Why IPO Star Uber Faces A Rough Road Ahead

Ride sharing behemoth Uber Technologies Inc.'s IPO, valued at potentially $100 billion, makes it the highest profile IPO among the 2019 class of unicorn tech giants. Financial data in the company's prospectus and several experts, however, indicate that Uber faces major challenges to prospering longterm.

The prospectus shows that quarterly revenue growth has stalled in its core ride sharing business. It's continuing to burn through tremendous amounts of money to maintain its share of the market as competition increases. Despite rising revenue, the company posted more than $3 billion in losses from operations in 2018 and about $12 billion losses over 5 years. The company said it will continue to spend heavily, likely adding more losses, to grow its ride sharing and food delivery businesses, according to the Financial Times.

A handful of analysts, lawyers and corporate governance experts also suggest that Uber could face a particularly rough road as a public company. Challenges include labor, legal and regulatory issues. Some of these are related to Uber's controversial co-founder, Travis Kalanick, who resigned in 2017, as outlined by the Financial Times. These could significantly affect its valuation, its early trading price and its long-term profits,

These roadblocks make Uber's IPO even trickier than that of rival Lyft Inc. (LYFT), whose shares have stumbled since debuting this year. Uber, like Lyft, also has yet to turn a profit, and instead has seen its losses widen into billions of dollars. This amounts to a daunting list of hurdles for CEO Dara Khosrowshahi.

Risks Facing Uber

• Labor costs
• Lawsuits and government investigations
• Tarnished image
• Negative relationship with regulators

Source: Financial Times

“With Uber, given their previous CEO and history, there are more risk factors than with other companies,” says IPO expert Jay Ritter, per the FT. He cites the structure of Uber’s business model as its key risk. Uber’s service is fueled by a growing cohort of gig-economy drivers who are not technically classified as employees. This has allowed Uber and other sharing economy companies like Lyft and Airbnb to keep its labor costs low. On the other hand, it has attracted a wave of legal claims from workers who are seeking improved terms, as well as from global regulators who scrutinize the company for its unorthodox practices.

“I can’t think of a bigger risk to them than the idea that these people will become employees,” said John Coffee, a securities law expert at Columbia University. Uber recently paid $20 million to end a legal battle with drivers in California and Massachusetts who were seeking employee status. The company will continue to consider them independent contractors, but agreed to change how it removes drivers from the app, and now allow appeals. Coffee warns that the SEC may require additional action from Uber.

Under the leadership of co-founder Kalanick, Uber gained big media attention from a number of scandals, including accusations of a toxic corporate culture, tarnishing its reputation and leading to a movement to #deleteUber. Other major issues hindering the company at that time included a lawsuit from Alphabet Inc.’s (GOOGL) Waymo unit, which was settled in 2018, as well as a data breach announced in 2017 that had reportedly occurred over a year earlier.

Now, as Uber continues to push into new markets, it can expect to meet regulatory hurdles almost everywhere, according to Carl Tobias, a law professor at the University of Richmond. The app’s low-cost service, called UberPOP, has already been banned in a handful of countries.

Uber CEO Khosrowshahi, Uber has made resolving key legal and regulatory issues a priority, as well as cleaning up the firm’s culture and image. Uber has been strategically partnering with licensed car services and taxi operators in new markets, such as Germany and Japan, which could bolster its revenue growth. But the risk of rising labor and regulatory costs, nonetheless, remain a threat. For Uber to succeed long term, the global ride sharing market may have to meet industry forecasters' most optimistic targets.