The Deep Dive

Analysts Expect Uber IPO to Outperform Price Range

Despite weighty challenges, positive financial signals abound for the high-profile firm, and its still relatively new management team wins strong p...
David McCannMay 9, 2019

Many of Uber’s drivers staged a strike this week seeking better pay and working conditions, and the company is still working to overcome a self-inflicted bumpy ride chock full of controversy and scandal. Nonetheless, analysts are quite bullish on prospects for the company’s Friday initial public offering — expected to be the largest U.S. IPO of the year — and future performance.

In Morningstar’s latest report, analysts Ali Mogharabi and Julie Bhusai Sharma maintained an estimate that Uber will achieve a $110 billion valuation, or $58 a share. That’s 23% higher than the midpoint of the company’s IPO price range of $44 to $50, which implies a market cap of $83 billion to $95 billion.

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Also, said the Morningstar analysts, Uber will have a $740 billion addressable market by 2023. That includes the aggregate of the total taxi, ride-share, bike-share, scooter-share, and food-delivery industries, along with the U.S. and European markets for freight brokerage and the share Morningstar believes ride-share companies can take from global public transport.

Morningstar expects the company to become sustainably profitable by 2024.

Further, Uber will continue to lead the ride-sharing market, according to Morningstar. The firm assessed the company’s current market share as 30% and said Uber will be the leader in an estimated $411 billion total addressable ride-sharing market, excluding China, by 2023. The company faces competition from other players including Lyft (mainly in the U.S.) and Didi.

As for Uber Eats, Morningstar said the food delivery service can increase its current 11% global market share to 25% by 2023.

On the downside, Uber continues to face various regulatory and legal issues. However, Morningstar said the company can either overcome or has the flexibility to adapt to hurdles via price and take-rate adjustments while maintaining its market-leading position.

Another report, from Management CV, an independent research firm focused on analyzing executive teams, is also upbeat on Uber.

“Uber CEO Dara Khosrowshahi has done an excellent job fixing the many management and corporate culture issues that had put Uber’s brand equity in peril two years ago under the firm’s founder and former CEO, Travis Kalanick,” Management CV wrote.

“Now, Khosrowshahi needs to finish what is arguably the most important task his early shareholders expect: bringing liquidity to their stakes in Uber through the IPO.” Like Morningstar, Management CV predicted that the company’s valuation will be north of $100 million.

The report further said that the rest of the executive team is also “capable and executing well on their strategic and tactical plans.” Additionally, their compensation plan is “reasonable,” with substantial incentives to exceed the $100 billion and $120 billion market capitalization thresholds.

Management CV said it particularly likes the fact that Khosrowshahi was previously a long-tenured CEO of two highly successful companies: Expedia (for 12 years) and IAC/InterActive (7 years).

Expedia’s revenues quintupled during Khosrowshahi time at the helm, and “we think the potential at Uber is much bigger,” the report said.

Uber’s CFO, Nelson Chai, was hired in September 2018, almost three years after the departure of predecessor Brent Callinicos. “Chai is emblematic of the strong résumés the new CEO has brought to Uber’s executive team in the last 18 months,” Management CV noted.

Chai was suggested for the role by new Uber director John Thain, a former chairman and CEO of both CIT Group and Merrill Lynch, and a former CEO of the New York Stock Exchange. Chai previously worked for Thain as president of CIT and CEO of CIT Bank, and as Thain’s CFO at both Merrill Lynch and the NYSE.

Before joining Uber, Chai was CEO of Warranty Group, which private investment firm TPG sold to Assurant in March 2018 for $2.5 billion.

As CFO, Chai will benefit from Uber’s prior venture capital rounds, which raised more than $20 billion. But, Management CV noted, his job won’t be without weighty challenges. The company burned cash at a $1 billion rate in the first quarter, the company’s growth rate is slowing, and there are multiple expansion plans (for Uber Eats, Uber Freight, Uber Jump, etc.) “with unknown margins.”

The report said Chai has demonstrated a prudent approach to cash flow and capital discipline — important traits, considering the company’s continuing operating losses. The report also praised Khosrowshahi and Chai for pursuing a series of joint ventures and strategic partnerships that have reduced the company’s capex burden.

Management CV also gave a thumbs up to Chai’s insurance industry experience at both CIT and Warranty Group, given that Uber (like competitor Lyft) has a subsidiary that underwrites automobile insurance.

Chai’s compensation includes a “reasonable” $800,000 salary and an annual cash bonus target equal to 100% of his salary. He was also, though, granted $17.7 million in stock awards in 2018.

Further, Chai will receive a pair of $5 million restricted stock unit (RSU) grants, in September of 2021 and 2022. Each tranche will be composed of 50% time-vesting RSUs and 50% performance-vesting stock units (PSUs).

Chai will earn the first half of his PSUs when Uber’s equity market capitalization reaches $100 billion for at least 90 consecutive days on or before Dec. 31, 2020, and the second half of the PSU awards will vest if the firm’s market cap trades above $120 billion for 90 consecutive days between 2022 and the end of 2025.