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Uber has a lot riding on the success of ride-hailing rival Didi’s IPO

Uber sign.
Reuters
The gig is up.
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While the ride-hailing business was hammered by the pandemic last year, the fast pace of vaccination in the US and gradual reopening of cities has breathed some hope into Uber’s prospects. Another source of optimism: it stands to make a windfall gain this quarter from its investment in its Chinese ride-hailing rival.

China’s largest ride-hailing company Didi Chuxing is gearing up for a much anticipated IPO on the New York Stock Exchange tomorrow (June 30), which could help the firm raise around $4 billion by offering 288 million American depositary shares that it aims to price between a $13-$14 range. Depending on the pricing, Didi could emerge with a $62 billion to $67 billion valuation.

The interlinked paths of Didi and Uber

Uber and Didi are rivals—though in some areas of the world they don’t compete—but Uber also became a major investor in its Chinese competitor under the terms of a 2016 deal that saw Uber cede the China market to Didi. That allowed it to still benefit from the Chinese firm’s growth.

While the Chinese company is set to fuel its expansion further with the new funding, which could mean trouble ahead for Uber in places where they do compete, the listing is also expected to benefit Uber, which will retain a 12% stake (pdf, page 218) in Didi after the IPO.

If Didi shares are priced at the top of the range, Uber’s stake in Didi, in theory, could be valued at around $8.06 billion. According to Uber, it owned 15% (pdf) of Didi as of the second quarter last year, which it valued at around $6.3 billion at the time.

“Uber is very likely to benefit from the [Didi IPO],” said Brendan Ahern, the chief investment officer at KraneShares, a China-focused Exchange Traded Funds provider. If Didi’s listing takes place as scheduled, Uber could incorporate that gain into its second-quarter earnings, which means the IPO could have an immediate impact, he told Quartz.

The company last year reported earnings for the April-June quarter, within which the Didi IPO is falling, in August.

Can Didi help Uber post a quarterly profit?

Uber is targeting turning its first quarterly profit on an adjusted EBITDA basis some time in 2021—a goal that it also set and missed last year.

In May it announced it had pared back its net loss in the first quarter to around $108 million. That was a huge improvement from its $968 million loss in the preceding quarter that came despite the hit from new expenses for its drivers in the UK in the wake of a major gig economy ruling. But the lower-than-expected loss was largely due to Uber’s gains from the sale of its self-driving unit ATG, a deal that brought the company $1.6 billion.

Still, Uber’s Didi stake—as well as past divestments—have helped its financials before. In 2018, Uber reported an annual net profit of $997 million (it still posted a loss on an adjusted EBITDA basis, which its executives look at closely to monitor performance). That was largely thanks to the one-time impact of selling its international businesses, but its numbers were also helped by an unrealized gain of nearly $2 billion from a mark-up in the value of its Didi holding.

It seems reasonable to expect a paper gain on Uber’s next financials from Uber’s IPO, though the final IPO pricing will decide its size. Whether that would help tip Uber into a quarterly profit for the current quarter of course depends on a host of other factors. The company has already said that incentives to get drivers back onto the roads will eat into revenues this quarter.

Ahern, of KraneShares, believes it’s the reopening of business in the US that will have the most significant effect on the company’s path to profitability.

“As people get vaccinated, Uber is clearly a beneficiary of the reopening,” he said. The IPO gains, he says, will be “icing on the cake.”

SoftBank, Tencent also gain from Didi IPO

Uber is certainly not the only one riding high on this year’s wave of tech listings in the US.

SoftBank, the Japanese conglomerate whose mega Vision Fund is a major tech investor, posted a record net profit of $45.8 billion for the year ending in March, partly thanks to the firm’s investment in South Korean e-commerce giant Coupang, which listed in the US in March.

When it comes to Didi’s IPO, SoftBank could see its sizable stake in the firm valued at around $13.6 billion, while Chinese social media and gaming company Tencent’s holding in Didi could be worth around $4.3 billion.

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