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Hubert Horan: Will the “Train Wreck” Uber/Lyft IPOs Finally Change the Public Narrative About Ridesharing?

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Via Naked Capitalism

By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants

Long time readers of the Naked Capitalism series know that much of the evidence and explanation for points mentioned below are found in earlier parts of the series or in my 2017 Transportation Law Journal article, [1] The NC and TLJ material, which now runs to over 100,000 words, provides the detailed documentation of Uber’s lack of competitive economics and the origins and early success of its propaganda/narrative based public communication approach.

Readers looking for a more manageable (a mere 9,000 words!) overview of the central issues should see “Uber’s Path of Destruction” which I have just published at the American Affairs Journal.[2] That article does not include any material that long-time NC readers won’t have already seen, but it should provide a better introduction to Uber for people who have not painfully waded through what I have published over the last four years.

The stock market valued Uber and Lyft at roughly half of what their owners and bankers were expecting

The path to the recent IPOs was triggered by the 2017 rebellion of Uber Board members frustrated by their inability to covert the paper gains on their investments into real money. Uber CEO Travis Kalanick, who knew that Uber was not ready to face full capital market scrutiny, was replaced by Dara Khosrowshahi, who promised an IPO by the end of 2019, and was promised a $100 million bonus if the IPO achieved a valuation of $120 billion.[3]

Khosrowshahi’s plans for a 4thQuarter 2019 IPO were upended at the end of last year when Lyft announced that it would go public early in the 1stQuarter. Lyft hoped that going first would give it an advantage over Uber and other expected 2019 IPOs. Uber immediately accelerated its own filing process but would not be able to beat Lyft to the market.

Companies seeking these types of stratospheric IPO valuations need to make powerful cases that their core business is not only capable of producing years of robust profits, but that profitable expansion into a range of  other businesses will fuel even greater rates of growth. Lyft laid out its investment case in its IPO S-1 prospectus on March 1st[4] which provided the first public documentation of its huge losses. Lyft’s S-1 made no attempt to explain how the ridesharing business could ever be profitable for anyone, much less how it could covert billion-dollar losses into years of sustainable profits in the face of competition from a much larger Uber.

Lyft began trading on March 29th. After claiming that its public placement was hugely oversubscribed, Lyft raised its offering price from $65 to $72 per share (targeting a $25 billion valuation) and generated about $2.3 billion in new investment. By design the price popped another 20% (to $87.24) immediately after trading began. This allowed favored insiders to capture huge artificial profits, and for one minute Lyft was valued at $30 billion, double its last private valuation.

But Lyft’s value fell 10% that afternoon, and continued to decline as shorts borrowed a half-billion dollars to bet against the stock. It reached a low of $47 on May 13th, after it reported poor 1stQuarter results, a 45% decline from its first day high, although it has been mostly trading in the mid-$50 range since early April. Mainstream news coverage of the Lyft IPO did not directly address whether it had failed badly versus expectations, but the factual points highlighted (e.g. “Lyft’s Stock Drops Below I.P.O. Price in Second Day of Trading”,  ”Lyft falls to fresh low, extending its post-IPO plunge to 35%”) left no doubt that it had.

When Uber’s released its S-1 on April 9th; the public was already aware of its multi-billion dollar losses, but Uber attempted to obscure the exact magnitude by misrepresenting paper gains from untradeable securities as profits from ongoing car service operations.[5] Its primary pitch to investors was the wholly unsubstantiated assertion that it could become the “Amazon of Transportation” and that it had incredible growth potential because to date it had only penetrated 1% of its total addressable market. As one observer noted, that  market definition (transport plus food delivery) included nearly 10% of global GDP.[6]

Given Lyft’s terrible performance, Uber abandoned its original $120 billion valuation objective. As it began its roadshow, it announced a $90 billion target ($55 per share) designed to raise over $10 billion in new investment. Despite claims that the offering was oversubscribed three times over, it later cut the offering price down to $45.

When trading began on May 9th, Uber shares not only failed to get the initial price pop its investment banks were supposed to engineer, but they opened at $42, and steadily declined down to a low of $36. This meant that over 80% of the $29.5 billion invested in Uber over time was now underwater. Uber’s 2015 investors had lost 15% over a period when the S&P 500 rose 50%.  Given the lower price, Uber raised $2 billion less new capital than expected.

