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Will the Uber share price plunge when lockup ends?

Uber shares will face a major test when the lockup on most of its share capital will expire. We explain what to expect and what it means for both investors and traders.

Uber Source: Bloomberg

When does Uber’s lockup period end and what will happen?

The lockup period on Uber shares will expire on Wednesday 6 November. On this date, a flood of new shares can be freely traded in the market.

Those investors that bought shares in Uber before its initial public offering (IPO) on 10 May are currently subject to a lockup agreement. This means the company’s founders, management and early investors are unable to sell their shares in the business until 180 days after the IPO.

This is a significant event because a huge number of Uber shares will become freely tradeable on the market. Uber currently has a public float of just over 733 million shares. This is the number that can be traded on the market right now. However, once the lockup expires, up to another 948.7 million shares could enter the market, according to the company’s prospectus - meaning the number of tradeable shares will more than double overnight.

Lockup periods are designed to minimise the amount of selling pressure and volatility imposed on the shares of a newly listed business, so both of these things tend to increase once the lockup ends. Such a large number of shares entering the market is highly likely to weigh on Uber’s share price and inject some short-term volatility, although, the owners of the lockup stock are able but not obliged to sell their shares once the period ends.

Will early investors in Uber cash out?

Uber’s IPO was a catastrophe, and its performance since has been even worse. It has become clear that the company grossly over valued itself when it went public. It issued shares at $45 and started to lose ground from the first day of trading. It has only traded above its IPO price very briefly – on 28 June, when it hit an all-time high of $46.38. In contrast, shares hit their lowest point so far on 10 October, at just below $29, and today they are trading closer to the low than the high, at around $33.

This is unsurprising considering Uber has confessed it may never be profitable (although, chief executive Dara Khosrowshahi has since said there is 'no doubt in my mind that the business will eventually be a break even and profitable business') and released financial results that have been regarded more as a warning than as a financial update. In the first quarter of 2019, it reported a 20% year-on-year (YoY) jump in revenue, but said it still made more than a $1 billion loss and burnt through $722 million in cash. The second quarter (Q2) was even worse. Revenue growth slowed to 14%, the quarterly loss amounted to a staggering $5.2 billion, and the cash burn soared to over $1.6 billion.

Uber has quickly lost credibility among investors and the appalling performance since going public may encourage early investors to cash out when the lockup period ends. Although the share price has plunged from the IPO price, the early investors and insiders that own the lockup shares will have paid significantly less than $45 per share. Probably enough to comfortably profit even at Uber’s current share price.

Uber lays off over 400 staff as it tries to steer towards profitability

Some of Uber’s early investors have already suggested they could start to sell down their stake once the lockup ends. Venture capitalist GV sold off part of its stake in Uber last year, along with other investors, when Japanese conglomerate Softbank wanted to get in on the action. David Krane, who leads GV, recently said the business was weighing up what to do on 6 November.

Speaking to Techcrunch in early October about whether GV will look to sell more shares, Krane said: 'I think it’s not clear yet, to be honest with you. We’re paying attention to the market, which is a bit unstable, to say the least. But yeah […] we’re going to have a big decision to make'.

The owners of the lockup shares are interesting. Based on the company’s prospectus, directors and named executives own around 448.4 million shares in the business, equal to a 26% stake. This includes Matt Cohler’s 144 million shares. He is a venture capitalist from Benchmark Capital Partners, which also owns a similar sized stake in Uber. It also includes the 113 million or so shares owned by Travis Kalanick, the co-founder of Uber who was ousted as chief executive in 2017. Softbank owns over 216 million shares and Alphabet has over 71 million. Other notable investors include venture capitalist firm Expa LLC, payments firm PayPal, and Saudi Arabia’s sovereign wealth fund, The Public Investment Fund. A sizeable number of the lockup shares are owned by individuals, including many Uber employees, which have so far been unable to cash in and have simply had to watch Uber’s value fall further and further away from the IPO price.

Plus, Uber has attracted short sellers that are betting against the company’s future. Around 57.5 million shares – equal to 7.8% of its current float – are on loan to short sellers that believe Uber’s share price will head lower in the future, according to MarketBeat. Just under a quarter of all IG clients that have an active position on Uber are betting against the company and going short.

An average of 9.9 million Uber shares have been traded daily over the 65 days to 28 October, according to MarketWatch. Considering the number of shares to enter the market once the lockup expires is equal to 96x the stock’s average daily volume suggests the market will not be able to fully absorb them.

