Strong investor interest has seen Uber, the taxi hailing app with big ambitions in the driverless cars industry, pull in $2 billion from a junk bond sale. The massive cash injection is expected to be the company’s last ahead of a massive early 2019 IPO that Uber hopes will value it at $100 billion despite never having come even close to breaking even.
The Financial Times reports that even more could have been pulled into the Uber war chest with investor applications for the debt totalling $3 billion.
The Uber bonds were unfortunately not available to those investing online through retail stock broking accounts. The whole $2 billion placement of 8 and 5-year notes at 8% and 7.5% interest respectively were taken up by institutional investors. The 5-year debt totalled $500 million of the $2 billion and was sold by investment bank Morgan Stanley through a private placement. Morgan Stanley, together with Goldman Sachs, will also be lead underwriter for the Uber IPO in 2019 which is expected to be the biggest on Wall Street in many years. While it hasn’t been confirmed, as a public-facing service provider, it can be expected that those investing online will be able to apply to participate in the IPO by buying Uber shares.
The Uber bond issue marks a continuation of the trend for large companies expanding quickly to combine bonded debt with raising money through the sale of equity. WeWork, the co-working office company, and Tesla, Elon Musk’s electric carmaker, have both seen recent bond issues over-subscribed. Investors hunting for strong yields see the prospect of a guaranteed 7%+ annual return attractive when the issuer is seen as big enough to service the debt even if burning cash. While Uber is expected to bring in revenue of over $10 billion this year it will also again post a heavy loss.
In recent years, markets have been generous to loss-making companies if they are growing quickly and their future market is judged to be big enough to take on the risk of financing their future dominance of it. Uber investors are less interested in the current business model as the one that the ride-hailing app is paving the way to – driverless taxis-on-demand. Much of the losses incurred by Uber are the result of it investing in driverless car technology and building up its brand in anticipation of the moment when driverless taxis replace personally-owned cars. Investor faith in the driverless future is also why Tesla has such a lofty valuation despite never having turned a profit and on revenues a fraction of those of established companies such as Ford and GM that have smaller market capitalisations.
Uber fully intends to put the enthusiasm for an electric and driverless future to the test by valuing itself at $100 billion through its upcoming 2019 IPO. If the valuation being put forward by the banks vying to underwrite the offer is met it would make the Uber IPO the second biggest in history behind only Chinese tech giant Alibaba’s New York float. A major difference is Alibaba was already highly profitable and had relatively low capital expenditure, which sat at 8% of revenue over the 12 months prior to the listing. Uber posted a net loss of $1 billion over Q2 of 2018 as it invests in electric bike sharing, food delivery and it autonomous vehicles unit.
If an IPO were to go ahead at a $100 billion valuation that would be around 10 times Uber’s expected net revenue for 2018. Amazon, a tech-based logistics business that can be compared in some ways is valued at roughly 5 times expected net revenue for 2018. Uber will also have to keep up its heavy spending over the next few years. With the recent tech sell off already leading to Tencent Music, the music streaming arm of Tencent, another Chinese tech goliath, postponing an IPO spin-off, Uber needs to hope that the equities bull market holds out for another several months. An IPO of the scale suggested would be unwise in a bear or volatile market.
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