Press coverage of the Uber IPO explicitly acknowledged that it had been a “train wreck.” Vanity Fair’s headline said “Uber’s Colossal IPO Flop May Be the Worst Ever on Wall Street” while Gizmodo had no doubt that it was “The Worst Performing IPO in US Stock Market History.” Uber’s value had fallen roughly 35% from its mid-April target, and 50% from what Uber and their investment bankers said the value was at the beginning of the year.

Since they created roughly $80 billion in corporate value out of thin air, these “train wreck” IPO results were actually an unprecedented achievement

As this series has discussed at length, Uber and Lyft were seeking to create huge corporate value and private wealth out of thin air. Neither company has any hope of achieving sustainable profits in competitive ridesharing markets as neither can produce their service at costs consumers are willing to pay. There is no evidence that they can ever profitably expand to any other markets (food delivery, driverless cars, etc.). Losses and cash drains are far worse than any previous Silicon Valley funded startup, and these companies have none of the economic characteristics that allowed companies like Amazon or Facebook to quickly grow into profitability and drive strong public equity appreciation.

These IPO results were obviously not the best case outcome for prior investors who were seeking roughly $145 billion ($120bn Uber, $25bn Lyft). But relative to Uber and Lyft’s actual (nonexistent) economic fundamentals getting independent investors to buy stock at prices that yield a combined valuation of $80 billion ($65bn Uber, $15bn Lyft) seems to be amazing accomplishment. The qualification is necessary since final judgements about the value created will need to wait until after the SEC mandated six month lockup period for pre-IPO shares expires (end of September for Lyft; early November for Uber).

Another obvious caveat is that this is not a positive accomplishment. From society’s standpoint it represents a massive misallocation of resources that significantly reduces overall economic welfare and raises troubling questions about the workings of capital markets. But it is an important and unprecedented accomplishment.

Uber and Lyft have spent nine years evading and actively subverting competitive market discipline

In a more ideal world the link between corporate value and economic fundamentals is (loosely) enforced by competitive capital and consumer markets. In order to allocate resources efficiently those markets depend on information about efficiency and other economic fundamentals (e.g., prices, financial results, investment requirements, media reports about company strategies and performance) being reasonably accurate.

Building a company with strong fundamentals and strong potential for long-term profitability is extremely hard. Uber is the breakthrough case of a company that skipped the difficult process of finding legitimate efficiency advantages, and used tens of billions in predator investor subsidies to fuel its rapid growth. These subsidies distorted normal price signals which in turn subverted the ability of consumers to allocate resources to the most efficient competitors.

This also subverted capital markets, as these artificial subsidies also exploited the myopic focus of Silicon Valley venture capitalist on top-line growth.  While certain types of tech startups had used rapid early growth as a path to profitability, Uber insisted that its subsidy-fueled growth was actually evidence of powerful Amazon/Facebook-type scale and network economies that it did not actually have.

Remaining private for nine years created further distortions. Uber and Lyft could easily raise money from tech oriented investors obsessed with rapid revenue growth, which allowed them to avoid capital markets discipline based on public information about actual economic performance. And there wasn’t any way for the private investors to mark their investments to any actual market valuation.

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As one observer noted, Uber and Lyft spent nine years living in “the Enchanted Forest of the Unicorns.”[7] In the Enchanted Forest, your corporate value is whatever you say it is, and there are no independent investors who can wager money that you are wrong. In the Enchanted Forest, there are no audited financials that would allow anyone to challenge your narratives claiming your growth was driven by technology-driven efficiencies and powerful network economies.

Alas, Uber and Lyft could not remain in the Enchanted Forest forever, although that was what former Uber CEO Travis Kalanick wanted to do. So The Uber Board sacked Kalanick and hired a new CEO who promised to deliver the Enchanted Forest caliber returns they felt they were entitled to.

In addition to the general desire to cash in their paper gains, the 2017 Uber board rebellion was driven by conflicts between early investors, and post-2015 investors (including Saudi Arabia’s Public Investment Fund, Vanguard and T. Rowe Price) who had paid much higher prices for their shares. For all prior investors to at least break even, Uber needed an IPO valuation of roughly $90 billion. The $120 billion target that the Board gave Khosrowshahi was the valuation that would have provide healthy returns for all prior investors.[8] The two investment banks bidding for Uber’s IPO work (including Morgan Stanley, which won the work) recognized the Board’s expectations and both publically claimed Uber was actually worth $120 billion.[9]

Uber and Lyft’s owners seemed to have understood that the IPO was their last best chance to realize large payments for their shares before the markets began to recognize their real value. There is no evidence any prior investors bought shares at the IPO price, so apparently none of them expected strong future equity appreciation above that price. If the owners thought rapid, dramatic near-term profit improvement was likely they would have delayed the IPOs. One can raise a lot more money after demonstrating strong profit improvements than after reporting annual losses of $3 billion (Uber) and $1 billion (Lyft).

