Uber tanks more than 10%, falling below $38 per share, after disappointing debut

Key Points
  • Uber fell more than 10% Monday, the first trading day after it disappointed investors in the most highly anticipated initial public offering of the year.
  • The stock fell below $38 per share.
  • Despite the market reacting negatively, analysts at New Street research think the stock is attractively valued and has a promising path to profitability.
Traders work during Uber Technologies initial public offering on the floor of the New York Stock Exchange on Friday, May 10, 2019.
Michael Nagle | Bloomberg | Getty Images

Uber closed down more than 10% to below $38 a share Monday, its second trading day as a public company following its disappointing debut on Friday.

Uber began trading at $42 per share but dropped 7.6% on its first day on the New York Stock Exchange on Friday. To be sure, the last two days have been volatile for the U.S. stock market amid a breakdown in trade talks with China. Major U.S. indexes dropped more than 2% on Monday.

Uber priced its shares toward the low end of its target range of $44 to $50 per share on the eve of its debut. This share price gave the company a market valuation of $75.46 billion, which well below the $120 billion it was reportedly seeking when news first broke it was preparing to go public.

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If and when the ride-hailing company will generate a profit is a huge question for investors. Despite the market reacting negatively to the stock, analysts at New Street research think the shares are attractively valued and have a promising path to profitability.

"Uber will eventually reach high single digit margins, as a percentage of booking, as bookings reach $200 billion," New Street research analyst Pierre Ferragu said in a note Monday. Ferragu said Uber can reach 7% margin on bookings over time.

Ferragu also said individual usage is growing. "Uber can grow monthly active users 3x in the US, 4x in the rest of the world," he said.

However, average ride per user is not growing, said Ferragu. "This conflicts with the idea that ride-sharing can continue to take share from other means of transportation, especially private cars," he said. But Ferragu said average usage will pick up as user growth data slows.

"A flat average ride per user therefore hides increasing usage at an individual level," he wrote. "Our cohort analysis clearly demonstrates this means average usage will pick up as user growth slows."

Ferragu also pointed out that against common wisdom, ride-sharing penetration is low. With 50 million to 60 million riders in the U.S., only 30 million are active monthly users, which is only about 13% of adult urban penetration.

Many investors looked to Uber's ride-hailing competition Lyft on the heels of Uber's debut. Lyft stock is down almost 33% since it went public in March.

In an interview with CNBC's Andrew Ross Sorkin that aired Friday, Uber CEO Dara Khosrowshahi said Lyft's performance "led us to be a bit more conservative."