Why investors can't wait to buy into Uber, a company that's never made money and maybe never will

It's one of the fastest growing technology companies in the world.

Customers took more than five billion rides on the service last year, spending almost $50 billion US in the process.

And each and every time someone ordered up one of the company's services the companylostabout 58 cents.

Sound like a good investment? With most companies, the intuitive answer to the question above would likely be no. But Uberisn't like most companies.

Founded in Silicon Valley a decade ago after its two co-founders reportedlycouldn't find a taxi on a cold night in Paris, Uberpioneered the concept of ride-sharing,with drivers operating as independent contractors, by coming up with a smartphone appthat allows users to request a ride, and easily pay for it via a linked-up credit card.

It has since grown to include food and package delivery services, waged an all-out war with the taxi industrywhile becoming an eponym for the sharing economy as a whole, prompting a slew of imitators to pitch themselves along the wayas "the Uber of" whatever industry they are attempting to shake up.

It's quite animpressive feat for a company that has burned through $20 billion worth of venture capital money since its founding in 2009 and, by its own admission may never turn a profit.

"We have incurred significant losses since inception," the company acknowledgesin paperwork it filed with regulators in April, on the road to going public in Friday's IPO. "We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability."

Trifling details like actually making money don't seem to be a hindrance to investors, who have beeneagerly awaitingthe company'sIPO, which gives the public its first opportunity to buy into the hyped-up company.

At the end of business Thursday, Uberset the IPO at $45 a share, on the lower end of its targeted range of $44 to $50 per share.

The company will raise$8.1billion in the IPO, giving Uber a valuation of $82.4billion. But despite those eye-popping numbers,not everyone is convinced the company will get five stars with investors over the long term.

Look at what's happened with Uber's main rival, Lyft, which went public in March in an IPOthat raised billions and valued the company at $72 a share.

The shares roared out of the gate to almost $90, but quickly reversed course. Today they're under $60 a share as investors have started to realize there's a sea of red ink below the sky-high expectations of ride-sharing companies.

Mike Ward, an analyst with Seaport Global, is the lone analyst with a sell rating on Lyft, and a lot of the reasons for his cynicism about Lyft can be said of Uber, too.

Namely, they burn through far more cash than they bring in. In Lyft's case, the company booked $8 billion worth of rides last year, and kept about a quarter of that money for itself the rest went to drivers.

Within that $2 billion,Lyfthas to pay myriad expenses, including marketing, insurance, regulatory and legal costs in new markets that are usually resistant to their entry, and other expenses. Add it all up, and Lyftlost $911 million last year or $1.47 for each and every one of their more than 616 million rides last year.

So why buy? For investors, the case in favour of these companies basically boils down totwo ideas: They will make money as more people ditch car ownership and opt for ride sharing instead, and self-driving cars will turn them into autonomous cash machines.

Both of these arguments are far from certain. Ward, for one,doesn't buy the first argument at all.

"In our view, in order for the company to justify its current market valuation, investors need to take a big leap of faith that millennials and later generations will forego ownership of a car and opt instead for reliance on a ride-sharing service."

And he doesn't see that happening. He cites U.S. census data showing that while the number of young people with a driver's licence declined for a few years after the financial crisis, today about three quarters of millennials have a driver's licence not exactly backing up that theory that they have no need of driving themselves.

"The bull case for the ride-sharing industry is that the younger generations will substitute ride-sharing for vehicle ownership," he said."We disagree with thisthesis, and recent licensed driver and home ownership data, in our opinion, supports our thesis."

Despite heady predictions that millennialswill soon kill the car, Ward "believes people will continue to own their own vehicles as primary transportation and instead rely on the ride-sharing services as a convenient supplement."

Uber'sprospectus pegs the theoretical market for its ride-sharing service at $5.7 trillion annually, but Ward thinks it's far smaller about $70 billion in the U.S., by his calculations.

To the second point, a fully autonomous fleet of driverless cars would obviously allow the company to keep a lot more of its revenue, but even that is no sure thing. When an autonomously controlled Uberstruck and killed a pedestrian in Arizona last year, the company hit the brakes on the whole self-driving experimentand has only recently started it up again, on an even more limited basis.

No widespreaduse of self-driving cars?

Both companies spend a small fortune on insurance, and self-driving technology would help them a lot there, too, but Ward says realistically that is still a long waysoff. "At some point, the option for a fully autonomous vehicle could provide a solution, but in our view, widescale, fully autonomous vehicles are unlikely to be available for a decade or more."

To be fair, Uber is far from the only technology company that hastried to cash in before making any actual money. Twitter, Snapchat, Spotifyand many othersall came to market before they'd earned a penny and the stock charts of all three since their IPOs should be reason enough to givewould-be Uber investors some pause.

Becausethingsdidn't usedto be thisway.Finance professor Jay Ritter at the University of Florida crunched numbers dating back almost 40 years, covering more than 3,000 large technology companies that have gone public since 1980.

For most of those early years,about 90 per cent of tech companieswere profitable before they tried to go public. That ratio plunged to barely one in seven during the tech bubble of 2000 as worse and worse companies rushed to market to cash in while they could.

The ratio recoveredsomewhat during the mid-2000s to about 70 per cent profitability. But today? It's back to barelyone out of every six tech companies that bothers to turn a profit before going public.

That's a problem, according to Jawad Mian, the founder of macroeconomicresearch firm Stray Reflections.

In addition to Uber and Lyft, technology companies such as Airbnb, Pinterest, Slack and many more are believed to be rushing to market in the coming months, with stratospheric valuations based on impossiblyhigh growth prospects.

The fervour is so intense that it reminds Mian of another era one that didn't end well for investors.

A hundred years ago, American railroad companies raisedmillions of dollars fromstock market investors happy to buy in basedon breathless projections about the infinite size of a nebulousuntapped market.

"This ended badly, of course, as shares collapsed once valuations reached bubble territory and investors realized that railroads were not as lucrative as they were led to believe," Mian says.

We have long argued the biggest risk to the bull market is an Uber IPO- JawadMian, macroeconomics research firm Stray Reflections

"And railroads have more parallels to today's ride-sharing companies than we might like," he deadpans.

While the industry may evolve into a viable one at some point, the hyped-up valuations of companies like Lyft and Uber makes him worry. "We have long argued the biggest risk to the bull market is an Uber IPO," he says.

"As these companies go public, investors will want to see a clearer route tolong-term profitability even at the expense of growth [but]the dilemma is that there are not many levers to pull to make that happen," he says.

Uber, he notes, has internally been referring to its IPO plans under the ominous codename of "Project Liberty" a nod to the thousands of employees and early investors who have waited years to sell their stakes for a profit.

"If history repeats, perhaps it was so named to liberate fools from their dollars," he said.

"It won't be long before we find out."