I usually don’t read too much into it when a corporate executive sells stock in a company they are associated with (or formerly associated with) since there are many reasons why someone might sell shares of stock that are unrelated to the fundamentals of the business. Also, even if an executive does sell a stock for “fundamental reasons” relating to expectations of future business performance, so what? If you look up any great-performing business over the past twenty years, you will find some executives sharing shares every quarter. Heck, in 2008, there were five executives at Visa (V) that sold stock at a price between $16 and $18 per share that is now worth $188 per share.
Notably, however, it was recently disclosed (per SEC filings) that the Uber co-founder Travis Kalanick sold nearly all of his stock in Uber. In May 2019, when the stock went public, Kalanick had almost 100 million shares of Uber stock. He has liquidated that position down to 7 million shares, but may have sold all of it (due to SEC filing deadlines and the accompanying reporting lag). As a result, he has collected almost $3 billion in cash pre-tax from the liquidation of his holdings.
Although there have been reports that Kalanick is frustrated with the management team that ousted him, you don’t sell billions of dollars of stock and incur the accompanying tax costs unless you have concerns about the future performance of the stock itself.
I suspect Kalanick knows darn well that: (1) Uber is set to issue approximately 250 million shares of stock over the next five years to executives; (2) it is losing $3-4 billion per year, which could cause massive dilution if the company needs to undertake a dilutive equity issuance to raise capital to offset its losses sometime around 2022-2024; (3) and the stock is massively overvalued.
Expanding upon valuation, Uber currently generates $14 billion in revenue while losing about $4 billion. The analysts are assuming that Uber will generate revenue of approximately $25 billion to $30 billion in approximately five years due to its rapid international investments. Even if those lofty revenue projections take hold, the fact is that the transportation industry has only historically averaged profit margins of 5%. So if it earns $30 billion revenue, the normalized profits for a transportation firm would be $1.5 billion (this is an optimistic scenario, as Uber has shown no sign of ever generating such a ‘typical profit’ and many U.S. states are adding regulations that will add significant costs to the company’s business model that relies upon independent contractors that take on many of the duties of an employer/employee relationship except for the discretionary work hours).
If Uber were to earn profits of $1.5 billion, and issue an additional 250 million shares to bring the share count to 2 billion, the company would be earning somewhere around $0.75 per share under this scenario. With the current stock price of $30 per share, that would mean that the stock is currently trading at 40x the earnings that it might optimistically be generating five years from now.
Therefore, 25% annual revenue growth, along with a reversion towards the industry’s mean profitability ratio (that Uber has never experienced), are the necessary conditions for Uber stock to be worth $30 per share in 2024. That is a very high threshold in order to breakeven on an investment over the course of the next five years.
These nutty P/E megacap valuations should strike you as self-evidently disastrous. In June, I made fun of Beyond Meat’s $150 price tag because the P/E ratio for the stock was absurd based upon conventional metrics. Just six or seven months later, the stock is already down to $77. There was no magic insight on my part. It was just the common-sense observation that megacap stocks rarely are worth more than 20x earnings over a long period of time, so you have to prepare for a terminal return to that valuation level.
Even at $30 per share, Uber is still valued at $50 billion. That is crazy. If Uber were to be graded on conventional precepts five years from now, it would need to effectuate revenue gains north of 25% annualized while also dramatically raising its prices per fare (unlikely) or paying its drivers less (unlikely, given the regulatory trend towards guaranteeing higher minimum levels of compensation).
No wonder Kalanick departed with his shares. The company would have to perform admirably for the next five years to be worth $30 per share in 2024. At most, Uber is worth $15 per share today. Essentially, Kalanick was able to take advantage of the emotions of the market participants to capture $2.8 billion in capital gains from an investment that, properly understood, is worth $1.4 billion at most. He’s collecting a billion-and-a-half irrationality tax in his favor that is being paid by people who think pressing a button to summon a car is cool.
In my entire life, I have only covered one stock that has built real wealth while appearing non-sensical according to conventional metrics during its rise. And that company is Amazon. But what distinguishes Amazon is that, if one judged the firm’s revenue growth while presuming that it could generate the profit levels of Wal-Mart, the valuation would at least become intelligible. And it rolled out Amazon Prime and hiked prices to realize the shift. Uber does not have the benefit of pulling such a profit lever, and even if it did, it would still be unattractively valued. To the extent Kalanick has acted upon this, it has literally been a billion-dollar insight.