The piece of news that I found interesting from last week:
Uber’s in the money
Uber, that disrupter of taxis, raised some private money last week. Specifically: $1.6 billion dollars, which effectively valued the start-up at around $17 billion.
Now I don’t know how everyone else feels, but I find these numbers unsurprising. The news pieces can go ahead and use new adjectives (“eye-gouging” is my new favourite) – but I have big number fatigue. For example, when Apple bought Beats the week before last for $3 billion, I listened to three different podcasts declare some variation of “Tim Cook just spent some chump change”. But this week, we’re supposed to be concerned about tech bubbles and overheating.
So because I’m feeling otherwise this morning (it’s cold), I’m going to argue the other side: the value is too low.
And now that I’ve done a google search, it seems that I’m not alone.
Either way, here are my thoughts:
- On Friday, I shared a video in a post on the collaborative economy. This sharing idea is quite pervasive – I read a lot of opinion pieces, and it keeps popping up.
- And it makes sense that it should. Today’s millennial is less concerned with “ownership” in the traditional sense. We’ve moved back in with our parents. Many of those that haven’t are doing the renting thing (I am one amongst many). There’s a steady aversion to car ownership. And yes – this could be a result of not-having-credit as a result of the now-tiresome Great Recession. But even if it is, there’s no guarantee that we’ll go back to desiring ownership once the ebb of time rolls things around.
- And if you can’t rely on my desire to “own” something that I will then call “mine”, what are you left with? You’re left to rely on utility (what do I need to use?) and investment (what’s the best use of my money?).
- Confession: I initially threw in the part about “investment” because it works well with my argument. But I think it’s valid regardless.
- Uber can help with both of those things:
- for those that own cars, it can allow them to earn the occasional return on their assets when they would otherwise be parked in a garage (for example, by taking advantage of surge-pricing in heavy rain to make their unproductive asset productive – see my earlier blog post on surge pricing).
- for those that don’t use their cars often enough to warrant buying them, it allows them to have convenient access to a vehicle whenever they need it at a cheaper effective cost than buying a car to cover those occasions (and convenient access really is Uber’s selling point – they bring cars onto the road when people really need them, albeit at a price).
So I like Uber as a solution and/or as an intelligent way of using resources (vehicles).
And I especially like their surge-pricing model – it brings more cars on the road when the demand is highest, and it does that by charging higher prices for its drivers. It’s a magnificent profit curve: you have more drivers driving around for more money just when people are willing to pay more for it.
I mean: show me the taxi cab company that can offer more money to their employees in bad weather. And show me the taxi cab company that can afford to keep extra cars in reserve for those times when demand peaks.
But that doesn’t necessarily mean that $17 billion is a reasonable valuation.
Bringing It Back To The Numbers
What the world has been told:
- Because this is a private investment deal, we really don’t know very much. There was never a need to publicise anything.
- But some statements have been made:
- Allegedly, Uber is making $10 billion a year in gross revenues (ie. in collected taxi-type fares).
- Uber takes a 20% cut of whatever its drivers are making, so that’s $2 billion in net revenues.
- Uber CEO Travis Kalanick recently said that Über’s revenue is doubling every 6 months (although this number is beyond unsustainable – we’re all familiar with the chess board story – at that rate, Uber would be collecting $5 trillion a year in revenues by 2020 and/or $700 per year from every person on the planet).
- All that aside, Uber is only in 130 cities. And apparently, the bulk of that revenue comes from only 5 of those cities, because it’s still so new in most of them.
- So even if you extrapolate some of those growth rates very conservatively (because Uber, if it had any business sense, would have targeted the low-hanging fruit first), $17 billion doesn’t seem like a terrible deal.
- The other point: Uber could have chosen to list publicly – only it hasn’t. Why? Probably because it expects to get much higher valuations going forward. In which case: this need never be about the fundamental profits/revenues/growth rates. It could just be a bet on how much the Uber concept could be sold for in the future.
In the end, of course, there is only one thing to be sure of: the pool of private investors getting in on the action are unlikely to have bought into a bad deal.
Private investors get to do their due diligence. And they get to negotiate around the table, with all of the inside information in the hands of their advisory teams.
So it’s a fair bet to say that the valuation is fair.
Oh, and also – I think that the protesting taxi drivers in London just did the best free advertising for Uber ever. I mean, what was the thought process? “Let’s show Uber that we don’t like them driving our customers around by not driving our customers around“?
For more on the Uber valuation:
- I just heard some startling things about Uber’s financial performance (Business Insider)
- Why Uber’s $17 billion valuation is justified (CNBC)
- An $18 billion valuation for Uber taxi app seems absurd (The Guardian)
- What people who think Uber is worth $17 billion believe (Quartz)
- Why Uber might well be worth $18 billion (Dealbook)
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.