Much of the Uber/ridesharing story can be seen as a battle between perceptions based on the artificial, manufactured narratives that the media has embraced, and perceptions based on economic/financial evidence.

The narratives Uber has successfully manufactured are the key to how $80 billion was created out of thin air and key to the subversion of the market discipline that would normally limit these resource misallocations and welfare losses.

Uber is the breakthrough case where the propaganda-type narratives that dominate partisan political coverage successfully developed a multi-billion dollar private company from scratch. Uber not only manufactured powerful narratives, but deftly manipulated the mainstream business and tech industry press into endorsing and promulgating them, and ignoring all of the economic evidence contradicting them.[10]

Few, if any of Uber’s narrative claims were objectively true. Hype about powerful, cutting edge technological innovations that could overwhelm incumbents in any market worldwide helped hide the fact that Uber was actually higher cost and less efficient than the operators it had driven out of business. Stories about customers freely choosing its superior products in competitive markets helped hide Uber’s use of massive subsidies to subvert market price signals and mislead investors about its growth economics. Misleading accounts about driver pay and working conditions helped hide the fact that most margin improvement was due to driving driver take-home pay down to minimum wage levels.

Uber was never going to dominate driverless cars and displace private car ownership, but these tales created false impressions about robust long-term growth. But all of these claims were uncritically repeated in the mainstream media, and over time they shaped the powerful general perception that Uber was “successful, efficient and highly valuable.”

The formula Uber used to build powerful, effective narratives was copied directly from what is widely used in partisan political battles. It combines significant resources (money and communication channels), the emotive, us-versus-them propaganda-style techniques demonstrated to be effective, and (Travis Kalanick’s contribution,) the willingness to deploy them in a ruthless, monomaniacal manner. The formula is especially effective when the interests that might disagree or challenge those claims were significantly less organized or funded.[11] 

The effectiveness of Uber’s storytelling critically depended on having them endorsed and repeated by seemingly independent voices in the elite, mainstream media. Having the technology reporters for multiple national publications tell readers that Uber’s growth has been driven by the technology in its great app was far more powerful than a report that passively quotes an Uber executive’s assertion that its growth was driven by its cutting edge technology.

This type of narrative promulgation directly exploits the erosion of journalism standards. It is far easier for a reporter to repeat a pre-packaged spiel about heroic disruption than to independently research the competitive economics of the industry being disrupted.

Uber was able to trade favorable stories for access to insiders, and took advantage of reporters who had adopted some of the biases and ideological preferences of the tech industry and the Silicon Valley finance worlds they covered. Most media outlets also proactively conceal that many sources are paid advocates for well financed corporate or political interests, giving their claims much more credibility in the eyes of readers. This allows journalists to present themselves as impartial arbiters of dispassionate experts, rather than note takers for powerful companies who have spent millions to push manufactured narratives.

The mainstream media’s IPO coverage illustrates these media biases and the residual power of  Uber’s “successful, efficient and hugely valuable” narratives

The coverage of these IPOs illustrates many of the journalism problems Uber was able to exploit over the years and the residual power of the narrative-driven perception that Uber is “successful, efficient, and highly valuable.”

Prior to the IPO, mainstream stories never challenged conventional wisdom, either through independent analysis of the valuation issues, or by presenting a range of differing views. Even after the IPO results demonstrated that the prior coverage and consensus of experts had been badly wrong, the media simply doubled down, quoting the same experts making the same narrative claims, with no attempt to consider alternate views, or to undertake new analysis of what had changed.

The vast majority of pre-IPO press coverage gave readers the sense that market observers believed that Uber and Lyft were very valuable companies, and that the IPOs would succeed. Dozens of stories in the mainstream press uncritically repeated Uber/Lyft talking points. A few reporters appeared dubious, and filed stories highlighting that neither company was profitable and noting the risk factors mentioned in the S-1s. But neither these (nor any other stories) ever raised the possibility that the IPOs might fall short of expectations.  Other stories not only took success as a given, but described the spectacular returns existing investors would make, and how all the newly minted millionaires would affect the San Francisco housing market.

