Before I take on this beast, it would be prudent to offer a few caveats. The first, nothing about my normal way of estimating value works for Uber, at this point. The second, I experienced a remarkable lack of information on the company’s actual operations, which is not surprising given that it is private. The third is that value is remarkably shifty, and for a tech company, infinitely more so. In the well famed valuation conflict between the urges to either quantify or storify, we clearly know who is winning here. Final caveat, I’m writing this on my phone so there’s lots of helpful things I could have linked to or tables i could add, but didn’t. Obviously, you’re not making an investment decision here, so we should be good.
That said, we’re still left with the question: how in the world is an upstart taxi-car company valued at $40 billion aka comfortably more than 72% of the publicly traded Fortune 500. How does anyone justify that? Well, let’s attempt to reverse engineer the thought process.
1. General Industry Metrics: I’d point out that for tech companies, astronomical valuations are the norm rather than the exception but you knew that already. I mean, Whatsapp was acquired for $19billion, and Snapchat is at $3bn, sans revenue. For those that do have revenue, like Uber does, the median valuation ratio seems to hover at around sales x 32. Uber’s 2014 revenue is being whispered at around $1.2 to $2 billion. Strictly valued on revenue multiples then, there is a case to be made for Uber at $40 billion. But we know revenues aren’t earnings and there’s a lot more to that 32 that meets the eye. So then, let’s look deeper.
2. Growth: Uber is growing revenues at around 600% annually. At that rate, the investors are paying today for a much more sizable company in the future, something any future value regression model could show. The central question is whether those future revenues can be counted on. Will Uber keep growing, even if at a lesser rate, and making money for investors in the next 5, 10, even 20 years? It depends. How is the company operating and capturing it’s opportunity?
3. Market Definition and Execution: as a pure cab company, Uber is already capturing significant market dominance in US cities, serving more than 7 times more people than the closest competitor, Lyft. It is also expanding globally at a furious pace, currently in more than 200 cities in close to 60 countries. What they’re clearly gunning for is to dominate every major city on all continents. When you consider that emerging markets, Asia and LatAm cities are projected for strong growth in the coming decades, you’ll appreciate the value of and the opportunity in Uber’s market leading push. They could, as we say in Nigeria, finish work. The other angle is that there is no law telling Uber, you must be a cab company and nothing else. They after all, are primarily selling a platform. They keep no cars, and employ no drivers. There’s nothing that says their software and logistics platform cannot be licensed to your normal taxi companies, extended into car rental services, fleet management/monitoring, and other areas of logistics. They could become the Microsoft operating systems for any company that needs to track vehicles as they come and go, take payments and more, including truckers, plane charter companies, deliveries, what have you. There’s a lot of niches they could expand into. Amazon started out selling books, Google doing search. There’s some precedent.
If I was doing a more rigorous analysis, I’d account for the fact that number 3 above stretches Uber’s potential industry from $100 to almost $600 billion. A quarter market share, long term growth value, and deft operations could all take you well over $40 bn.
The last consideration is pure liquidation risk. The risk that Uber would completely fail and lead to investment loss is very low. For one, they’re absurdly well capitalized, and their latest $1.2 billion funding round added comfortably to that. Additionally, their capital reinvestment needs are low, since they don’t have cars and most of the pay for drivers come from the drivers’ earnings. Most of their capital investments then, will go to fund growth, which is a pretty good deal.
In all, I don’t deny that $40 billion is a heck of a lot of money, but there is some justification. It falls apart if you approach it with traditional valuation mindset, and this is definitely not one for the Buffets. But it’s not altogether, haywire.
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