3 reasons why Uber had such a 'weird' and terrible IPO, according to a portfolio manager who wouldn't buy the stock

Getty/JOHANNES EISELE/Contributor

Uber CEO Dara Khosrowshahi at Uber's IPO, May 10, 2019.

• After all the hype, Uber is now a publicly traded company with a market cap, at day's end, at $69.7 billion.
• That's still a eye-popping number. But a far cry from the lofty $120 billion valuation that the board wanted CEO Dara Khosrowshahi to deliver.
• The IPO wasn't just a dud, it was a weird dud.
• One portfolio manager tells Business Insider what scared him off of buying the stock.

After all the hype, Uber is now a publicly traded company with market value, at day's end, of $69.7 billion.

That's still an eye-popping number. For comparison, Ford, which brought in three times the revenue and is profitable, is worth $41 billion. But it's a far cry from the lofty $120 billion valuation that the board wanted CEO Dara Khosrowshahi to deliver.

And the IPO wasn't just a dud, it was a weird dud.

"I've never seen anything like it," says longtime portfolio manager, Dan Morgan, a senior portfolio manager for Synovus with $700 million of assets under his management. Morgan has been trading and analyzing tech stocks since the 1980s.

"It came out on the preliminary [offer] below the $45 [initial price], that was weird," he told Business Insider.

Read: The woman who rang Uber's IPO bell is Austin Geidt, whose life is the stuff of Valley legend

It was also weird to watch the day's pre-market bids for the stock, each one below the $45/share mark, the price the bankers had set for the stock the night before.

Any institutional investor who bought the stock at the IPO price after Uber's roadshow was under water the second the market opened.

The day reminded him of another horrible IPO experience: Facebook's, where the NASDAQ suffered technical glitches, the stock eventually popped then ended the day below the IPO price, and stayed low for months. (Facebook's stock price has done well in the years that followed.)

Ultimately, Morgan decided to pass on investing in Uber, just as he has passed on Lyft. At least for now.

"We're struggling with rideshare models," he explained. Like Lyft, he's turned off by Uber's core financials. "Investors are still struggling with investing in another ride share company that's not profitable."

He's not buying the argument from management and sell-side analysts that Uber is another Amazon or Salesforce or Workday. The message there is that the stock will zoom to unimaginable heights.

"This is a new kind of business. This isn't an enterprise business, it's a consumer app business. It's not dictated by IT spending," he says of those comparisons, referring to Amazon's profitable cloud business in particular.

Ride sharing, as well as Uber Eats food delivery, is a business of "convenience." he says. And only time will tell if Uber's customers will remain loyal.

Scary indicators

Morgan found at least three scary indicators in Uber's financials, too, that turned him off, he wrote in a research note.

1. Cost of revenue. "Many investors are concerned about rising costs associated with booking fees shared with contractors ("Cost of Revenue" on the income statement)," he wrote. That was one of Uber's largest expenses. "This expense will be difficult to reduce as sales rise as contractors may require higher fees as the demand for more drivers (to fuel growth) increases!"

2. Rising long-term debt. "Looks like Uber is adding LT debt at a pretty good clip," Morgan wrote, noting that long-term debt went from $1.423 billion in 2015 (unaudited) to $6.869 billion in 2018.

"That's an increase of $5.446 billion over the course of four years." Uber raised $8.1 billion from the IPO but Morgan fears that at the rate it's burning money that may not be enough. "Uber will be forced to add more debt once cash from the IPO runs out!" he warns.

3. No profits in sight. Uber priced its shares to look like a steal next to Lyft. Lyft is trading at about 11-times sales ($2.2 billion fiscal year 2018 revenue). With FY2018 sales of $11.4 billion, Uber was priced at about 6.6x - 7.7X sales. But investors weren't biting. "So even after Uber reduced its IPO value the valuation appears too rich."

Plus, it's just plain wrong-headed to believe that investors don't care about profits just because this is a tech company. Video conferencing company Zoom Technologies was profitable and Zoom "soared after its IPO," he points out.

"We struggle with companies that aren't profitable. At least show me a road to profitability," he says.

All this said, Morgan isn't kissing off Uber, or Lyft, forever. If over the next few weeks or months, the stock drops low enough and management explains its plans better, he'll be eager to buy.

"We're waiting for a Facebook situation," where the stock dropped in six months making it a good buy, he said.

Read: Here's who's getting rich on Uber's massive IPO