Tech investors and the media have been scrutinizing the long list of unicorns coming to market. Uber was the clear standout given its speculated valuation of nearly $120 billion.
However, that lofty valuation proved illusory. Uber immediately ran into market skepticism about its ability to become profitable. Yet, even pricing below initial expectations, the IPO still valued Uber at a remarkable $80 billion.
Where that valuation goes in the coming years will be subject to much analysis and debate among investors, which means Uber needs to engage the market effectively given the high stakes for the company.
However, the early signs are that Uber is not engaging particularly well. It appears that Uber didn’t fully understand what awaited it once it left the sheltering arms of VC backing. There are some lessons from Uber’s experience that are relevant to any company planning to go public:
Be Careful of the Hype
Uber seemed caught up in the hype. As one of the largest IPOs ever, it would have been reasonable to assume management would be well prepared for being public, but it appears they weren’t. Why? Hype is a probable factor. The belief of pre-ordained success and that communicating with public investors would be easy.
One of the early signs of the hype was CEO Dara Khosrowshahi’s incentive package. The Board agreed to grant him a nine-figure equity award if Uber’s market cap surpassed $120 billion for a period of three months. This package was negotiated in the midst of the pre-IPO speculation of Uber’s $120 billion valuation. While we can’t know for sure what the CEO and the Board were thinking then, it is safe to assume they did not intend to have the trigger level 50% above the price where the shares debuted.
The next sign was the downward adjustments to the IPO’s pricing. While some argued at the time that it reflected broader market weakness (although markets have since recovered while Uber’s share price has not), the real issue seems to be management’s investment story was not winning over institutional investors.
Investors are hard-nosed in understanding a company’s prospects and being fed high-minded visionary soundbites (“Our mission is to ignite opportunity by setting the world in motion,” or “We are the Amazon of transportation”) does not support a valuation analysis.
Being public is ultimately a corporate self-awareness exercise. A company cannot hide from its eventual performance. Therefore management must formulate an investment narrative that reflects a sober take on the inside planning view. Otherwise management risks lasting damage to its credibility by over-promising and under-delivering to the market. That’s particularly true for newly public companies where management is under extra scrutiny given its lack of a track record with investors.
Markets Are Not As Patient as VCs
Uber operated for nearly a decade with tens of billions of dollars of patient backing by VCs. A period where growth was the priority, losses accepted and profits an afterthought relegated to the distant future. Unfortunately, Uber did not seem to recognize that uncertain profitability would be a problem for the public markets.
After all, profits are the sine qua non of investing. While portfolio managers can be patient, they are not VCs as their analytical investment horizon is typically 3-5 quarters. For them to hold shares in a company where profitability is distant like Uber, portfolio managers need a credible investment story. A story that describes how the company will become profitable and offers a path over which investors can assess management’s progress.
So far Uber has not provided that story and valuation of its shares has become more of an optionality bet than a fundamental analysis. A dynamic that creates volatility and discounts any potential valuation in the shares that could exist if investors better understood the company’s prospects.
Investors Can’t Own Pro-Forma Stock
Non-GAAP financial measures are useful and important metrics for a company to describe its future earnings potential. However, management needs to be sensitive to the observation that investors do not own pro-forma shares.
Smart managers understand the need to strike a balance between GAAP and non-GAAP when discussing performance. After all, GAAP results are the bridge investors must cross to reach the eventual non-GAAP metrics that management seeks to deliver.
Uber has not struck that balance. Uber’s first quarterly earnings release largely highlighted top line non-GAAP growth, but said little about actual GAAP financial performance and outlook. Any investor that wanted to understand why Uber’s margins worsened in the first quarter won’t find the answer in the press release or the Supplemental Information presentation. Even after reading the earnings transcript, an investor might still be befuddled by the apparent explanation offered by the CFO:
“During Q1 2019, we invested in our Rideshare category leadership through product improvements and competitive pricing relative to competitors that (sic) we continue to try to use capital to mitigate our efficiency and effectiveness advantages. Due to this investment, our Core Platform contribution in Q1 was negative 4% as a percent of ANR down from positive 18% in Q1 of 2018.”
Investors understand that despite the flowery language, the CFO basically said that Uber had to spend money to defend market share, and that widened its operating losses. Management may choose to call it an “investment” but that won’t score credibility points with sophisticated investors.
IR Basics Matter
Even beyond the challenges of communicating a credible investment narrative, Uber seemed unprepared with even the mundane elements of a well-functioning IR capability.
If an investor were to look at the Uber IR website just days before their first earnings call, they would have been greeted with:
“Information Coming Soon”
Trivial perhaps, but companies are competing for capital and investor attention. A company needs to make it easy for investors to analyze it. Posting the details of a first-ever earnings call is basic and should not be overlooked. But it was.
The information that IR provides is also critical. Important financial and strategic information must be readily available. The first step of any investor will be to do some basic analysis of a company. Only if the investor thinks the investment case of interest will they follow up with sell-side analysts, the IR team or management. But Uber makes it difficult to do this basic analysis as there is very little standalone information in its disclosure to support that initial analysis.
Underinvest in IR at one’s peril
Uber’s current market cap is almost $75 billion. Consider that just a ten basis point increase in its share price — 4 cents — is $75 million of incremental value for the shareholders.
Having a deep and strong IR capability to craft a compelling investment narrative, to support that narrative with adequate quantitative and qualitative disclosure, to explain that narrative through effective investor coverage, and most importantly to defend and enhance management’s credibility with the market over time, should be obvious on the surface but wasn’t at Uber.
While outsiders cannot know how much Uber spent on consultants in the preparation for its flotation, there’s little doubt that they spent a fair bit on PR consultants but clearly underinvested in their IR function.
While quantitatively linking share valuation with IR is difficult, no institutional investor would disagree with the assertion that good IR and strong management credibility is critical for any public company seeking to improve its valuation. A strong IR effort at Uber has to be worth more than ten basis points on the share price, and hence would be a good investment by the company.
Being public is a marathon (albeit broken up in 100 meter dashes), and Uber has time to adapt and adjust its engagement with the market. But a company’s and management’s credibility can be harmed by poorly thought-out and executed IR efforts and for Uber the clock is running.
Yet since its flotation two months ago, during which the broader US markets have rallied, Uber’s stock price has largely treaded water. Investors continue to struggle to understand the prospects for the company. Despite this, little seems to have changed in their efforts to effectively engage the market with a credible investment narrative.