Uber could make a fortune this week—giving rides to all the shareholders leaving.
The normal average daily trading volume for Uber is 11.2 million. On Tuesday, nearly 51 million shares traded with the closing price down nearly 10% from Monday’s $31.08 to $28.02. By 3 p.m. on Wednesday, volume had hit almost 120 million and shares dropped more than another 4% to below $27.
The rush of sales is a combination of the end of a lockup period for insider selling and questions investors have about the company’s fundamental performance and its attempt to become profitable.
The great breakout
Lockup periods are standard following IPOs. Many insiders and early investors face restrictions on selling their positions when a company goes public to keep a sudden rush of shares onto the market from driving down the price. Roughly 1.7 billion shares were open for sale starting today, according to Uber’s IPO prospectus.
One analyst, who asked not to be directly quoted, estimated that the collection of VCs that funded Uber held about 946 million shares and that at least 438 million, purchased below Tuesday’s closing price, could be sold for a profit. That still leaves many shares purchased at above the current price that are “underwater,” or worth less than the going share price.
That’s a lot of supply to drive down prices, especially after shares are 35% off from the $41.57 closing price on May 10, 2019, the day of the IPO.
“If this thing trades 150 million shares or 200 million shares and the stock is down a percent, it shows you the market was already pricing in the significant insider sales, and that was what was weighing on the stock the past several weeks,” says Jason Helfstein, managing director and head of Internet research at Oppenheimer & Co. The issue isn’t fundamentals, he says, but that people who had held onto their shares for a long time wanted to finally sell.
“It’s very hard to predict how VC’s and their LP’s will behave but some will sell for liquidity reasons and some will hold the stock for valuation reasons,” Brad Erickson, a senior research analyst with Needham & Company, tells Fortune. “If the stock faces significant near-term volatility, given the attractive valuations the equity is approaching, we’re confident those types of dislocations would find buyers.”
And yet, despite the economics 101 logic behind the pressure from a flood of shares hitting the market, there are some deeper issues at play. Tuesday’s 10% stock decline came after the previous evening’s earnings report.
“I don’t think the quarter was really all that poor,” says Tom White, a senior vice president and senior research analyst at D.A. Davidson, which is a market maker for Lyft and Uber. “The one area where they missed a bit was on Uber Eats [the division that focuses on delivering restaurant food to consumers]—specifically on gross bookings, which were a little bit light.”
“People were hypersensitive over Uber Eats,” agrees Steven Fox, managing director at Cross Research. Significant competition will depress the rates companies in the space can charge, which lowers the chances of profitability in that segment. “While Uber is willing to acquire diners at higher costs for now, with continuing losses generated and/or without much improvement in pricing, the firm could also exit certain markets as it did in South Korea,” says Ali Mogharabi, senior equity analyst at Morningstar Research Services.
On the other hand, there is “some truth in the contrary point in that they do get a platform effect,” which could give them more opportunities with their existing customers, Fox says. “[And their] balance sheet is a lot better funded than maybe some of the other competitors that are struggling.”
There is the additional dynamic at work of investors wondering when growth finally turns to profit. SoftBank Group just did a $9.2 billion write-down on its WeWork investments, while Goldman Sachs took a smaller but still substantial $267 million hit on its interests in so-called unicorn startups.
“While we are seeing a swing of sentiment away from growth at all costs, investors in Uber and Lyft are not yet willing to reward them for merely having a path to profitability despite improved guidance,” says Masha Kahn, director of equity research at HSBC Global Banking and Markets. “We are going through a realization period that you cannot get both—high growth and profits. Something has to give and in the case of Uber, bookings and ride metrics were a bit softer. Consensus expectations especially for Eats bookings growth are too high and need to be adjusted down significantly.”
With that in mind, Uber didn’t help matters with its $1.2 billion loss for the quarter and $7.4 billion for the first nine months of the year.
More must-read stories from Fortune:
—“Secret” recession signs may provide clues to when the next downturn is coming
—The HENRYs—high earners, not rich yet—may finally be having their moment
—A recession may not be likely, but a ‘semi-recession’ is. Here’s what that means.
—Bill Gates talked to high schoolers about the secrets to success. Here’s what he said
—A.I. vs. the wolves of Wall Street
Don’t miss the daily Term Sheet, Fortune’s newsletter on deals and dealmakers.