Market Overview

Uber Finally Gets An Upgrade As Analysts Hope For IPO Recovery

Uber Finally Gets An Upgrade As Analysts Hope For IPO Recovery

Disruptive companies that changed the world we know had raised record funds in private. But things went south when they went public as there was no unlimited demand to tap into. Their disappointing post-IPO performance made it clear that private investors were too optimistic. And there aren't many deals likely to go out until the end of the year due to this sentiment. None of that is good news for banks that are the ones who earn big from underwriting these IPOs. But at least for Uber Technologies Inc (NYSE: UBER), things seem to be finally looking up!

From neutral to buy

On Monday, Citigroup upgraded Uber's rating to "buy" from a "neutral"position. The argument is that Uber Eats is not properly reflected in the current share price and the expectation is that the revenue growth will be reflected in the upcoming third quarter results. However, the price estimate was kept the same, at $45 per share.

A rough start

Uber was valued at $68 billion in the private markets but its stock has dropped 34% since its IPO in May, leaving the company far behind where it was valued pre-IPO. Moreover, Uber suffered a $5.2 billion loss in its latest quarter due to billions in IPO incurred costs. And more importantly, Uber posted a $4.72 per share loss for its fiscal second quarter in June. Its poor revenues grew just 2% from last year however Uber Eats' revenues rose 72% to $595 million this year and analysts have a lot betting on this segment.

Competitor following the same trajectory

In March, Uber's main competitor Lyft Inc (NYSE: LYFT) was valued at $24 billion for its IPO debut and this was far above its previous valuation in the private markets that amounted $15 billion. But since then, its stock has fallen 46% as investors grew increasingly worried about the company's steep losses.

WeWork Postponed

WeWork, its parent We Co., that is, abruptly postponed its highly anticipated IPO on Nasdaq last month, and it isn't the only company who did so. The decision was taken after prospective investors revolted against the office-sharing company's governance and significant losses. The New York company and its underwriters anticipated a weak demand and consequently, trimmed about $30 billion away from its expected valuation.

2019 – Expectations Vs reality

Due to governmental pressures, 2019 had its share of unfavourable winds. But surprisingly, markets persisted. There were also successful debuts, such as of Pinterest Inc. (NYSE: PINS). But analysts still find it is unlikely that 2019 will be the record year that many analysts had envisioned. What is traditionally one of the busiest times of the year is now a virtual standstill as many postpone their debut hoping for markets to improve. According to Goldman Sach's, this year's IPOs are expected to be the least profitable since the technological big-bang.

The shift from "traditional" to "direct listing"

This still is not only freezing the private-funding market but also pushing companies to rethink their investment strategies in favour of less expensive alternatives. Slack Technologies Inc. (NYSE: WORK) yet another unprofitable company that made its debut in June, used an unusual method called a direct listing. The company didn't raise capital but simply used $26 as a reference price when its shares started trading. But Slack shares now trade 4% below that reference price, showing the underlying reality: the public market rewards companies that generate cash flows with further revenue growth prospects.

2020 – Possible IPO recovery

When the IPO market does come back to life, more companies are expected to enter the spotlight and most probably through direct listings. Even Airbnb which is set to go public during the first half of 2020, might do so. There's also the retooled We to look out for. Surely, many companies will do their best to successfully bypass the costly traditional entry to the public market. But it remains to be seen how close can 2019 manage to rise up to its high expectations, with Uber's quarter results also giving a glimpse of hope for the better.

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