Uber IPO to be 2019’s crucial test case

People in the back of a car
Uber has disrupted the taxi market

The flotation of the world’s biggest ride-hailing app will be a pivotal moment for equity markets.

We will see some major technology initial public offerings (IPOs) in 2019. None will be bigger than Uber. Over the last year, investors have been buying into the company at valuations of $70bn or more. Everyone is going to want to make a profit on that, which means the IPO will have go even higher. The result? The deal is already being pitched at $120bn.

Bigger than AstraZeneca…

It is an extraordinary sum of money for a company that is only nine years old. If it listed on the FTSE, it would come straight in at number four, behind BP but ahead of AstraZeneca.Then again, Uber is an extraordinary business. It has two million drivers, making 15 million journeys a day in cities around the world.

It has become one of the very few business with such a recognisable brand that it has become a verb in itself – people Uber around the place, in the same way they Google for stuff (in the old economy, only Hoover every really managed to pull off that trick). In one of the world’s biggest and most basic industries – transporting people from place to place – it has become a dominant player in a very short space of time. That is a substantial achievement.

But is it worth $120bn? On the one hand, it is clearly a fabulously successful concept, with millions of users around the world and huge potential for further growth. A taxi market which in most cities was over-regulated and over-protected, and as a result way, way too expensive, was ripe for disruption. Uber has slashed the cost of transport and created a huge new market, in much the same way the budget airlines did when they stormed into the airline market. It has used smart-phone technology to create new products like UberPool, where shared rides reduce the cost even further, and make a taxi competitive with public transport. As self-driving cars develop, and Uber has been pouring a fortune into developing that technology too, its mastery of the networks needed to connect people, vehicles and journeys puts it in the perfect position to dominate that industry as well. And that is before you get into divisions such as Uber Eats, which is competing on food delivery, and Uber Freight, which is taking on the massive trucking industry. It is not hard to understand why this is a company that gets people excited.

… but still a leap of faith

On the other hand, its management is chaotic and it may never be able to make a proper profit. Its co-founder Travis Kalanick was embroiled in a series of scandals and had to be replaced. Uber has also burnt through more than $20bn of its backers’ money, but while it has managed to narrow its losses it still hasn’t managed to make a profit. The taxi app industry is ferociously competitive, with very few barriers to entry, and Uber has to constantly discount prices, or match the one-off deals from its rivals, to stay in the game. Its data and expertise might be worth something – but perhaps not as much as the bulls think.

So who will prevail, the bulls or the bears? Uber is turning into a crucial test of whether the huge new app economy has any real substance, or whether it is just unprofitable froth. If the latter view prevails, then the stockmarket is in big trouble. Technology has spearheaded the bull run of the last few years. Uber’s IPO will show us whether that market is still in place. If it isn’t, it will take every equity index down with it.