Naive Musings on Uber
May 10th, 2017
Disclaimer: I know very little to nothing about how investors value private companies. But I’ve never read an article that even attempts to do basic arithmetic around this, so I thought I’d write down my own thoughts.
Uber is facing a lot of scrutiny these days, but the one I’m most fascinated by is Waymo’s lawsuit against them and its impacts on Uber’s valuation.
A couple of key figures for 2016:
- $68 billion valuation
- $20 billion gross bookings
- $6.5 billion revenue (Uber’s 30% cut of driver fares)
- $2.8 billion loss
Uber’s bookings doubled in the last year, but there’s been considerable competition, especially abroad in countries like China, India, and most countries in Southeast Asia. So while Uber’s bookings are sure to continue to grow even in its home markets, it seems unlikely they’ll continue to double. After all, they tripled the prior year and apparently were hoping to hit $26 billion in 2016. No doubt their defeats internationally contributed here, but that’s not going to change, which means that Uber’s gross booking growth rate is likely to decline.
Looking at this year, to get $10 billion more in gross bookings, they spent $9.3 billion (revenue + loss). No doubt a lot of that goes into maintanence of existing markets (R&D, infrastructure, etc), but I’m guessing most of that spend goes into capturing marketshare.1 $9 billion spent to make $3 billion.
That’s not bad. Uber is a habit, so a market, once captured, presumably will continue to “throw off” $3 billion in revenue for Uber year after year. So, spending $9 billion to buy this revenue stream is excellent. If I told you I’d sell you a golden goose for $9 and it laid $3 eggs once a year, you’d buy it in a heartbeat. The question, then, is how many more golden geese can Uber buy, and at what price?
The interesting bit comes with Uber’s valuation. Most tech companies are valued at around 10x their revenue (though, Facebook is actually valued more than 20x). So Uber’s current revenue roughly matches their current valuation. $6.5 x 10 = $65 billion, just shy of their rumored valuation of $68 billion. Let’s assume Uber can still grow their bookings by another $10 billion this year. That puts them at a very nice $9 billion in revenue and thus $90 billion valuation.
To get there, of course, they’ll need to spend more than $9 billion. The cheapest golden geese have already been bought. Which means another year of losses, depleting Uber’s cash reserves, but that’s what investors are for.
So Uber is fine? It sort of depends on this lawsuit’s outcome.
Investors value tech companies at these multiple because there is the presumption that tech monopolies, once established, are incredibly sticky. This has been true, unless someone comes in with a vastly superior technological product. Yahoo to Google. Blackberry to iPhone. Oracle to Amazon. Rideshare to self-driving cars. Given Google’s head start, it’s clear they were always going to have a functional car first, but given Uber’s aggressiveness, it’s not clear they would have had it for long: a year or two; not enough time to roll out a decisive market share lead given the logistical complications.1 However, if this trial impede Uber’s progress, and Google beats Uber by 3-4 years, it could be the same problem Microsoft had with the iPhone. By the time they had a viable challenge, it was too late: iPhone and Android won.
Let’s say Uber is still able to get to autonomous vehicles only a few years after Google and still retain marketshare. Now, they’re splitting the market, which means competitive pricing across the board. Uber’s ability to control the market was having both supply (drivers) and demand (riders). Except Google has a massive cash hoard to buy supply (autonomous vehicles) and a massive user base that can be turned into demand: Google Maps. Uber’s advantage in the world evaporates, and a new pricing war, which will require new investor capital, opens up. Uber’s already lost a lot of the battles internationally. What happens when the domestic front opens up again?
I actually think Uber’s probably going to have a moderate outcome: $100-200 billion in market cap in the next 2 years. The likelihood of total collapse is not worth considering. But the likelihood Uber would even approach a market cap of $200 billion is significantly hurt by this trial, especially if they end up losing it.
Update: Turns out that UberPool cost as much as $1 million/week in San Francisco alone. When the discounts were cut, they experienced 26% churn. This is brutal—it shows that the burn isn’t just the cost of acquiring a market, but potentially an on-going cost for at least a fourth of their rider base. It also shows how critical it is for Uber to crush out local competitors at any cost. Burning billions to buy a monopoly is acceptable. Burning billions to buy a temporary surge is not.