The “companies highly valuable/everyone expecting IPO to succeed” emphasis in the mainstream business and tech industry press was amplified by even more positive stories on cable TV channels and websites dedicated to promoting stock sales, where journalism standards are especially low. These articles highlighted the optimistic views of “analysts” who worked for firms that actively promoted IPOs, without ever presenting any contrary views or disclosing the financial interests of the analysts. CNBC’s Jim Cramer told his audience “you want as much Lyft as you can get” and predicted that a post-IPO Lyft surge would bring huge numbers of investors back into the market.[12]

Outside the mainstream one could find numerous articles critical of Uber/Lyft claims and their lack of business fundamentals. These included observers who thought that there was a huge, dangerous “tech bubble”, or who thought that years of private control had eliminated most future appreciation potential, or who thought Silicon Valley venture capital had become totally unhinged from reality, or who thought that years of artificially low interest rates had destroyed the market’s ability to evaluate business risk, or who had actually discovered how vacuous Uber and Lyft’s S-1 claims were. These minority views were available to investors doing very diligent research, but these observers were never quoted in the New York Times or the Wall Street Journal, much less CNN or CNBC.

The press reported the actual IPO results accurately. But it has largely ignored the obvious questions these results would raise with readers, and continued to ignore anything related to underlying economics. Just as pre-IPO coverage had ignored basic valuation questions (what was the basis for investors’ expectations of future profits and equity appreciation?), the post-IPO coverage refused to examine why the expert conventional wisdom the press had described was so badly wrong, and why the gap between the company/banker valuation and the market’s valuation had been so large. Instead these media outlets published a slew of new articles relying on the same narrative and the same experts, suggesting they were in a state of denial about the actual results.

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One category of article includes little but rah-rah cheerleading (“Uber’s Best Days Are Ahead” and “Uber Is In It For the Long Haul, NYSE President Says” (both at Bloomberg)) or unexplained assertions that initial results are just noise, and markets will quickly readjust to the conventional wisdom (“Uber’s Terrible First Day Might Not Matter At All” (Vox) “Lyft’s IPO Failure Has Been Greatly Exaggerated (Motley Fool) “Sorry Bears, Uber’s Bad IPO has Nothing to do With The Company’s Future Success” (Market Watch)). Many of these emphasize that Facebook’s IPO also stumbled out of the gate, while ignoring the fact that Uber and Lyft have none of characteristics that allowed Facebook’s value to quickly recover.

Another category mindlessly repeated prior PR claims without any attempt to explain why the people actually investing in these stocks were too stupid to believe them (“Lyft’s IPO: Disruption is Coming and the Investors Are Prepared to Wait” (Forbes) “Why Uber May Still Be Worth $100 Billion Even After Its Embarrassing IPO” (Yahoo Finance) “Uber Eats Could Fuel a Post-IPO Stock Rebound”(Fortune) “Uber Will Become profitable by 2024 Analyst Mogharabi Says” (Bloomberg)). Readers of this series may recall that Mogharabi was the Morningstar analyst who published willfully dishonest Uber valuation claims based entirely on arbitrary multi-billion dollar spreadsheet P&L plugs.[13]

Some tried to assure readers Uber really did have a path to profitability (“Uber Isn’t Screwed, There Are Tons of Ways it Could Become a Profitable Monster” (Business Insider), “Uber’s Three Paths to Becoming Profitable” (The Information)). but all of the paths involved pie-in-the-sky prospects (sell data or advertising) the author knew nothing about, or ideas (raise prices, cut service, cut driver wages) that would directly reduce growth and customer support, or proposals for an Uber-Lyft merger that are clearly financially (and probably politically) infeasible. Absolutely no one considered the possibility that Uber didn’t have a path to profitability.

Numerous articles recognized the gap between expectations and reality but emphasized excuses designed to exonerate management. One (“Uber IPO Stalled Out, Caught in Perfect Storm” (Axios)) focused on unforeseeable bad luck the day of the IPO. The article actually suggested that Donald Trump might have deliberately timed announcements about Chinese tariffs just to hurt the Uber IPO, and that events in Venezuela and North Korea had seriously suppressed demand for ridesharing stocks. Even though none of those events hurt the overall stock market, which was up at the end of the day.

