Uber has grown to dominate the ride-hailing business by offering steep discounts. On Friday, Wall Street returned the favour.
The most richly valued private US tech company stalled in its New York Stock Exchange debut. Its shares closed down nearly 8 per cent from the US$45 ($68.34) initial public offering price in one of the worst debuts for a big US listing.
Coupled with the disappointing performance of rival Lyft since its late-March market debut, it cast doubt on investor appetite for ride-hailing businesses and raised questions about whether bankers have mispriced some of the most high-profile IPOs in years.
"Discovering the correct price and floating the shares without tumult has now defied two syndicates of highly competent Wall Street underwriters," said Rett Wallace, co-founder of Triton Research.
As the inevitable finger-pointing begins over who or what was at fault, a number of candidates have emerged.
Company executives and others with knowledge of the deal pointed to this week's US equity pullback to explain the disappointing first day. The benchmark S&P 500 fell 2.2 per cent, its worst week this year, as US-China trade tensions flared. Lyft also sold off.
"You can't control the day," Dara Khosrowshahi, Uber's chief executive, told the Financial Times, citing "volatility and uncertainty" stemming from the trade dispute.
But by Friday's closing bell, the S&P 500 had turned positive on the day — while Uber and Lyft sank further.
The day had begun with Uber executives, investors, board members, drivers and even the company's first intern (now an executive) descending on the historic NYSE trading floor in lower Manhattan. Travis Kalanick, the Uber co-founder Khosrowshahi replaced in 2017 after a run of scandals threatened to tear the company apart, also attended.
The first pricing indications of US$46 to US$48 came about half an hour into the trading day.
As the minutes ticked by, the indicated range fell below the US$45 issue price, damping the celebratory mood.
Khosrowshahi; John Thain, the former Merrill Lynch and NYSE chief executive who sits on Uber's board; and Stacey Cunningham, NYSE president, flanked the Citadel Securities trader set to open the stock. Kalanick had already left.
At 11:50am, the stock opened at US$42 a share — 7 per cent below the IPO price. Shares traded down as much as 8.8 per cent during the day.
Uber's stumble came despite what Khosrowshahi described as a conservative approach to pricing its IPO. The US$45 price was near the bottom end of the indicated range, raising US$8 billion and delivering a fully diluted valuation of US$82b. Morgan Stanley, Goldman Sachs and Bank of America Merrill Lynch were lead underwriters.
While that made it the biggest US tech offering since Facebook in 2012, it was below the US$100b valuation the company had recently hoped for and the US$48.77 price at which it sold stock to private investors three years ago.
An air of caution swept into the listings market after Lyft's shares quickly downshifted to trade below the offer price, amid high interest from short sellers. Pinterest, another Silicon Valley unicorn, priced its shares in April below its last private round, but has since rallied.
"Let's face it," said JJ Kinahan, chief market strategist at TD Ameritrade, "there is a hangover from Lyft."
Uber and its bankers factored Lyft's record in the weeks since its listing into their thinking, according to a person familiar with the pricing talks.
Khosrowshahi said Uber picked investors who would hold the stock "for the long term" rather than quickly selling.
"The considerations were how aggressive we would be on pricing versus what kind of investors we put our stock with," he said. "We leaned into picking the highest-quality investors that really were on board with our three-to-five-year plan."
That included some institutions that already held Uber shares in the private market, as well as investors Khosrowshahi knew well from his stint at the top of online travel company Expedia.
But that strategy did not prevent an ignominious beginning to Uber's public life, suggesting the company and its bankers misread the public markets.
The retail investors
Kinahan said that contrary to the debut of other high-profile tech companies such as Facebook and Twitter, Uber did not seem to have "that push" from retail investors clamouring to get a piece of the IPO.
"It was a popular trade, but not in the way we have seen in the past," he said. "Instead of buying 500 shares, you had [retail accounts] buying 100 shares. They are waiting to see how this shakes out."
The business model
The cold shoulder Uber and Lyft have received suggests public markets are far warier than the private backers who have poured so much money into the companies over the years.
Investors appear to be sceptical about an unproven industry, said Asad Hussain, emerging technology analyst at PitchBook.
"We believe the recent volatility surrounding both Uber and Lyft is partially driven by investor hesitance to invest in highly capital-intensive, deeply unprofitable and untested business models at this late stage of the economic cycle," he said.
Lyft cast a shadow over Uber's offering with a US$1b first-quarter loss and a warning that revenue growth would slow this year. Uber's revenue has stalled in recent quarters as it has ramped up spending to see off competitors in ride-hailing and food delivery.
"It really casts into doubt how many investors want to own these assets," said Nicholas Colas, co-founder of DataTrek. "You've just had two long roadshows, intensive Wall Street marketing, and promises of lower losses from two industry leaders. And you can't hold issue price."