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Uber’s first day of trading ended deep in the red over gig-economy fears

The rocky beginning raises questions about whether companies losing billions of dollars a year will be sustainable

Uber's first day of trading on May 10 started with a rare drop as investors question the value the company. (Video: Reuters)

SAN FRANCISCO — For years, Silicon Valley has been enthralled by the rise of Uber, which has drawn billions of dollars in investments from the biggest names in technology venture capital in the hopes the company could revolutionize transportation.

On Friday, Wall Street sent a message that it may not be as big of a believer.

Uber went public at the low range of expectations and fell even further after trading began, an embarrassing debut for what was supposed to be one of the biggest initial public offerings in U.S. history. That followed a disastrous few weeks for its chief rival, Lyft, which has fallen a stunning 35 percent since hitting the markets in March. Uber closed down about 8 percent Friday, while Lyft was down more than 7 percent.

Although Uber and Lyft could make a comeback, the rocky beginning raises questions about whether gig-economy companies losing billions of dollars a year will be sustainable — and whether the public pressure to make profits will put an even greater squeeze on the millions of drivers who work for them. Uber has been undergoing a deep overhaul under new leadership to create a more stable, market-ready company, but the poor performance of its shares is a sign the company is still a risky bet.

“If Uber cannot deliver profits over time, it spells real trouble for the gig economy,” said Aswath Damodaran, a professor at New York University’s Stern School of Business. “They have not demonstrated that they can do all the things they want to do and also do it profitably — so the scrutiny of public markets will certainly be a big first test for them.”

A host of other gig-economy start-ups have been planning to go public in Lyft and Uber’s wake, including grocery service Instacart and delivery companies Postmates and Doordash, which observers say are unprofitable largely because they are also dependent on contract workers. (As private companies, they aren’t required to disclose their financials.) Airbnb, the hotel alternative, is one of the rare profitable start-ups that has been eyeing a stock market listing. The gig-economy model that Uber helped pioneer — paying gig workers a fraction of what the company earns from customers — leads to losses because, to disrupt the existing industry, such as taxis, the start-up needs to compete on price. Uber and Lyft charge less per ride than what it costs them to provide it.

If the gig-economy companies do poorly, Silicon Valley investors say, it could dampen enthusiasm for innovations that could challenge the existing big players in tech. Such start-ups tend to rack up years of losses, which venture-capital investors can stomach better than ordinary investors.

Uber went public amid extreme market volatility. Stocks recovered Friday to close up, but a flare up in the trade dispute with China led to the largest weekly decline of the stock market this year. Tech stocks often soar on the first day of trading, as a wider range of investors finally get access to fast-growth start-ups. But Facebook’s stock price tanked in the weeks after its 2012 IPO, recovering months after its listing. Messaging app Snapchat, which was the most anticipated tech stock market listing two years ago, spiked in its first days of trading, but is now worth less than half of its peak valuation.

Despite the rocky start, numerous early backers and employees made significant sums of money as Uber went public Friday. Co-founder and former CEO Travis Kalanick’s stake is now worth nearly $5 billion, while some of the early investors in the company — which raised more than $15 billion over the years — finally saw their bets pay off.

But traditional market investors are likely to have a lot less tolerance for the systemic, costly problems with Uber’s business model, which the company hasn’t been able to solve in a decade.

Uber got its start under the swashbuckling Kalanick, who disregarded regulations and quickly scaled up by contracting with millions of drivers. It rapidly rolled out the app in new markets, each time driving up costs with low rates to hook riders. It subsidized those fares with massive infusions of investor cash. While it initially gave drivers a set percentage of each fare — like with taxis — it eventually changed its pay model to a fixed rate based on mileage and time, no matter how much the rider paid.

But some venture capitalists behind Uber ousted Kalanick two years ago, following allegations of a company culture that fueled workplace sexual harassment. Kalanick also came under fire for his behavior, including footage of him arguing with a driver who had complained about declining pay. It was the same year the #DeleteUber movement caused a massive headache for the company, sending riders to Lyft.

To replace Kalanick, Uber hired Dara Khosrowshahi, who led another publicly traded tech-based company, Expedia.

Food delivery, freight and logistics: How Uber aims to move things around the world

Now, Khosrowshahi is laying out an ambitious plan that positions the company as a competitor to logistics expert Amazon. Uber plans to rely on its ability to apply its vast data trove and routing software to rewrite how goods and people move from one place to another and use computer algorithms to remove inefficiencies. Its budding business lines include freight forwarding and food and package delivery, something triggering its high valuation — billions of dollars higher than that of Ford. Uber values potential revenue from all of the services it wants to eventually tackle globally at $12.3 trillion.

But that vision comes at a steep cost. The company lost $3 billion on its operations last year and has indicated it could be unprofitable indefinitely.

If Uber is able to grow revenue by at least 10 percent annually, it could turn a profit in 2024, Morningstar analyst Ali Mogharabi said. He said Uber, with a market capitalization of about $70 billion, could reach $110 billion as marketing and other costs fall. As recently as last week, bankers thought Uber could be worth as much as $90 billion upon its stock market debut.

Company executives including Khosrowshahi were on hand Friday morning for the bell-ringing on the balcony of the New York Stock Exchange. Kalanick was in attendance on the floor.

Meanwhile, tensions have increased in Uber’s core business, as some drivers say they believe Uber executives are becoming millionaires at their expense. Drivers held demonstrations and strikes in cities around the world Wednesday in protest of the company’s pay practices, demanding fair and transparent wages as they say their paychecks have decreased.

Uber and Lyft drivers strike for pay transparency — after algorithms made it harder to understand

Uber’s persistent losses may heighten pressure for it to push wages down further.

“They are the big name,” said Shawn Key, 42, an Uber and Lyft driver in Baltimore. “So it’s not going to get any easier for us drivers if they are not making money themselves.”

Key, who drives about 30 hours per week, said he participated in the strike Wednesday. “We are the brand, we are the ones who make the money for them — so why are we making less?”

Nicholas Farhi, a partner at OC&C Strategy Consultants who focuses on ride-hailing apps, said the strikes and demonstrations by drivers this week may have spooked investors, who would now have another reason not to buy into the hype surrounding Uber.

“I think that’s quite a scary prospect for Uber, as well as for an investor, that certainly would have encouraged me to price at the low end of expectations," Farhi added.