Dear Uber Employees,
You’ve come quite a long way! 86% annualized revenue growth over the past 5 years(1) is quite an accomplishment. Congratulations. You are part of what may be a once-in-a-lifetime transformative company.
We write you, as we did Lyft and Pinterest employees(2, 3), to help you make informed decisions about what to do with your stock when it vests.
Uber starts trading on Friday, May 10th. 6 months later, those who are fully vested via the IPO are free to sell(4). If you have RSUs, options, or warrants that will vest, you have something to look forward to(5). If you have RSUs or other equity incentives vesting in the next few years(6), this still applies to you.
During the six-month lockup period, you have a lot to consider. Namely, how much, if any, stock to sell.
This decision should incorporate your overriding financial objectives. For example: When do I want to retire? What level of retirement income might I need? Do I want to buy a house? A car? Pay for a wedding? Send kids to college? Etc. This is all about you. Take your time considering these items.
Next, consider factors that will likely impact Uber’s stock price over the next 12 months. And then develop a view of their longer-term prospects.
If we were in your position, here’s where we would focus:
Stock Dynamics Over the Next 12 Months
IPO Newsflow and Initial Pricing – This will likely garner a lot of attention. Numerous articles addressing possible valuation(7), IPO pricing levels(8, 9), driver-strikes(10), or how Uber is “totally different” from Lyft(11) have been written. We will not re-hash them. Since you are locked-up for 6 months anyway and will likely have future vesting, we suggest you understand the news flow, but then set it aside. The most important thing is where the stock is in 6 months, which most likely will be based on current and expected operating results at that point.
Public market investors – Uber’s IPO is much larger than others that have listed this year. According to Kiplinger’s, it is the 8th largest IPO, ever(12). You will have many new shareholders. And they are likely to extrapolate your first few sets of quarterly results, as IPO investors usually do. They will probably focus most on the growth of Monthly Average Platform Consumers (MAPCs)(13), driver incentives(14), and net revenues as a percentage of bookings(15), among other things. If the results are better than expectations, your stock price will likely be rewarded. If viewed negatively, the stock price could decline(16).
Lock-up expiration – 181 days after the IPO, vested employees will be able to sell(17). Should you sell at that time, or wait? Predicting the future is hard and a myriad of factors determine market prices. However, assuming we are still in a bull market at lock-up expiration, a big if, and if you believe in the company’s long-term growth prospects, it is probably better to wait. Why? Newly public companies tend to be volatile in their first six months—or even year—of trading. Even the most successful IPOs of the past 5 years only realized an average of 10% of their ultimate value by lockup expiration(18). Facebook made its lows just before its lock-up expired(19). If you must sell, developing a strategy that accounts for this would be a smart thing to do.
Lock-up expiration trading dynamics – At lockup expiration, typically a great deal more stock becomes eligible for sale than was initially listed at IPO(20). This is normal. Yet, it can create supply/demand imbalances (more sellers than buyers) and poor share price performance in the days heading into and just after the expiration date(21). Selling around this time, can make getting a fair price from the market more challenging.
Tax implications – If you have incentive stock options, your eventual sale will probably be taxed at long-term capital gains rates, unless the Alternative Minimum Tax (AMT) gets in the way(22). If you have restricted stock, you will pay ordinary income tax at vesting and then long-term capital gains rates if you hold your shares for more than a year, also subject to AMT(23). Most companies, in part because employees may not have cash on hand to pay the tax while keeping their stock, make sure enough stock is set aside to cover the tax, similar to a paycheck(24). The amount of stock withheld for tax purposes is a proportion of how much stock is being sold. Regardless of which form of stock you own (ISO, RSU, etc.) and how you’ll pay the tax, having a handle on possible ways to minimize the tax consequences of selling, before pulling the trigger, would be smart.
After you’ve understood these trading dynamics, you should also develop a view on what may happen to Uber’s business. Here is what we would focus on:
Uber’s Business
Uber has already achieved significant size and scale. In 2018, it was active in over 700 cities around the world(25) and posted gross bookings of $49.8 Billion(26). However, Uber believes there is still significant room to grow. According to their S-1, Uber has less than 1% penetration based on total vehicle miles traveled(27). This represents their opportunity(28).
If you believe this thesis, here are the questions we think you should ask as a stress-test:
- What is a realistic percentage share of total miles traveled 3, 5, and 7 years from now?
- How quickly will your percentage share of total miles traveled grow?
- How expensive will this growth be and when will you achieve profitability for investors?
If you’re unsure about Uber’s growth prospects, here are the areas of the business that we recommend developing an understanding of:
- Platform network effect(29) – Will having your different verticals (Ridesharing, Uber Eats, Uber Freight, Uber scooters and bikes, etc.) on one technology platform attract more drivers at sufficiently attractive rates and trip times for users? How will it allow you to dominate what may ultimately be highly price competitive industries with low barriers to entry(30)?
