Investors are very excited about the possibility of an initial public offering for ride-sharing services Uber and Lyft at some point in 2019. And for good reason: Uber could be on its way toward a valuation of more than $120 billion, according to reports. But how can average investors get in on the company before the IPO?
Traditionally, only favored wealthy funds and a few accredited investors who provide capital to professional managers are able to participate in an IPO before the stock is released to the general public. But many average investors would like a chance to bet on Uber. The company is part of a broader movement that is disrupting the transportation industry, first taking on black cars and taxis and now challenging private shuttles, buses, subways and food delivery. Uber and Lyft stand as the face of a young and rapidly growing multibillion-dollar industry.
There are a number of ways for average investors to directly or indirectly bet on Uber’s performance. This article explores ways that investors can profit from Uber’s growing global dominance in the ride-sharing market.
The Indirect Approach
One indirect method is to invest in a publicly traded company that owns a sizeable share of Uber private stock. Some major Uber investors include Alphabet Inc. (GOOG), Microsoft Corp. (MSFT), Softbank (which can be bought OTC, the ticker is SFTBY), or private equity giant BlackRock Inc. (BLK). Given that Uber’s post IPO shares would become part of these investing company’s balance sheets, their stocks can realize strong gains when Uber’s private stock goes up.
For example, Yahoo Inc. (which is now Altaba Inc.: AABA) was a very large investor in Chinese e-commerce giant Alibaba Group Holding Ltd. (BABA). Prior to Alibaba’s IPO in 2014, Yahoo! saw strong gains thanks to its Alibaba holdings. When Alibaba stock rose and fell during a trading session, Yahoo stock regularly followed.
The Competitive Approach
You can also effectively wager on your expectations for Uber's and Lyft's future by speculating on a competitor’s stock. While the companies' rises may seem unstoppable, both are in fact facing many competitive, legal and regulatory challenges. Competitors in the transportation industry are not going to go down without a fight. No group of rivals has been more outspoken and willing to use lobbyist influence than the taxi industry.
Uber’s largest legal threat is probably coming from the approximately 160,000 drivers working for them. Uber classifies these drivers as independent contractors and not employees. This allows the company to avoid responsibility for any Social Security or Medicare payments, healthcare costs, or workers compensation claims. But these drivers are initiating lawsuits claiming that they are employees who should receive benefits and protections. A number of current cases in California could lead to an avalanche of lawsuits across the country. And in April 2018, a ruling by the California Supreme Court made it "much more difficult for companies like Uber...to classify workers as independent contractors rather than employees."
For these reasons, anyone with a bearish view on Uber can profit by investing in a company whose stock would surge if Uber fails in a sea of legal and regulatory challenges. That company is Medallion Financial Corp (MFIN), a specialty finance company that writes and services loans for taxicab medallions in major U.S. markets like New York City. Medallion’s stock has plummeted over the last 52 weeks under the uncertainly of the future of the taxi industry in the age of ride sharing.
The Accredited Investor Approach
Following successful seed and angel investments in 2009 and 2010, respectively, Uber raised capital through a Series A round of investments with venture capital and private equity giants. The company has now completed many rounds of funding and obtained an additional $8.9 billion in December 2017 secondary market funding. In 2015, the firm raised capital from private equity giants Baidu and Tata Opportunities Fund. To become a client of a private equity fund, which might invest in private, pre-IPO companies like Uber, you must become an accredited investor.
To qualify to be an accredited investor, you must have a have a net worth of at least $1 million, not including the value of your primary home. Another way to qualify is by earning income of at least $200,000 for two consecutive years. You may also qualify if your combined income with your spouse is at least $300,000 (for more read, “Breaking Down 'Accredited Investor’”).
Accredited investors can give money to the private equity companies that invest in Uber. For a better understanding of the types of funds that have invested in Uber, read CrunchBase’s breakdown of the firm’s investor rounds.
The Bottom Line
The private equity funds and venture capital companies that invested in Uber are no doubt looking forward a big payday following the IPO. Average investors who want to bet on Uber and Lyft pre-IPO can invest in other ways—for example by purchasing or shorting the stock of rival companies. (For more, read "Is Uber The Future Of The Taxi Industry?”)