A major story in the New York Times [14] documents the original Khosrowshahi/Morgan Stanley agreement on a $120 billion valuation objective, but then absurdly claims that neither could have foreseen at that time the problems that caused the value to collapse. Softbank and Didi have been aggressively expanding for years, but the article claims that no one could have predicted they might invest in Asian and Latin America markets Uber might have been interested in. The IPO revealed that all of the investment houses interested in ridesharing had already invested, and none wanted to make new investments at higher prices; the article suggests that neither Uber nor the investment bank responsible for drumming up IPO interest could have possibly been aware that years of private funding rounds might reduce the demand for a public placement. The article includes the China tariff excuse and even cites Uber’s huge losses, slowing market growth, and Lyft’s ongoing losses as things that no one involved with the IPO could have imagined affecting its ability to achieve a $120 billion valuation.

This IPO coverage also illustrates the widespread media tendency to tell what readers what they ought to think, instead of laying out competing evidence or opinions that might allow readers to reach their own conclusions. Instead of laying out factors that might cause the IPO to do well or do poorly, most reports cherry-picked quotes that consistent with their pre-established conclusions. Reporters who believe they know what the right answer is will tend to only present one side of the story, fail to disclose the financial interests of quoted experts and will present opinions as if they were factual evidence.

In the past, Uber had proactively driven most of its favorable news coverage, but the pro-Uber slant of IPO coverage seems to have been almost entirely an expression of the views of the media outlets themselves. Throughout the IPO process what has surprised me most is that Uber’s powerful PR machinery seemed to be missing in action. Given the huge importance of the IPO to Uber’s owners, I expected to see a flood of messages targeted at different classes of investors or different parts of the financial press, and a range of articles written by outside experts explaining the company’s great outlook and why its stock would be a great investment opportunity. Instead, Uber’s public communication seemed to be limited to Khosrowshahi’s rare public appearances. Nobody at Uber could apparently come up with any arguments for the stock except becoming the Amazon of Transportation and only reaching 1% of our market potential so far, which appear targeted at the most gullible, unsophisticated people in the market. Public enthusiasm for these IPOs depended almost exclusively on the residual power of narratives developed many years ago.

The media’s refusal to ever revise or correct narrative claims makes them impervious to new, contrary evidence

As the IPO coverage illustrates, once the media has embraced a given narrative it will systematically ignore contrary evidence and steadfastly refuse to acknowledge that past reporting may have been incomplete or wrong. After reporting that Uber’s growth was driven by its cutting-edge technology, abundant evidence might emerge that Uber’s growth was actually driven by massive subsidies, regulatory arbitrage and other factors, and that the cited technology had no material impact on productivity or cost efficiency. But mainstream publications will almost never retract the original claim, or publish a new piece emphasizing the new evidence. Since readers see that the original narrative claims haven’t changed they get locked into conventional wisdom and become largely impervious to new evidence.

The mainstream press’ report of pre-IPO expectations was not the result of a serious survey of investors who had evaluated company data against valuation criteria. It simply reflected what most of the reporters (and their editors) personally expected. When actual IPO results were totally different from what they had told readers to expect, no stories even acknowledged the discrepancy. Instead there was an abundance of stories doubling down on the previous claims. The narrative we reported can’t be wrong; there must be a problem with reality. Admitting that prior reporting might have been wrong also requires admitting that they might have been played by sources that were being paid to manipulate media coverage.

The willful denial of new evidence is usually driven by the unwillingness to reconsider underlying beliefs or to avoid the implications of larger, more controversial issues. If a tech industry reporter’s coverage over the years has been based on the belief that Uber (despite flaws) is a great company that has used technology to hugely improve urban transportation, they may have difficulty recognizing that investors’ concerns about billions in cash burn might be a more important issue, or revising long held beliefs based on that evidence. Reporters who concentrate on Silicon Valley or IPO markets may find career options limited if their reports openly suggest that these fields include much that is wasteful and destructive.

It is unclear what might lead the media to abandon its embrace of the “Uber successful, efficient and highly valuable” narrative. $14 billion in losses in the last four years, pathetic S-1 prospectus claims and a “train wreck” IPO do not seem to have had much impact.

