Why the Uber IPO is all about network effects

Uber Technologies' initial public offering has finally arrived and is set to be the fourth-largest IPO since 2011, surpassed only by Alibaba, Softbank and Facebook. The offered price range translates into an aggressive valuation compared to rival ride-sharing service Lyft, as Uber has a rapidly declining growth rate compared to Lyft.

Buying shares in Uber comes with an unattractive risk-reward ratio and the valuation is essentially driven by whether one believes in long-term network effects or not. Lyft’s recent share price developments should be of great concern to any investor considering Uber. Our main message is to whether one should be lured into Uber by promises relating to the future of transportation and growth. In Uber's case, both factors are questionable.

A classic, low-float offering from Silicon Valley

Uber starts its prospectus with the words “we ignite opportunity by setting the world in motion” – the typical, buzzword-based style popular with new companies. The firm is offering 190,628,298 shares to the public in a public offering of 180,000,000 shares with the remaining shares in private placement at the IPO with PayPal. According to PayPal CEO Dan Schulman, the investment provides “future commercial payment collaborations, including the development of Uber’s digital wallet.”

We have to wonder... will an ownership share of 0.6% really make any difference to partners? It seems like a waste of capital for PayPal shareholders.

In addition to the issuance of new shares, an over-allotment option to investment banks has been offered as well; it's worth 27,000,000 shares that, if exercised, will come from existing shareholders. In an unusual move, Uber has set aside 5,400,000 shares (out of the 180,000,000) for sale to certain qualified drivers in the US. Apparently this has been marketed as a bonus to drivers, but let’s be honest: it’s a sale offer that will only pay off in a relative sense if Uber’s shares do better than the S&P 500. Furthermore, by only including US drivers, Uber is essentially transferring wealth from international drivers to their US counterparts in case the share price performs well. In the firm's S-1, the CEO says that Uber will always do the right thing, but how this international element fits that statement is left unquestioned.

The shares will be listed on the NYSE under the ticker UBER, so UBER:xnys on Saxo's trading platforms. Uber is offering the new shares in a $44-50/share price range, leading to IPO proceeds (excluding underwriting fees) of $8.96 billion at the mid-price. According to our sources, the expected pricing date is set for May 9 and the listing for May 10, but this has not been confirmed to the public. The actual, private discussions over valuation will ultimately dictate when the shares are priced. Immediately prior to the IPO, all of the company’s convertible preferred stock will be converted into common stock.

The free float, or the number of shares that will be freely traded on the exchange in percentage terms, is going be typically low at 13% – this is nothing out of the ordinary for Silicon Valley technology companies. These offerings are not truly public in the sense of being public companies with a large share of ownership actually held by the public. Instead, the firm will be privately owned by a few investors and founders with excessive voting power; the publicly listed shares are essentially a side show. On a positive note, however, Uber is not listing with dual share classes, as is the case at many other tech companies, but is instead sticking to more corporate governance-friendly, one share = one vote principle.