Uber’s IPO is the biggest IPO since Facebook (FB) went public in 2012.
It marks the first time individual investors can buy this beloved company.
IPOs carry a special allure. Investors dream of “getting in on the ground floor” and riding the stock to 20X–30X profits.
But collecting profits of 20X or better is possible if you identify disruptive stocks early on.
Uber is certainly disruptive. But as I’ll show you, it’s a horrible investment.
Uber Burns More Cash Than Any Company I’ve Ever Seen
It is dangerously unprofitable.
Its IPO documents show it lost $1 billion on $3 billion in sales in just the past three months.
Now some might say: "Stephen, it's no big deal that Uber makes no money. Amazon made little profit for its first couple of years and it’s been an incredible investment. Its stock has soared 100,000% since its IPO. I want to get in on the ground floor of Uber like many did with Amazon!"
It’s true that early investors in Amazon (AMZN) got rich. It’s also true that Amazon lost money in its first seven years of business. From 1996 to 2002, it burned through around $3 billion.
The thing is, Uber has lost more money in the past nine months than Amazon did in its first seven years!
And Uber isn’t a “new” company.
You can forgive young startups for sacrificing profits for growth. Uber has been around for a decade and is still nowhere near profitability.
Another Popular Argument for Buying Uber Stock
It goes like this:
“Uber will be among the biggest IPOs since Facebook… and Facebook’s stock has shot up 450% since 2012!”
Facebook is one of the most efficient cash-generating machines America has ever seen.
It makes money selling online ads, which is an extremely profitable business.
At its peak, Facebook was turning $0.50 on every dollar of sales into pure profit. That is off-the-charts incredible. It’s nearly unheard of for a company as big as Facebook.
Uber’s margins are off the charts too. But they’re off-the-charts awful. Uber loses 25 cents on every dollar it brings in. In fact, research from Recode shows Uber loses an average of $1.20 on every ride.
Uber’s problem is the fares it charges aren’t nearly enough to cover its expenses. Roughly 80% of a fare goes toward paying drivers and related expenses.
In other words, almost all its revenue is gone before it can even pay overhead costs like rent or salaries for its 16,000 employees.
Uber Will Never Make Money
Money-losing firms often aim to achieve profitability through “scale.”
This means a company keeps growing and growing and selling more and more stuff. Eventually its revenue surpasses expenses.
This worked for Facebook. In its first few years, Facebook actually lost money. By 2009, it was selling enough ads to earn a profit.
It cost Facebook a ton of money to build out its online ad platform. But once it was up and running, it barely cost anything to sell each additional ad. As it sold more and more ads, costs stayed flat and income soared.
Uber’s business model does not afford this luxury. Very few of its costs are “fixed.” Every ride costs it money. As I said, it’s losing roughly $1.20 on every trip.
More trips won’t solve this because costs rise just as fast as revenue.
Uber is trapped in a money-losing spiral it can’t escape.
Even if Uber Succeeds, Most of Its Upside Is Long Gone
Early private investors have claimed it all.
For example, former cyclist Lance Armstrong is an early investor in Uber. He invested $100,000 around 2009 when the company was valued at less than $4 million.
Since then Uber has surged 25,000X in value! If Armstrong held on to his whole $100,000 stake, it’d be worth roughly $2.5 billion today.
As I said, you stand a chance to reap triple-digit profits or even more if you buy when a promising disruptive stock is small and 20X gains (or better) are on the table. By the way, you can check my three favorite stocks that fall into this category here.
But Uber is already HUGE. As I mentioned, it’s worth $100 billion. It’s already among America’s 100 largest companies.
Uber’s IPO is no ground-floor opportunity. Uber is a giant, overvalued, money-losing enterprise that early investors have already milked dry.
It’s a win-win for drivers and customers.
But it’s a lose for investors.
Stephen McBride is the editor of the RiskHedge Report, a popular and rapidly growing advisory dedicated to helping investors understand and profit from disruption.
© 2024 Newsmax Finance. All rights reserved.