The conventional wisdom embodied in media-endorsed narratives can sometimes change quickly, but only if the change doesn’t threaten those deeper, underlying beliefs. Susan Fowler’s blog describing systemic sexual harassment at Uber triggered some of the most negative press coverage any company has ever experienced, and reversed the media narrative about Travis Kalanick overnight. But the media narrative that Uber was a successful, efficient and highly valuable company remained sacrosanct. None of the reporters suddenly focused on lawbreaking and misogyny at Uber were willing to even consider the possibility that Kalanick’s culture was an integral part of Uber’s horribly money losing, monomaniacal grow-at-all-costs business model. And there are abundant examples of media refusals to abandon narratives in the political world in the face of far more overwhelming new evidence (e.g. weapons of mass destruction).

The path forward may depend more on media narratives than marketplace changes

From a financial valuation standpoint, the question going forward is very simple: either Uber and Lyft have huge profit improvement and stock appreciation potential or they don’t. While there are many things the companies could do to make their P&Ls marginally less worse, I cannot imagine any near-term changes that would increase profitable growth enough to revive the stock price. If you review the hundreds of recent press articles, you will see that no one else has been able to come up with a remotely plausible path to sustainably profitable growth for these companies either.

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It is obviously too early to make a definitive judgement as to why the market valued Uber and Lyft the way they did. My working hypothesis is that there was a large number of investors who thought their value was much lower than conventional expectations, and another large number who though ridesharing was a great investment opportunity. I would argue that both groups were strongly influenced by Uber’s difficult-to-dislodge “successful, efficient and hugely valuable” narrative. The highly optimistic view is likely to erode as ongoing quarterly losses dash any hopes of a rapid stock price rebound. My guess is that negative investor opinion is primarily driven by a growing sense that the Silicon Valley venture capital tendency to focus myopically on growth while ignoring profitability is a major, exploitable market imperfection, and that the private companies who have been living in the Enchanted Forest of The Unicorns have lost the ability to understand how public markets might value companies. But this doesn’t seem to be based on analysis showing Uber and Lyft have no hope of sustainable future profits. It seems to reflect a sense that they are “successful, efficient and hugely valuable” but to the tune of perhaps $40-60 billion, not $80-100 billion value.

As peculiar as it seems, these companies—with a current combined value of $80 billion, who just raised $10 billion in fresh capital—might soon become zombie companies. Both have plenty of cash on hand, but neither has any path to sustainable profitability in their current form.  Both are also caught between a valuation rock and hard place. Things they might do to boost the P&L (raise prices, eliminate weak markets, kill driverless car investments) would destroy any notion that they were “growth companies.” If Uber actually made the investments needed to move towards becoming “the Amazon of Transportation”, their profit and cash flow problems would get dramatically worse. Both management teams are undoubtedly highly focused on the need to everything possible to keep the stock prices from collapsing further, but it is hard to imagine what major steps could be taken in the near-term that would reverse the growing IPO was a “train wreck” perception. If Dara Khosrowshahi was unable to make substantive improvements in Uber profitability in the 18 months prior to the IPO, he is unlikely to be able to do much during the balance of this year.

Decline seems inevitable. What remains to be seen is whether it comes quickly or slowly, or whether it comes gradually or suddenly. The media is likely to cling tenaciously to successful/valuable narratives, which may help prop up the stock for a while. The chance that we will suddenly see a spate of mainstream stories suggesting there might have been some serious flaws in all the pro-Uber reports over the last nine years are between zero and nil. At the moment, economic/financial evidence is still badly losing the battle against artificially manufactured narratives.

The media’s hand may be eventually forced by external factors that could place considerable downward pressure on these stock prices. There will be huge selling pressure after the six month lock-up periods end, given the unusually high percentage of pre-IPO shares, and investors and employees wanting to liquidate gains before prices fall further.

Another risk is the possible reemergence of the 2017 Uber Board civil war. Khosrowshahi’s hiring in September 2017 quelled the previous Board rebellion because he promised Enchanted Forest caliber returns to both the 80% of shareholders who are now totally underwater and the 20% who invested prior to 2015 that are merely unhappy. He obviously failed to do this and there’s little evidence that he took any of the major actions a stronger IPO would have required, such as developing compelling IPO sales pitches or strong 2018 P&L improvements that could be highlighted in the S-1 prospectus. One could argue that King Solomon would not have been able to accomplish those things either, but King Solomon would not have accepted a $45 million annual salary, plus huge payments for foregone Expedia bonuses plus the potential for bonuses up to $100 million unless he was willing to take bold action to produce the IPO results the Board was explicitly paying him to deliver.

