Is an Uber IPO in the Works?
Some have suggested that the chances of an Uber Technologies Inc. IPO (initial public offering) have increased. The opportunity for an Uber IPO—perhaps even an Uber IPO in 2016—has opened up because Uber has sold its Uber China division to competitor Didi Chuxing. The Uber-Didi deal, say analysts, is the right catalyst for the stock to list.
So, will there be an Uber IPO in 2016? That’s the big question.
The sale of Uber China to Didi Chuxing has ended Uber’s loss-accumulating effort to challenge Didi, the ride sharing leader in China. A premature IPO would hurt Uber stock, given its plans.
Simply put, I don’t expect an Uber IPO in 2016 and here’s why…
Didi Chuxing was born in February 2015 from a merger between two rival services founded by the Chinese giant Alibaba Group Holding Ltd (NASDAQ:BABA) and Tencent Holdings Ltd (OTCMKTS:TCEHY). Since its creation, Didi has proven to be a tough competitor.
Indeed, Uber CEO Travis Kalanick hinted that the company’s loss in China chasing after Didi Chuxing was one of the company’s biggest obstacles to launching an IPO. Uber reportedly spent more than $1.0 billion per year in an effort to challenge Didi in its home market of Beijing. Unfortunately, it wasn’t paying off. As Kalanick wrote in a blog post, “Uber and Didi Chuxing are investing billions of dollars in China, and both companies have yet to turn a profit there.” (Source: “Does Uber-Didi Deal Clears The Way For Uber IPO,” Bloomberg, August 1, 2016.)
How Does This Bode for an Eventual Uber IPO?
With the China problem out of the way, an Uber IPO would seem to be the next logical step for the famous vehicle-for-hire (ride-sharing) service. Didi Chuxing was Uber’s biggest competitor in the Chinese market and it plans to invest $1.0 billion in Uber Technologies Inc., the mother company itself. Indeed, the company and other shareholders, which include Baidu Inc (NASDAQ:BIDU), will get a 20% economic stake in the new Didi-Uber China company, while Didi founder Cheng Wei and Uber CEO Travis Kalanick will join each other’s respective boards. (Source: “In Deal With Didi, Uber Frees Itself to Expand in Other Markets,” Bloomberg, August 1, 2016.)
To be clear, while Uber may have faced difficulties in China, it already represents a market-disrupting force in well over 400 cities worldwide. As well, the Didi-Uber merger stands to win in the lucrative Chinese market, which offers potentially several hundred billion riders. As well, while the Chinese auto market is growing faster than anywhere else in the world, most people still don’t have a car, making ride sharing a big business with huge potential. In congested Chinese cities, in fact, no one would want to drive to work everyday, but there are also many who want an alternative to overcrowded public transport.
The company simply arrived late to the Chinese market and it is not a Chinese company. The resulting contest between Uber China and Didi added an obstacle to a successful Uber IPO on Wall Street.
However, China or not, doubts still remain about an Uber IPO in 2016.
Uber CEO Travis Kalanick Prefers to Keep Uber Independent
Travis Kalanick has often expressed a desire to keep Uber private as long as possible. In other words, Kalanick will likely hold back from an IPO in 2016. (Source: “Uber IPO uber-unlikely: CEO Kalanick,” CNBC, March 29, 2016.)
Uber has managed to raise some $10.0 billion in the past year and a half, which will be enough to keep it running without having to go to the public markets. It will also maintain the independence and flexibility that a public listing would restrict. Kalanick likes the independence, which is facilitating expansion.
But expansion isn’t going to be easy for the company. In fact, Didi invested $100.0 million in Lyft, Uber’s main competitor in the United States, and has also made life harder for Uber in other Asian markets, reaching agreements with Ola and Grab in India. Kalanick will need the independence gained from being a private company to go after these major markets and beat out competitors.
Still, an Uber IPO is an appetizing morsel. It’s no secret that the company is the world’s most valued startup. But the firm has much more than a lofty valuation going for it—the company also rakes in a fair bit of cash.
Uber takes a 20% fee on all fares, regardless of whether drivers are full- or part-time workers or whether they operate their own vehicles. Then there is the longer-term plan to replace drivers with robots. To this effect, Uber is also investing in developing driverless technology. It has a research center devoted exclusively to this purpose.
Indeed, this is where an Uber IPO finds its proverbial Waterloo. The company simply faces too many risks right now, using independent drivers. One false move from a driver or a slip in the background investigation of a hire with a criminal record, and Uber’s liability becomes too high for investors to sustain.
The Bottom Line on an Uber IPO in 2016
Didi Chuxing will, reportedly, run Uber China as an independent entity. The growth of such services offered by the company or Didi has developed quickly in China, but not without some pain.
Now, Kalanick said on Facebook that this consolidation will allow Uber to allocate funds to other projects, including food delivery and autonomous cars. So, I would not bet on an Uber IPO in 2016—at least not while the company continues to evolve, adding more opportunities for profit (albeit, adding more risk, too). (Source: Kalanick’s Team Memo, Facebook, August 1, 2016.)