Uber and Lyft: 5 reasons behind the broken IPOs

Uber and Lyft were two of the most highly anticipated IPOs in the recent Wall Street history. Speculation and buzz were at an all-time high regarding how these IPOs will turn out. Yet when their respective days arrived, both ride-sharing companies gave rather underwhelming performances. Uber and Lyft ended up committing the cardinal sin of the IPO realm: they broke below their IPO prices. (A broken IPO is one whose shares trade below its original offering price to the market soon after trading begins.)

Uber and Lyft: 5 reasons behind the broken IPOs

Let us delve into the factors that caused this underwhelming performance and take a look at the lessons to be grasped from the same.

Lack of sustainable model

Over the years Uber has grabbed eyeballs for its huge growth, growing revenues, and successful fundraisings. However, all these accolades came at a heavy price.

Uber and Lyft both have accumulated heavy losses through the unchecked burn in their competition to outdo each other. Indeed Uber is burning in the excess of over $1 billion USD merely to please customers and accelerate growth. This is a classic example of unsustainable start-ups making larger than life promises to venture capitalists to raise funds and then burning these funds to attain short term goals. These funds are being used as incentives to customers while the company continues making losses.

A better model can be attributed to other cab hailing companies such as Jugnoo, which gives more emphasis on sustainability rather than quick fixes. Jugnoo strives to create sustainable growth rather than through pushing offers and incentives. Jugnoo creates a true value proposition by offering low fares to customers and simultaneously accepting a lesser commission from drivers, keeping both parties satisfied. Such models attract greater customer loyalty and succeed in the long run.

Cost of revenue

Another major concern that swayed the investors about Uber and Lyft was the cost of revenue. Cost of revenue is the total cost incurred by the company for providing the services. For Uber and Lyft, this constituted a huge chunk of their expenses. Moreover, with frequent demand for more drivers to fuel growth, this expense is expected to steadily increase causing another dent on their finances.

Long term debt

Uber has been rapidly accumulating long term debt, moving from  $1.423 billion in 2015 (unaudited) to $6.869 billion in 2018. This increase of over $5 billion long term debt over the course of 5 years is a major turn off for the investors. Lyft similarly is deep in thralls of long term depth with no feasible plans for a recovery in the near future.

No route to profitability

It’s time to address the elephant in the room. Behind the accelerating growth and increasing revenues, Uber and Lyft are making staggering losses, and these losses are growing bigger every year. Let’s take a simple example of Q2 in 2018. Despite, making a $12 billion in revenue, Uber ended up reporting a heavy loss of over  $700 million due to its unchecked burn and operating costs. Similarly, Lyft loses money as its revenue doesn’t generate enough gross profit to cover its operating expenses.

Alarmingly, neither company has a clear cut path or vision, to move on to a model that can turn them profitable. Ironically, Uber has been branching out its services and burning even more money to sustain its new projects such as Uber Eats. Companies like Jugnoo set a better example by giving more importance to profitability and keeping the finances stable.

‘Tip top’ valuations

According to Wall Street experts, Uber and Lyft may have stayed private for too long. The abundance of funding raised through venture capital has allowed the companies to continue burning money and remain afloat despite drowning in losses. But experts speculate that these rounds of funding lifted the valuations to loftier heights and have finally led to a broken IPO. Most experts concur that it’d have been better for the companies to go public at an early stage, rather than at tip-top valuations.

 

Overall the disappointing IPOs point towards the need for money-losing companies to do a better job explaining how they’ll eventually make money. Uber and Lyft have highlighted themselves as an example of how burning money without a sustainable model, is not likely to succeed in the long run. Uber, remarkably lost more money during the 12 months before its IPO than any company in all of history. Meanwhile, more trouble brews with Uber and Lyft drivers strikes becoming more frequent. For now, Uber and Lyft seem to be stuck in a muddle without a sustainable model or clear cut route to profitability in the near future. Let us wait and see whether these giants will cope up and find the path towards a successful and sustainable future.

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