Buy what you know is an old investing adage – when applied correctly
In early May of 2019, Uber had its long-awaited IPO and raised billions of dollars. The company priced its IPO at $45/share, it debuted at $42/share and after the first day of trading, it was down 7.6%. But it still had a market cap of about $70 billion.
About six months later, after the market close on November 4th of 2019, Uber announced its third-quarter earnings and the results were not good.
Glass-half-full-Uber-lovers might tell you that the losses in the 3rd quarter were at least smaller than the enormous losses in the 2nd quarter, but that’s hardly a silver-lining.
Third Quarter 2019 Results
If you’re confused by the success Uber has had in becoming a household name, while losing a lot of money, you’re not alone. Let’s quickly review their most recent earnings results.
But before we do this, keep in mind:
This is not a recommendation to sell Uber, buy Uber, use Uber, get an Uber tattoo or name your new puppy Uber.
- Uber’s revenue climbed 30% year over year to $3.81 billion
- Uber saw a 26% increase in monthly active platform consumers to 103 million
- Uber lost $1.16 billion, or $0.68 per share
- Uber raised guidance for its full year 2019, saying it now expects an adjusted EBITDA loss of $2.8 billion for the year
- Uber’s stock price lost about 9% after posting their 3Q2019 earnings
- Uber’s stock price crept above its IPO debut earlier this summer and was trading at its lowest level ever subsequent to the release of their 3Q earnings
Uber’s IPO Debut
If the CEO of a car company tried to convince you that a certain new model car was worth $30,000, but then when they went to sell said car and they could only sell it for $20,000 to other car experts, would you buy it?
University of Florida professor Jay Ritter calculated that Uber’s more than 7.5% decline the day after its IPO debut made it “bigger than first day dollar losses of any prior IPO in the U.S.” Whoa.
Let’s use another car analogy: you buy a new car for $30,000 and you know that as soon as you drive it off the lot it will be worth less than that. Maybe after a year it’s worth 10% less. But you get to drive it for a year. You can’t drive a stock.
Uber Has Never Made Money
Part of the problem is that Uber continues to lose money, including a $1.8 billion loss in 2018 and a loss of $2.2 billion the previous year. In fact, one analyst estimated that every time someone ordered up one of the company's services — the company loses about 58 cents.
Never. Made. Money.
I’m Buying Uber Because…
It’s an old investing adage: “Buy what you know.” And you know Uber, right?
But that advice has real downsides if you don’t apply it properly. Investing icon Warren Buffett advocates that investors purchase stock in companies whose businesses they understand. The proviso is that investors take a sophisticated approach. Because plunging ahead, full of self-assurance, often is risky and unprofitable.
According to Buffett:
“Whenever you buy a stock … you should be able to take out a one-page sheet of paper and say: “I am buying the General Motors company at $55 billion because…”
If you can’t write that out, then you ought to go onto something else,” Buffett said.
“If you’re buying groceries, buying anything else, you can answer that question. But if you can’t answer it on something you’re involving your savings in for however many years for, why should you be doing it?”
That’s a great question.