Here are some questions we would ask about other key metrics:
- Will MAPCs continue to grow at a sufficient rate?
- When will contributions from each driver improve?
- When will core platform net revenues and revenues as a percentage of bookings resume growth?
- When will driver incentives decrease?
- When will expected cash flow become positive?
- Please see the graphs below, taken from your S-1, that illustrate the trends in each of these categories
Finally, and most important, what is your view of Uber’s future in autonomous transportation? Uber’s gross bookings in 2018 were $49.8 Billion(31). Of that, $37.3 Billion was paid to drivers and restaurants(32). It is probably safe to say that scaled autonomous transportation will allow Uber to keep a great deal more of this booking revenue.
The key question is: how soon will that be accomplished? For reference, remember that Lyft aspires to have the majority of its rides autonomous in approximately ten years(33). Uber’s ability to implement autonomous automobiles on its mobile platforms may be a key to its future success.
Call to Action
To make the most of your opportunity, here is where we would focus our time, if we were you:
- Nail down your short, medium, and long-term financial objectives, as well as your risk-tolerance over the next few months
- Next, learn more about the trading dynamics that may impact your stock’s performance over the next 12 months or so.
- Build a point of view on Uber’s chances of success – especially re platform network effects and autonomy.
- Finally, establish a plan to sell enough stock so that you are on track to meet your financial goals.
If you do this, you’ll be ahead of the game, regardless of how well Uber the company ultimately does.
However, you will also likely be incredibly busy at work during this time. Peter Lynch, one of the greatest investors of all time(34), once said that otherwise intelligent people spend more time buying a car or a lawnmower than they do on financial planning and investing. Just as much of computing and storage are now outsourced, a similar approach to financial execution may add value. If you are looking for help in discerning this plan, we are certainly willing to lend a hand.
Best wishes,
Chuck Pinson-Rose is an investment adviser with Perigon Wealth Management. He has over two decades of experience in equity research and as a corporate credit analyst. Chuck serves as Perigon’s Chief Investment Officer.
- Uber S-1, p. 96 & Perigon Wealth Management research
- David Hale, CFP® & Eric Jardine, CFA, Letter to Lyft Employees: Some Thoughts on Navigating Risks and Opportunities Ahead; March 28, 2019
- David Hale, CFP® & Eric Jardine, CFA, Letter to Pinterest Employees: Our Thoughts on How to Approach the Future; April 18, 2019
- Uber S-1, p. 23
- Ibid
- Ibid, and p. 252-254
- Munsif Vengattil and Akanksha Rana; Uber IPO Proposals Value Company at $120 Billion; Reuters; October 16, 2018
- Corrie Driebusch and Maureen Farrell; Uber Set to Price at Midpoint of Target Range or Below; The Wall Street Journal; May 8, 2019
- Ruth David, Crystal Tse, and Sridhar Natarajan; Uber IPO Has Enough Demand toPrice at Top of Range; Bloomberg News; May 7, 2019
- Kate Holton and Jane Lanhee Lee; Uber Driver Go On Strike in London and U.S. Ahead of IPO, Early Protests Sparse; Reuters; May 9, 2019
- Ryan Browne; Uber is “totally different” to Lyft, Major Investor Saudi Arabia Says Ahead of IPO; CNBC; May 1, 2019
- Tom Taulli; The 25 Biggest IPOs of All Time; Kiplinger’s; October 19, 2018
- Uber S-1, p. 109-116
- IBID
- IBID
- Connor Smith; Lyft Stock Wobbles as Investors Digest First Earnings Report After IPO; Barrons; May 7, 2019
- Uber S-1, p. 274
- Factset & Perigon Wealth Management Research
- Ibid
- Don Dion, SeekingAlpha Blog post, Recent IPOs Sink on Lockup Expirations, 10/24/2017
- Drasko Kovrlija; Much Ado About IPOI Lockup Expirations: Data and Stats; SeeItMarket Blog; March 23, 2015
- IRS Topic Number 427 – Stock Options
- Equity (Stock) – Based Compensation Audit Techniques Guide (Aug 2015); IRS Website
- Uber S-1, p. 23
- Uber S-1, p. 100
- Uber S-1, p. 107
- Uber S-1, p. 2
- Uber S-1, p. 17
- Uber S-1, p. 13-15
- Uber S-1, p. 101
- Uber S-1, p. 107
- IBID
- Lyft S-1, p. 134
- Joann Muller; Uber Committed to Self-Driving Cars, Despite Setbacks; Axios; April 12, 2019
- Ben Carlson, CFA; Peter Lynch’s Track Record Revisited; A Wealth of Common Sense Blog; July 17, 2016