Uber drops as London bans app

Transport for London has stripped Uber of its licence to operate in the capital. The company has 21 days to lodge an appeal, which it has said it will do, and it continue to operate until such appeal is completed.

Shares printed -5.9% in pre-market trading at $27.82 at one stage before paring losses just ahead of the open to trade 4.3% lower. The stock is barely a couple of dollars away from theall-time low. It could be a rocky session out there today.

Uber has suffered a big blow with this ruling. London, with about 3.5m users, is the largest market in Europe for Uber. London is one of the group’s ‘fab five’ cities that account for around a quarter of global revenues. There is a clear and obvious hit to revenues, if the ruling is upheld, which it seems likely it will. Competition in the shape of Bolt and Ola are ready and willing to step in at the drop of a hat in the capital and it could be forgotten pretty quickly once gone. At least a drop in revenues should also equate to narrower losses.

More broadly it betrays the scope and depth of the legal and regulatory problems faced by Uber. The list of legal issues is long and broad in its scope and geography. These present ongoing overhang for the stock as, whilst there have been problems about corporate culture, largely the run-ins with the regulators and policymakers pertains to the very structure of the business itself and how it operates; taxation, labour laws and consumer safety are the milking stool of regulatory instability. It betrays also the fact that cities and local lawmakers do have considerable leverage should they wish to use it. Uber will continue to face elevated competition from local rivals and a high-degree of regulatory scrutiny that threatens to undermine how it does business.”

Morning Note: Market selloff, Uber tanks again, Vodafone grasps the nettle

Forex
Indices
IPO
Morning Note

It was another, more brutal sell-off on Wall St led Asian shares lower overnight, setting us up for a nervy session in Europe. Futures right now look positive but we may well see selling pressure re-emerge.

SPX closed 2.41% lower, taking it back to March levels. This was its worst decline since the turmoil at the start of January. The Nasdaq suffered its worst day since December as tech stocks were the worst hit from the fallout of the US-China spat. The Dow shipped over 600 points, to end around 25,324, with some of its biggest hitters affected by the China trade story directly (Boeing, Apple).

Risks for now seem very much skewed to the downside until we see some kind of equilibrium achieved again. The market is seeing the window for a deal causing tightly, although with tariffs not taking effect yet we could yet see some improvement in relations. If this is the third shoulder of a giant triple top in the market there is a hell of a long way to go lower. But we are probably not at that stage yet. The Fed remains on side – bets on a cut this year have shot up from around 50/50 to around 75%.

Commodities

Gold spiked higher as a risk-off proxy. Prices which had dithered around $1280 level for a while drive up through the big round number at $1300 and was last just down a shade beneath this.

Oil had risen amid escalating tensions in the Persian Gulf. However the reality of the trade war began to hit home later and crude prices slid again. Brent, which had leapt clear of $72, was last holding just shy of the all-important $70.60 level. This is a level we have talked about time and time again and it is proving something of magnet for Brent right – a decisive break in either direction could signal a fresh direction.

FX markets are completely ignoring the whole stooshie, although there a touch of movement in the Chinese yuan, but not a lot. Little movement for now as central bank liquidity is onside to keep volatility low. BoJ now also talking more stimulus should consumer prices lose momentum.

Uber stock reels post-IPO

It was a bruising session for Uber with shares down by more than 10% on the day. Adding insult to injury, they fell further after market to trade below $37.

Following the Uber and Lyft debacles, there are now questions over whether some remaining unicorns choose to lust this year. The likes of Airbnb and WeWork could decide to pull their planned IPOs until there is more certainty.

Moreover current market conditions do not seem favourable for listings right now and companies may prefer to wait for a rebound in the broad market before listing. That said, it’s too easy to lump all IPOs into the same basket and see a read across.

There have been notable positives in the latest round of IPOs – Beyond Meat, Zoom and Levi’s shares rising firmly from the strike price post-IPO. Perhaps it’s just a case of good old fashioned stock picking and valuations after all.

Vodafone cuts dividend

Vodafone has bowed to pressure and cut its dividend. Or rebased to use the euphemism. The dividend was cut from 15 eurocents to 9, which is a very hefty cut indeed and investors will punish this move. Unlike some notable others, though, Vodafone has grasped the nettle and chosen to put the future of the business ahead of short-term returns to yield hungry investors. Now it’s not great news, but at least it shows the new CEO is willing to think longer term and is seeking to manage the debt.

On top of controlling debt, one of Vodafone’s key problems is the very large investment needed for 5G rollout. Auctions in Italy and elsewhere (Sweden, Australia) indicate the enormous costs and further divestments to shore up the dividend whilst still investing enough in capex seems inevitable. It is very likely Vodafone will flog its towers as part of this strategy, or to use another euphemism in today’s update – monetise. Vodafone also announced that it will sell its NZ business for $2.2bn in a move that frees up some cash.

