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Uber’s conservative IPO valuation faces first public-market test

Uber CEO Dara Khosrowshahi

Uber Technologies Inc. took a conservative approach to its initial public offering Thursday, picking a share price toward the bottom of the marketed range and at a valuation below its last private funding round. On Friday, public market investors will get to decide whether that was a good idea.

The No. 1 ride-hailing company's shares will start trading on the New York Stock Exchange after it raised $8.1 billion in the biggest U.S. IPO since 2014, pricing shares at $45 each. It had marketed them for $44 to $50 apiece.

In distributing the stock, Uber prioritized shareholders — particularly institutional investors — that it thinks will hold on to the shares for a long time, according to a person familiar with the matter. The company is hoping to avoid the tumultuous first weeks of trading in rival Lyft, whose shares fell below its $72 IPO price within days of listing and closed 23% below that price Thursday.

Based on the amount of stock outstanding after the offering, Uber's IPO price gives the San Francisco-based company a market value of $75.5 billion. Its last private market value was $76 billion. The fully diluted value in the IPO, including restricted stock units and other shares, could be about $82 billion.

"We view Uber's conservative pricing as a smart and prudent strategy coming out of the box as it clearly learned from its 'little brother' Lyft, and the experience it has gone through over the past month," Wedbush Securities analyst Dan Ives said. Uber's biggest competitor briefly dipped below its last private value of $15.1 billion in pre-market trading Thursday, before rebounding to close at $55.18 for a valuation of about $15.8 billion.

Top 10

Even at the low end of the price range, Uber's listing will be the ninth-largest U.S. IPO of all time and the biggest on a U.S. exchange since Alibaba Group Holding's $25 billion global record holder in 2014, according to data compiled by Bloomberg. Since the 2008 financial crisis, only two other U.S. IPOs have topped it: Facebook's $16 billion 2012 listing and General Motors' $18 billion offer in 2010 after its bailout by the U.S. government.

Still, it's a considerable climb down from earlier projections: Last year, bankers jockeying to lead the offering told Uber it could be valued at as much as $120 billion in an IPO.

That's partly because, after waiting a decade to go public, the most highly valued startup in the U.S. is set to make its market debut amid less-than-ideal conditions. U.S. stocks fell for a fourth day Thursday, leaving the S&P 500 index on pace for its worst week of the year as trade tensions escalated between the U.S. and China.

This year, widely expected to be the busiest for mega U.S. tech listings this century, started with a partial government shutdown that shuttered the agency that approves IPO documents for 35 days, all but killing activity in the first quarter. After submitting its confidential filing in December, Uber — along with Lyft and a host of other hopefuls — was left sitting on the sidelines while U.S. stocks enjoyed the best start to a year in at least a decade.

The pricing — and subsequent trading performance — will be closely watched by the cavalcade of other tech startups that are expected to go public this year, including Slack Technologies, Postmates, Peloton Interactive and Airbnb.

NYSE open

Standing center stage as Uber managers convene for Friday's bell ringing ceremony at the NYSE will be CEO Dara Khosrowshahi, who joined Uber from Expedia Group with the express mandate to take the company public. Notably missing from the platform will be co-founder Travis Kalanick, who resigned in 2017 when early investors pushed for his ouster, after a series of controversies including allegations of sexual harassment inside his company and the use of software to bypass regulators.

Co-founder Garrett Camp won't be present either, though both he and Mr. Kalanick are set to be multibillionaires after the offering.

Mr. Khosrowshahi's compensation post-IPO, meanwhile, will reward him handsomely if he brings Uber's public valuation to $120 billion over a 90-day span.

Final price

Uber's executives and advisers settled on a final IPO price after spending the past couple of weeks pitching to potential investors at roadshow events in cities including New York, London and San Francisco. Picking the right number helps ensure that the stock has a stable start to trading: The price should go up, but not enough to worry investors into thinking that more money should have been raised.

On the roadshow, Uber touted its plans to expand in logistics and other transportation businesses, including scooters, autonomous driving and mass transit, a person familiar with the matter has said. The company aims to become a one-stop shop for customers who would only need to use one platform for multiple services.

Arun Sundararajan, a professor at New York University's business school, said that while going public will give Uber money to capture more of the transportation market, it could also push it to put quarterly targets ahead of its broader ambitions.

"The trillion dollar valuation will come if they can spend the next five to 10 years getting to that place where more is spent on Uber than on any other form of transportation," Mr. Sundararajan said. "The trouble is that's going to require keeping investors at bay who are putting pressure on Uber to deliver earnings."

"The freedom to play the long game gets significantly reduced when you go public even when the resources to do so are increased," he said.

Operating losses

Like many of the IPO class of 2019, Uber is deeply unprofitable. It lost $3.04 billion last year on an operating basis on revenue of $11.3 billion, bringing total operating losses over the past three years to more than $10 billion, according to filings.

Uber has been working with Morgan Stanley (MS) to lead its IPO plans, alongside Goldman Sachs Group (GS) — once the company's go-to bank — and Bank of America Corp. as part of a roster of 29 banks in total that were listed in its prospectus as advising on the offering. Shares will trade under the ticker UBER.