Another external risk being closely monitored by investors is the potential for Jim Cramer’s worst fear, that the larger “tech IPO bubble” bursts. The last major IPO (Snap) had done poorly, and Silicon Valley investors hoped that strong Lyft/Uber IPOs would boost demand for the many other planned 2019 IPOs, including Slack, Airbnb, Palantir, Postmates, Grab and WeWork. All follow some aspects of the Uber/Lyft model where money-losing companies that had been privately funded for many years finally go public. If Wall Street systematically rejects the idea that companies burning huge quantities of cash all have the potential to become the next Amazon or Facebook, and larger world of Silicon Valley IPOs collapses, Uber and Lyft will be quickly buried under the rubble. As with the future of ridesharing, that outcome will depend on the ongoing battle between economic/financial evidence and artificially manufactured narratives.

________________

[1] Will the Growth of Uber Increase Economic Welfare? 44 Transp. L.J., 33-105 (2017)  available for download at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933177

[2]Hubert Horan, “Uber’s Path of Destruction” American Affairs, vol 3, no 2, Summer 2019, pp.108-133. https://americanaffairsjournal.org/2019/05/ubers-path-of-destruction/

[3] See Can Uber Ever Deliver? Part Seventeen: Uber’s 2018 Results Still Show Huge Losses and Slowing Growth as IPO Approaches (February 16, 2019)

[4] Lyft’s S-1 claims were discussed in detail in Can Uber Ever Deliver? Part Eighteen: Lyft’s IPO Prospectus Tells Investors That It Has No Idea How Ridesharing Could Ever Be Profitable (March 5, 2019)

[5] Uber’s S-1 claims were evaluated in Can Uber Ever Deliver? Part Nineteen: Uber’s IPO Prospectus Overstates its 2018 Profit Improvement by $5 Billion (April 19, 2019)

[6] Len Sherman, “Uber Should Be Judged On Its Own Merits, Not Amazon’s”, Forbes, May 5, 2019. Uber’s S-1 made no attempt to explain why it was losing billions on the tiny share of this market it was currently serving, much less explain how it could ever serve an increased share of this market profitably.

[7] Matt Levine, “The Three-Way Banana Split Was Bad” Bloomberg, May 16, 2019

[8] Most media coverage at the time ignored Board members interest in financial returns and incorrectly portrayed the rebellion as a response to the negative publicity from sexual harassment and other “cultural” issues. See Can Uber Ever Deliver? Part Ten: The Uber Death Watch Begins (June 15, 2017)

[9] Aggressively optimistic views of Uber’s potential value did not originate with Dara Khosrowshahi or Morgan Stanley. During the IPO Susan Fowler (whose 2017 blog post brought Uber’s systemic sexual harassment problem to national attention) quoted a Uber executive who told her  ” If we do not make it to a $200B valuation, I think most at Uber would feel as though we failed.” Sarah Lacy, “Who is really responsible for Uber’s failed IPO? Uber”. Pando, May 14th 2019

[10] While the discussion of the recent IPOs includes Lyft, the “narratives” about ridesharing were almost exclusively developed and promulgated by Uber, not Lyft. These Uber-created narratives probably had more to do with demand for Lyft shares than anything Lyft did.

[11]  Detailed discussions of how Uber’s narratives have always been directly based on propaganda techniques, the strategic importance of Uber’s PR/propaganda programs, and Uber’s success in getting its narratives uncritically endorsed in the mainstream media. can be found in Part IV the TLJ article and in Can Uber Ever Deliver? Part Nine: The 1990s Koch Funded Propaganda Program That is Uber’s True Origin Story (March 15, 2017)

[12] ‘You Want to Get as Much Lyft as You Can,’ When It IPOs, Says Jim Cramer” The Street, March 4th, 2019; “Cramer: Lyft IPO likely to surge, drawing investors back to whole stock market”, cnbc.com, March 28, 2019

[13] Can Uber Ever Deliver? Part Sixteen: Is Morningstar’s Horrendously Bad Uber Analysis a Preview of Uber’s IPO Prospectus? (13 August 2018). The comment earlier that press coverage had failed to ask basis valuation questions would be more accurately stated as the press only posed valuation questions to analysts willing to fabricate data about multi-billion dollar profit improvements.

[14] Mike Isaac, Michael J. de la Merced and Andrew Ross Sorkin, “How the Promise of a $120 Billion Uber I.P.O. Evaporated” New York Times,May 15, 2019

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