Today’s results were full of euphemisms actually. The raw results showed a 6.2% decline in revenues and a loss for the year of €7.6bn. But instead management is directing us to ‘alternative performance measures’, which show far healthier EBITDA growth of 3.1% and group services revenues rising by 0.3%. Caveat emptor. In addition to the 5G cost, Vodafone faces a number of competitive headwinds in Italy, Spain and South Africa. There’s a lot of restructuring going on amid big changes in the industry with 5G. Management seems to be grasping the nettle and should be allowed time to deliver on the strategy

Morning Note: Trade war escalates, Uber IPO caution, IAG profits sag

Forex
Indices
Morning Note

Tariffs on $200bn worth of Chinese exports were raised to 25% last night. Trump was true to his word, and there is no can kicking. This marks a sharp escalation in the trade spat, but it’s not gone nuclear yet.

Talks between the Chinese and the Americans are continuing today, although we don’t hold out much hope of anything meaningful being achieved this week.  

It all tends to suggest Mr Trump is playing one of his aces in order to force the Chinese into concessions. His bet is that the US economy can weather any hit from tariffs better than China. He is probably right but this will not help ease uncertainty about the global economy. Beijing is weighing whether to retaliate. 

Yesterday the S&P 500 bounced off its lows, closing down just 0.3% at 2870.72, having plumbed lows around 2835. The Dow was offside by 139 points on the close, but was over 400 points lower at one point. Algos seemed to bidding it up after the ‘beautiful letter’ nonsense.

Oil has rallied, indicating markets have had enough of the selloff. Brent was last pushing up at 70.75, above the key 70.60 resistance point. The flag pattern does look like it could be a bullish continuation pattern that is just about complete – watch for a leg higher. But failure to cement the tentative gains we see this morning would be bearish – look for the area around 69.50 for support.

Asian stocks bounced overnight and European futures point higher today. Chinese stocks were last about 3% higher – just remember how much these stocks had sold off earlier in the week.  There is still hope that a deal will be done.

Uber prices at low end 

Uber priced at the bottom end of the range at $45. It’s a rough time to be coming to the market after the selloff this week but this IPO exists to a degree in its own bubble. Are you betting on the long payoff? If not, you may well be disappointed – profits are not coming any time soon.  

But shares could yet pop higher today, partly because of this conservative approach that Uber clearly learned from Lyft’s bumpy ride post-IPO. I said yesterday (Uber set for big pop despite Lyft worries, 09/05/19) that I would not be surprised if the people selling Lyft stock are simply doing so in preparation for the Uber listing, so be careful reading too much into the Lyft troubles. FOMO is a strong emotion. 

Nevertheless, my main concern is the slowing revenue growth. Whatever the cash burn, you’d want to see accelerating top line growth in a disruptor coming to market.  

IAG profits sag

Profits at IAG were hit by rising fuel costs and a big FX headwind, whilst we see a broader thread across airlines with margins being competed away. Excess capacity remains a problem, as we heard from Lufthansa. In fact, we can pretty much regurgitate what we noted about Lufthansa – lots of competition means no one has the pricing power, whilst labour costs are a factor, but the biggest headwind right now is fuel costs, which were up 15.8%. Non-fuel costs were 0.8% higher. 

Although passenger revenue growth was at a healthy clip, up in excess of 5%, first quarter operating profit slumped to €135 million before exceptional items, which was down 60% from a year before on pro forma basis. Profits after exceptional items – which were zero in Q1 – were down 86%. FX headwinds knocked €61m from the bottom line. 2019 operating profit is seen in line with 2018 – which means no growth in the year ahead. 

Uber set for big pop despite Lyft worries

IPO

Uber will price its IPO today with shares set to be set somewhere between $44 and $50, with the stock to start trading on Friday.

There is certainly a more cautious tone to this one than when its big rival, Lyft, listed. Shares in the latter have fallen over 30% since IPO day. Fears that this is just the froth at the top of a tech bubble are surfacing. However with the pricing range there is a big chance of a significant pop on the day, even if one remains of a conservative disposition and wonders about the fundamentals and whether Uber can ever be profitable. FOMO will win the battle on the day, but maybe not the war.

Uber will be valued at between $80.5bn and $91.5bn, well below the $100 bandied about for some time but still well ahead of the last funding round in August, when the company was valued at around $76bn.

The FT reports that Uber will price at or below the midpoint of that range. I would anticipate a big pop on the day if that were the case, as this is already a fairly conservative range.

