Uber: The Road to a $69 billion valuation

Uber has been in the news due to a number of scandals.

Early this year, Uber lost 200,000 customers in a weekend after the #DeleteUber movement stirred up outrage over the ride-sharing app’s ties to President Trump. Following that, there were reports of sexual harassment, the whole Greyball affair, and a lawsuit over allegedly stolen autonomous vehicle technology. The (former) CEO, Travis Kalanick has since resigned but Uber remains, and their valuation still stands at a lofty $69 billion.

Billion you say?

At their current valuation, Uber is more valuable than companies such as Ford and General Motors – auto companies that have been around since the early 1900s. Not too bad for an app you can download off the iTunes app store.

For all the hoopla, Uber remains a deeply unprofitable enterprise. According to Bloomberg, Uber lost around $3 billion in 2016. With that kind of record you might be forgiven for asking the question: Why is Uber still around and why do people think it’s worth nearly $70 billion?

Uber’s story is one of hyper growth, big numbers and ambitions of global domination.

While Uber continues to lose money, they are also growing faster than a weed. They operate in more than 500 cities across 72 countries and as of October 2016, had 40 million active riders. Each rider spends, on average, $50 a month using Uber’s services.

uber1

Source: Google Play

They booked $20 billion in rides in 2016, which doubled their bookings for 2015. Their net revenue for 2016 was $6.5 billion, which puts their valuation at 10-11 times net revenue. It’s likely that this is where the $69 billion valuation comes from. Calculating potential value of a business using a revenue multiple, while being somewhat simplistic, is basically standard operating procedure. Take yearly revenue and multiply it by 10 to get an estimate for what the company is worth.

This can be misleading because not all revenue is created equal. There’s a method of valuing companies known as “discounted cash flow analysis” which tries to base a valuation on estimated future cash flows, but this method is unreliable when dealing with young companies and businesses that are growing at a rate similar to Uber. Net revenue for Uber in 2016 was 4x the amount in 2015, which itself represented a tripling of revenues in 2014. That kind of growth is hard to understand, and harder to value.

The truth is there’s a divide. Many startups either get a low multiple (2-4x) valuation and others get a high multiple valuation (10x+). Sometimes it makes sense to slap a 10x multiple on fast growing company and call it a day. Here are some of the criteria that would cause a business to qualify for that high-multiple valuation.

A True Competitive Advantage

The existence of a competitive advantage allows companies to beat away their contenders. In Buffet-speak, a competitive advantage is similar to an economic moat, the special sauce of a business that makes entry into the business arena incredibly difficult for competitors. In Uber’s case, their competitive advantage is their market share and little else. In other words, the only thing they have going for them is the first-mover advantage. They have 80% of the US market and that in itself, is the advantage.

If something were to happen to threaten that advantage, you would definitely see Uber’s valuation tank, perhaps reaching only $20 billion. Uber’s competitive advantage isn’t as clear-cut as a patent on proprietary technology but behemoths like Amazon and Walmart have used similar strategies to great effect. Be the biggest and no one can push you off the podium!

Existence of network effects

The network effect refers to the ideas that a business becomes more valuable as more people use it;leading to a winner takes all scenario. An example is Facebook, whose value comes from the fact that everyone is on it. It’s like being the only bar in town, you know that’s where everyone eventually ends up.

As expected, for a business that relies on network effects, the number of users matter a lot. Users of Uber’s app want short wait times and drivers on the app want fare after fare. The more users, the more drivers Uber can attract. The more drivers there are, the more users will want to use the app. Thus, the virtuous cycle continues.

uber2

Visibility, Consistency&Growth

Investors like businesses that are easy to understand, predictable, and have the ability to grow quickly. Uber ticks off all three boxes in that it’s very easy to understand their business model. They take a cut on every ride, plain and simple. The more people that take rides, the more money you make.

There’s also growth – Uber isn’t just a ride sharing company, they’re a logistics and transportation company. When you get to the core essence of what Uber does, it’s easy to see how they can enter different markets and disrupt them. Uber looked at what companies like Seamless and Postmates were doingand said, “We can do that”.  They were able to leverage what they had, in terms of infrastructure and resources, to come up with Uber Eats – their online meal ordering and delivery platform.

Gross Margins

This one is pretty basic, and goes a long way towards assessing the profitability of a company. Businesses with low gross margins, basically the gulf between your costs and your revenues, have low valuations and ones with high margins get high valuations.

Growth

This is the one that’s the hardest to qualify. The faster you grow, the larger future cash flows will appear to be.  $500 million in 2014. $1.5 billion in 2015, $6.5 billion the following year? What can you expect in 2017? $20 billion? What about the year after that?

Uber reported revenue of $3.4 billion for the first quarter of 2017. If things hold steady, you can expect Uber to bring in more than $12 billion this year.

Those are some of the characteristics that cause journalists and investors to value companies at a 10x multiple to revenues. Uber checks the boxes for many of these and it’s no surprise that its valuation is where it is. One thing to consider what the company’s strategy is to curb their losses and keep growing in the future. We’re all waiting to find out.

Save

Save

January 2, 2021 Update: We have just announced our BEST STOCK NEWSLETTER of 2020 AWARD!

CLICK HERE to find out which stock newsletter was up 78% in 2020 (and whose 2019 picks are now up 113%).

*** Our Award for BEST STOCK NEWSLETTER of 2020 ALERT ***

Updated January 2, 2021

At WallStreetSurvivor, we subscribe to dozens stock recommendation and advisory newsletters. There is ONE newsletter that is constantly outperforming all of the others--The Motley Fool Stock Advisor.

Five of their 2020 stock picks have doubled and the average return of all 24 of their stock picks for 2020 is up 78%!

We have been tracking ALL of the Motley Fool stock picks since January 2016. That's 5 years and 120 stock picks. As of Friday, January 1, 2021 the Motley Fool's January stock pick (TSLA) is up 720%, their March pick (ZM) is up 172%, their April pick of SHOP is up 226% and their June pick CRWD is up 120%; and another two have more than doubled. In addition, 10 of their 2019, 12 of their 2018, 11 of their 2017, 15 of their 2016. Most impressively, over the last 5 years that we have been tracking every recommendation, their average stock pick is up 209%--tht means over the last 5 years their stock picks, on average, have TRIPLED!

Now no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super-profitable. The important thing about the Fool stock picks is you have to buy them the day they are recommended because they usually pop 5-10% in the first 72 hours after the release their recommendation. You sure don’t want to risk missing out on their next pick.

Normally the Fool service is priced at $199 per year but they are currently offering a NEW SUBSCRIBER DISCOUNT that allows you to get theiir next 24 stock picks for just $99/year. HERE is the LINK to visit their New Subscriber Discount page.

CLICK HERE to get access to all The Motley Fool’s Stock Picks and their next 12 months of picks for just $99 per Year! 



GET UP TO $1,000 IN FREE STOCK

WHEN YOU OPEN A ROBINHOOD BROKERAGE ACCOUNT

Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.

Here’s the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.

Claim your free stock NOW (before it’s too late)



Comments are closed.