Investing in Technology IPOs: Why You Should Think Twice About Uber-Valuations

By Eli Rodrigues

On Friday, June 6, 2014, Uber Technologies Inc., a car-hailing smartphone application was valued at $18.2 billion, more than quadrupling its previous year’s valuation. Uber has secured more than $1.5 billion, with the most recent billion dollar round of funding coming from Fidelity Investments, Wellington Management and BlackRock Inc. According to Uber’s Founder and CEO Travis Kalanick, Uber is “growing faster this year than last year,” achieving an annual revenue in the hundreds of millions of dollars that is “at least” doubling every six months.

Uber has already left its mark in history by joining elite group billion-dollar startups, finding itself in second place to none other than Facebook Inc. in securing capital from private investors. With all of the publicity surrounding Uber’s latest valuation and funding, heated bidding for pre-IPO shares has begun as the company is preparing itself to go public. Now, the big question crossing many investors’ minds is: “When do I invest?” The answer: not until sufficient research has been performed and the company’s lock-up period has expired.

There is no specific answer for when an investor should add a company to their portfolio. No investment is a sure thing, especially when it comes to technology companies. Most recently, history has provided a much different picture for the technology industry, with IPOs often flopping, leaving heartbroken investors with fractions of their investments. Groupon Inc. is a one of the most recent examples that investors should learn from and hopefully subdue their excitement for Uber and other future technology IPOs.

What should an investor understand before committing any of their assets to a newly public company? As a general rule if the markets are doing well then so will IPOs. Additionally, IPOs have a much higher beta and are therefore much more volatile once they hit the market. If as an investor you are unable to tolerate price fluctuations, then this investment is not for you. Moreover, gathering reliable information about a company going public is very difficult because private companies do not disclose their financial information publicly, and numerous analysts generally evaluate the strength of their operations. It is important to note that IPOs do offer investors a prospectus, but the company, not an unbiased third party, writes that document. Under the rules governed by the Securities and Exchange Commission, insiders of any company going public are typically prohibited from selling their shares for a period of time, typically 180 days. It is very important for investors to find out if a lock-up period exists and when the period expires because the value of the stock can drastically change in anticipation of insider liquidation.

But Uber is different, some say. Its disruptive technology has dominated the transportation industry internationally and is now offered in more that 130 countries around the world. This might be true; however, technology IPOs often follow a different business plan because they are members of a sharing economy, bringing together users with service providers. Uber allows professional and nonprofessional drivers to sell their time and services to users. Uber does not own anything other than an application and its dispatch service. This business model has low barriers to entry and a potential investor should be weary of the ease in replicating the business. Many companies like Uber entered the market, offering an identical service at more competitive pricing. With driver and user loyalty driven on cost and an increasingly strict international regulatory environment, Uber has already been forced to rethink its cost structure, a fact investors should certainly be aware of the before making a decision to invest.