.
A large selloff after the end of a lockup period isn’t uncommon as some early investors seek to cash out while some sell due to concerns about a wave of shares hitting the market. Even after a strong post-IPO performance, stocks are sometimes not safe from a sell off; Pinterest (PINS) saw its shares dip 5% the week its lockup ended despite seeing post-IPO gains.
However, despite its non-assuring Q3 results, the turbulence felt on Wednesday was not as bad as it could have been. Uber’s CEO, Dara Khosrowshahi, stated that he had held an open dialogue with some of the company’s early investors who hold substantial amounts of shares in the company, and reported that they expressed their intention to hold shares after the lockup period ended.
A reason for early Uber investors like Morgan Stanley (MS - Free Report) , SoftBank (SFTBY - Free Report) , and Fidelity (FIS - Free Report) choosing to hold onto their shares may be because of the loss that Uber shares have endured since its $45 IPO. The incentive for shareholders to sell shares of the company aren’t exactly high if they wouldn’t be getting back the amount they originally paid for. Additionally, the staggering losses bring on one question: when will the company finally capture the profits that have eluded them thus far?
Is Profitability on the Horizon?
Khosrowshahi stated this week, "We're not counting on rationalization near term in Q4, but we do think that all of these markets need to rationalize." His comment acknowledges that the faulty unit economics the company utilized in order to upend competition has drastically weighed on the business’ efficiency.
The continued need to subsidize both riders and drivers in order to compete with rival ride sharing company, Lyft (LYFT - Free Report) , is a large contributor to the $1 billion Uber reported in net losses in Q3. Uber and Lyft have now each laid out a timeline to profitability on an adjusted EBITDA basis, with Lyft targeting Q4 2021 and Uber shooting for full-year 2021.
However, to ultimately reach the 2021 goal, Uber will have to undergo drastic cuts and financial restructuring. Uber drivers who currently often find themselves working for the company for an unlivable wage, especially in market’s with high living expenses, will likely take the brunt of the cutbacks.
Both Uber and Lyft are facing regulatory pressure regarding the compensation of their drivers, and if they lose the legal battle, fares could rise 20%-30% in certain areas. Raising fares then brings on resistance from riders who are used to paying the low rates that the company offered in its pursuit of growth.
Uber continues to feel the heat as the public market isn’t impressed with the ride sharing company’s performance thus far. Despite Uber hitting a new low Wednesday, it so far has avoided what can be a catastrophic sell off. The company now faces the challenge of keeping its promise of reaching profitable levels in 2021 which will require a restructuring that could potentially force the business to forfeit market share to its competitors.
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