Uncertain earnings

The latest financial figures raise as many questions as they answer. In Q1 2019, Uber made a net loss of $1bn, on revenues of $3bn. That represented growth of 18-20 per cent, solid enough, but well down from the 70 per cent growth a year ago.

Last year’s numbers also present investors with problems. 2018 revenues rose 43% last year to $11.3bn from $7.9bn in 2017 – good but slower than that of the prior year when we saw revenues double. The company burned $2.1bn in cash in 2018, albeit down from $4.5bn just a couple of years before. Meanwhile, revenues from the core ride-hailing division have flatlined over the last two quarters. Uber’s revenue for the fourth quarter came in at $3 billion, up 25 percent from the same quarter last year, but this was lower than the 38 percent in Q3.

Lyft’s spectre

Lyft casts something of a shadow over the Uber IPO. Having been aggressively priced ahead of going public shares in Lyft are now down over 30 per cent from where they were on IPO day. Lyft is a spectre in another sense – gaining market share from Uber. Indeed, it’s not just Lyft – Uber is losing market share to many other local rivals in a number of geographies. In the US and Canada it’s barely recovered from its 2017 annus horribilis.

Lyft’s Q1 earnings have been said to cast a pall over the Uber IPO. I would be less certain about that – it was a huge loss for sure, but below last year. Uber has said that 2019 will be when losses peak. I wouldn’t be surprised if the people selling Lyft stock are simply doing so in preparation for the Uber listing.

Week Ahead: Uber IPO incoming, Lyft reports earnings, Walt Disney awaits the Endgame

Week Ahead

Coming up this week: one of the biggest IPOs in history as Uber goes public, communications and policy decisions from several leading central banks, as well as key company earnings reports.

Traders seem to be in a frenzy ahead of Uber’s highly-anticipated stock market debut, but will the poor performance of rival Lyft have tainted the shares? Earnings season may be slowing, but there are still some top companies left to update. The focus of much of the week for the FX market will be commentary from central bankers. Top tier UK and US data on Friday could be another source of volatility.

Uber: huge demand, high valuations, no profits

How much are markets willing to pay for a unicorn that sucks in cash and has yet to make a profit? Up until Lyft’s IPO, it seemed the answer was ‘a lot’. But despite opening over $15 above its IPO price, Lyft stock quickly tumbled. As happened to Snap Inc a couple of years back, a must-have stock quickly became a damp squib. Those IPO prices seem like distant memories for the languishing share price.

Ride-hailing giant Uber could be different. While also not profitable, the company dominates the domestic market, has a huge international presence, and boasts several other strings to its bow that Lyft doesn’t, such as Uber Eats and Uber Freight. The company is even working to develop flying taxis.

Uber will go public on Thursday 10th, potentially raising up to $10 billion for a valuation in excess of $80 billion. Has the debacle of Lyft shown that markets aren’t really that eager to hold a piece of a loss-making tech startup? Or is this an indicator that in the battle of the ride-hailers, traders are waiting to throw their backing behind Uber?

Forex: central banks dominate the week until Friday’s top tier data

The Reserve Bank of Australia announces its latest official cash rate decision during the Asian session on May 7th. This is just the start of a string of policy communications from some of the world’s biggest central banks. The Bank of Japan publishes its Summary of Opinions and policy meeting minutes in the following session. The Reserve Bank of New Zealand follows with its OCR decision. There’s also a press conference and inflation expectations from the RBNZ to watch.

The European Central Bank publishes the accounts of its latest policy meeting during Tuesday’s European session. As with most of these communications, the risks seem tilted to the downside. The Federal Reserve is still cautious, albeit less so following last week’s FOMC meeting, so it’s hard to see how any of the other world’s central banks could find much room for optimism. We’re certainly not expecting that from the BOJ or the ECB.

Markets are unlikely to be expecting bullishness from President Mario Draghi and colleagues. Even so, there are still downside risks to the euro if it seems that the Governing Council seems in favour of more quantitative easing. A more bullish case for EUR/USD notes the descending impulse wave pattern on the daily chart. Five complete waves in the trend suggesting a potential three wave correction which could push the pairing higher.

Meanwhile, the Aussie is braced for a potential rate cut. Nothing is a given, but there is a strong consensus amongst analysts that a downward move is imminent. Meanwhile, the RBNZ will likely signal that it intends to remain sitting on its hands for a long time to come. Perhaps frozen policy could be an upside for the Kiwi, with traders breathing a sigh of relief that the RBNZ isn’t planning on following the RBA on a more dovish trajectory.

