On May 10, one of the most anticipated initial public offerings in recent years fizzled on the New York Stock Exchange. Uber, the controversial tech company that started off as a ride-sharing service, failed to impress both institutional investors and day traders alike as the stock did not come anywhere close to its target price of $48. By the time the bell rang on Wall Street, shares of Uber fell below $42, and they plunged towards $36 by the time markets reopened on Monday.
When shares of a company fall nearly 18 percent in just two trading sessions following a disappointing IPO, it is not surprising to hear about accusations and potential lawsuits. Morgan Stanley, the investment banking firm that handled the Uber IPO, is facing tough questions; however, certain external factors contributed to the poor IPO performance and subsequent drop in value. First of all, United States President Donald Trump escalated the global trade war with China by means of a fresh round of import tariffs, thus causing the Dow Jones Industrial Average to shed hundreds of points. Second, China retaliated by imposing tariffs on American imports, thus angering the U.S. agricultural sector. At the same time, Uber drivers from New York to Tokyo staged protests to demand higher wages and better working conditions. By the time IPO day came around, it may have been too late for Morgan Stanley to back down from its $120 billion valuation. As the situation stands in mid-May, Uber is closer to a $70 billion valuation.
For a few founders and early venture capital investors, the Uber IPO was a minor disaster because they did not receive certain equity awards. For Morgan Stanley and associated firms receiving commissions, they are guaranteed handsome rewards. For competitors such as Lyft, the Uber IPO has been bad news because it triggered a loss of confidence in the personal transportation sector.
It should be noted that Morgan Stanley previously faced a similar situation when it handled the Facebook IPO seven years ago, and it managed to make shareholders happy after a few weeks. What is more important for Uber is that it has established a successful, yet controversial, business model that is in a state of flux. Both Lyft and Uber are locked in an arms race to become the first to offer “robo-taxis,” a development that would upend what is known as ride-sharing economics. This is how it works: Uber drivers account for 80 percent of ride-sharing costs, which means that removing them with self-driving technology could bring this figure down to 50 percent, and the savings would be passed on to riders.
Electric vehicle maker Tesla Motors recently announced its intention to launch a future autonomous driving taxi service that could be valued at $500 billion. Uber is paying close attention to the self-driving sector, and it will certainly rush to get there before Tesla or Lyft. There is no doubt that Uber drivers will protest when this happens, but they have little to no recourse because of their status as independent contractors.