Uber may encounter rough IPO ride

Nokia Maps is seen on a smartphone in front of a displayed logo of Uber in Zenica, Bosnia and Herzegovina, in this May 8, 2015 photo illustration. REUTERS/Dado Ruvic/File Photo

NEW YORK (Reuters Breakingviews) - Uber Technologies could encounter a bumpy ride into public markets. The ride-hailing service has spent the past several years racking up impressive growth. It also has raised easily at least $15 billion, in the process inflating its value to some $68 billion on paper. That will make the next round, possibly in a 2017 initial public offering, tougher.

Founded eight years ago, Uber is now in 77 countries. Despite some controversial regulatory battles, many of which continue, investors have been mostly on cruise control. Net revenue, or the amount the company keeps after paying drivers, hit $1.7 billion in the third quarter, a 240 percent increase from the same period a year earlier, according to tech news website The Information. The promise of new growth comes from deliveries and self-driving trucks.

The valuation already factors in Uber being more than just a people mover. Annual revenue in the U.S. taxi and limousine business is about $20 billion annually, according to research outfit IBISWorld. Using America’s share of global GDP as a rough guide, the world market is perhaps five times bigger, or around $100 billion.

Third-quarter bookings of about $5.4 billion suggest Uber already has claimed a big share of the market. That could mean growth in this area starts to slow soon. Capturing more customers in existing cities and entering rural areas will be harder. Moreover, competition will increase. Uber bowed out of China after burning through $1 billion of cash a year.

What’s more, Uber still loses money - potentially as much as $2.8 billion this year, according to The Information, up to 40 percent higher than in 2015. Expanding in places like India is proving costly. When legal fights subside and marketing costs wane, there should be a path to profit. Taking a bigger share of receipts would risk alienating drivers, however, and raising fares threaten its competitive position.

That explains why Uber is wisely looking further down the road. Autonomous vehicles would enable it to lift margins, but these also are probably some years off. At the same time, the likes of UPS and YRC Worldwide should prove to be more formidable rivals than taxi drivers. Uber’s balance sheet is fortified for these fights. New investors may be wary of their fare.


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