How to trade Uber shares as lockup expires

  1. Do your research
  2. Decide how you want to trade it. For example, you may want to short Uber before the lockup expiration or go long after a bottom
  3. Open an account with IG to go long or short with derivatives, or buy the shares through share dealing
  4. Open your position

There are a few ways to trade the expiration of a lockup period following an IPO. If you believe the stock is going to suffer as a result of the lockup period expiring, then you could short the stock in the days beforehand. You could do this using IG’s spread betting or CFD services, which also allow you to utilise leverage.

Read more about the difference between spread betting and CFDs

For investors, it could present a different opportunity. If you missed out on buying any shares when a stock conducted its IPO, or feel like you have been priced out, then any knock to the share price when the lockup period expires could present an opportunity to buy at a cheaper price. This only applies if you believe in the stock over the long term, and want to get a cheaper entry point. You can use an IG share dealing account to do this and will own the shares outright, benefiting from any appreciation in price as well as any dividends that are paid.

If you want to try your strategy out risk-free, then you can open an IG demo account first before opening an IG live account.

Watch out: Uber to release Q3 results before lockup expires

It is vitally important to know that Uber will release its results for Q3 of 2019 on Monday 4 November – two days before the lockup expires. This means investors subject to the lockup will not be able to freely sell their shares in the company until long after the results are released.

Expectations are not high for Uber’s quarterly results. The main tasks will be showing that growth is steaming ahead and reporting better results than the disaster that was Q2. If it delivers yet another disappointing set of results then this could prompt a further sell-off, which would mean the share price will be even lower once the lockup expires. This could encourage investors subject to the lockup to either hold off selling in the hope of higher prices, or prompt them to reduce their exposure more than originally planned if their confidence in the long-term prospects is affected. If Uber can pull of a surprise and beat expectations, then shares could find some support. If the price pops higher, this could spur them to sell larger volumes to capitalise, or less if they can raise the same amount of money by selling fewer shares.

What can you learn from the end of the lockup on Uber shares?

It is unlikely that any single investor will offload their entire stake in Uber when the lockup ends but sell down their stake to reap some profits because they haven’t had the chance to do so in the last six months. However, it is worth watching who is selling what. Early investors will want to retain a sizeable stake in Uber if they believe in the company’s long-term prospects and will look to sell more if they think they need to reduce their exposure.

Uber shares: short- vs long-term view

Uber shares will undoubtedly see some selling pressure when the lockup expires, but reports suggest the fall will be fairly prolonged. This means the drop on 6 November may not be as severe as many anticipate, but that it could spark a sell-off over the following months.

It is usual to see a stock’s share price fall on the first day that the lockup shares can be traded. In fact, if other investors (not subject to the lockup period) begin to sell in the days before the lockup expires, then this is a sign that they expect the share price to fall. Uber shares have managed to find higher ground since about 10 October, but remain below levels seen in late August and well below the IPO price. Looking at 15 stocks that saw their lockup periods expire in the first two weeks of October, the majority of shares started to fall in the days before the expiration date, prior to bouncing back three to five days afterwards. Pinterest and Zoom both experienced selling pressure when their lockup periods expired on 15 October. However, some saw virtually no selling pressure on the day, and the share price immediately climbed once the lockup had ended.

There are two main reasons why Uber’s share price has struggled since going public. The first is the fact it overvalued its IPO. The second is a question of sustainability. Uber has proven its ability to innovate, disrupt and deliver an in-demand service, but that is no good if can’t do it profitably.

Sentiment toward Uber is warmer over the long term. Most brokers believe the dramatic fall in Uber’s share price since listing has been overdone. As of 29 October, Uber had an average broker rating of Buy and a consensus price target of $51.68 – implying there is well over 50% potential upside based on the current price. A total of 27 brokers think Uber is a Buy at present, while 10 think shares are adequately priced and recommend Hold. But, considering most people are anticipating shares to unwind over a longer period once the lockup ends, those investors looking for the cheapest entry point possible may be better off waiting a few weeks or months after 6 November, rather than be tempted to buy Uber shares on that date.

In addition, the days to cover on the short interest on Uber shares sits around 5.8 days, a relatively low figure. If there are concerns over the company’s long-term future, then this figure is usually much higher, implying that the market’s biggest concerns surrounding Uber are mostly confined to the short term.

Uber shares: technical analysis

Uber has been on a rebound over the course of October, with shares in the company rallying back into the 76.4% Fibonacci retracement level at $33.52 last week. That resistance level has been accompanied by a descending trendline, which tally up to a highly significant confluence of resistance around $33.50-$34.00. With the company losing ground over H2 of 2019, there is a clear downtrend in play, which has the potential to come back into play from here. A break through the $35.12 level would negate this long-term downtrend, yet this confluence of resistance remains the key that will make or break this October recovery.

Uber daily chrt Source: ProRealTime
Uber daily chrt Source: ProRealTime

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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