False hope from UK growth data, US CPI could dash rate cut hopes further

US CPI figures wrap up the week, which could tilt the US monetary policy outlook ever-so-slightly back towards the hawkish side of the spectrum. A solid consumer price index reading, while not the Fed’s favourite measure of inflation, could give markets reason to expect a little more optimism at the next policy gathering.

The UK’s first quarter GDP print is also due on Friday. This could make interesting reading. While analysts generally agree that the UK economy is likely to slow this year, as Brexit uncertainty and softer global growth conditions weigh on output, companies have been busy stockpiling ahead of the UK’s departure from the EU. This flurry of activity could inflate the first-quarter reading. It’s already helped push some for the PMIs for the January-March quarter higher.

Equities: Lyft to chronicle losses, Disney to pave the way for Q3 strength

Earnings season may be winding down, but there are still some points of interest on this week’s calendar. BMW kicks things off with its Q1 earnings during Tuesday’s European session. The highlight, however, will be the after-market first-quarter results from Lyft.

It’s been a bumpy road for the ride-hailing company since its IPO. The stock has plummeted following the traditional debut surge to trend around 30% lower.

The issue of profitability is key. Lyft will undoubtedly report another large loss for the first quarter. Traders will want to know how quickly the company can slow the cash burn and when management envisions the company entering the black.

Lyft had better make some progress fast, or it could see itself becoming another Tesla – constantly battling the short sellers and limping from quarter to quarter.

There are a trio of euro stocks due on Wednesday: Siemens, Commerzbank, and Wirecard. After being hit by an accounting scandal over the past few weeks, Wirecard will be hoping to return the focus to its fundamentals and away from its business practices. A poor set of numbers could see Wirecard tumble, especially as there is no longer a ban on shorting the stock.

Walt Disney releases prequel to highly-awaited Q3 results

Walt Disney releases its Q2 figures after the US closing bell on Tuesday. The House of Mouse is riding high at the moment, boosted by the recent announcement of its long-awaited streaming service, and the storming box office success of the Avengers: Endgame, the studio’s latest Marvel superhero offering. With the record-breaking film having been released during the company’s fiscal third quarter (a period which also contains the hugely-successful Captain Marvel) management’s latest guidance should make for interesting reading.

Thursday brings fourth-quarter earnings from BT Group and AGMs from Adidas and Ford Motor Co.

Indices: S&P to retreat from highs as rate cut odds dwindle?

The S&P 500 hit a fresh record intraday high last week, as well as notching up a record closing high. The strong number of beats this earnings season (against a particularly low set of expectations) helped push markets that little bit higher.

But equities lost a key fundamental driver last week. The Federal Open Market Committee concluded that the US economy is on a pretty solid footing, even if it is lacking inflation and recent PMI’s have been softer than hoped.

This means the odds of a rate cut this year aren’t as high as the markets have been counting on. Indices were quick to undo some of their previous bullishness. President Donald Trump may be demanding a 1% cut to the federal funds rate and another round of quantitative easing, but the Fed won’t bow to such request and this has left the equity rally looking overextended.

Forget earnings – Lyft set to release Q1 loss report

LYFT caused quite a stir when it held its IPO in March. The offering was quickly oversubscribed (as is Uber’s), and shares eventually hit the market at $87.24 – well above the company’s $72 per share offer price.

Initial public offerings tend to start with a bang – stock often rockets higher before settling down; as Lyft’s did when it closed its first day of trading at $77.75. It only took one more session to drop below its $72 offer price, and the rout has continued ever since. At the time of writing, Lyft is trending 30% below its offer price, languishing sub-$60.00.

More pain incoming for Lyft stock?

It seems that owning a piece of a unicorn that is yet to make a profit but is valued at over $26 billion quickly lost its shine. Tech IPOs are always exciting, because everyone hopes to end up holding a piece of the next Facebook, but so far Lyft looks more likely to follow in the footsteps of Snap Inc, which has never come anywhere close to reclaiming 2017’s starting price and is currently 62% below it.

Profitability is the key issue. Ride-hailers like Uber and Lyft may have disrupted the traditional taxi market, but so far they are burning through cash fast. In its IPO filing, Lyft revealed that it made a net loss of $911 million in 2018, up 23% from 2017. However, revenue was growing faster, with 50% growth to $2.2 billion recorded last year.

Markets will be looking to see whether Lyft can continue the rapid pace of revenue growth, while those losses need to be reined in. A slower pace would be a good start, but really markets want to see that number reversing as the company hopefully moves towards profitability. Will management offer any guidance regarding a timeline for that?

The stock will live and die on those expectations; growing market share or increasing revenue per ride will mean nothing if the company keeps piling up the losses.

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