
Uber Isn’t Worth $17 Billion - aaronbrethorst
http://fivethirtyeight.com/features/uber-isnt-worth-17-billion/
======
sixQuarks
I'm not arguing that Uber is worth $17 billion, but the author completely
brushed off the entire reason why investors are valuing it at $17 billion.
Only in the last paragraph did he mention that Uber may be looked at as a
"logistics" company and not a taxi service.

Hello? Of course that's what investors are banking on when they value the
company at $17 billion. Uber is not a taxi play, just like Amazon is not just
a book seller.

A great analogy of this article is when people were saying Amazon wasn't worth
$3 billion back in 1997 because the online book market wasn't big enough.

Could Uber fail to become a logistics company? Of course. But it's not
delusional to think otherwise.

~~~
patrickaljord
> I'm not arguing that Uber is worth $17 billion

No one is arguing that. Investors are valuing Uber at $17 billion, which means
future value, not current worth. I know you know that but many people seem to
be confused by high valuation by looking at current revenues which is weird
from supposedly tech bloggers. And you're right about its future in logistics
too. Huge potential there.

~~~
Alupis
I believe we are experiencing a Startup Valuation Bubble, evidenced by extreme
purchases such as WhatsApp for $16 Billion (and instant messaging company),
Oculus for $2 Billion (a research company with no product), SoundCloud, etc,
etc etc.

While other companies like Satellite companies are selling in the hundreds of
millions, not billions.

I don't think these gross over-valuations are sustainable.

These are all companies that a few years back, would have, _at best_ , sold
for a few hundred million.

~~~
mscarborough
Well of course it's all useless companies, but then how could we suck Graham's
and stupid fuck Andreesen's dicks?

------
jdh
Another point: it would help to know the terms associated with this investment
to decide if it was smart.

Author treats stock as if it was a public company, which is understandable.
i.e. these investors bought $1.2B of stock at a $17B valuation, and would need
to see massive market growth, massive share, and margin stability to make 2x
their money.

However, it's reasonable to assume they got preferred stock. So their return
profile looks like: if Uber is worth anything more than a couple billion
dollars (which they may view as near-certain), they get their money back +
interest. Then they hold an option should Uber execute like Amazon, as others
have suggested, and dramatically exceed their near-term market potential.

Valuing this is quite tricky: presumably the people who invested $250M less
than a year ago thought: I only have to clear ~$400M to get my bait back, now
that number is 3-4x higher.

While it is highly likely that the new investors have some sort of preferred
return, it's possible (though less likely) that have a participating preferred
or some other more complex instrument. Maybe the market price for straight
preferred was "only" $12B valuation, and the company said: "How about we
'guarantee' you a 2x return, with a participating preferred instrument, but we
want a 50% higher price, so in an upside case we are diluted less?"

This stuff is pretty common in these later rounds, though admittedly more on
the "bubble unicorns" than the true unicorns, who have utmost market leverage.
But you can see how even just the vanilla preferred stock would really change
your personal calculation of whether you want to put your nest egg into Uber
at this price.

~~~
digz
This is an important point. Further to that, Uber should be a company with
very clearly understood ROI. They put X number of dollars into a new city and
get Y number of users and make Z number of dollars over a few years. Because
they've done this in dozens of cities, they've got these numbers down. From
Uber's perspective, any money they raise should look as much like debt as
possible. Why? Debt means existing shareholders won't be diluted. If a growth
company can safely issue debt, it always will. Probably not realistic for Uber
to issue 1.2B in straight debt today (interest on that would amount to roughly
20-40% of their current revenue), so they would seek as much of the economics
of the raise to resemble debt as possible. The more it resembles debt, the
less we learn from the headline numbers about implied valuation.

------
jasondc
The author fails to mention Uber is creating a new market, and shouldn't be
valued at the size of the existing market it is disrupting.

Aaron Levie had a good tweet about this: "Sizing the market for a disruptor
based on an incumbent's market is like sizing the car industry off how many
horses there were in 1910."

~~~
mscarborough
Let's not get ahead of ourselves. We've had taxis and black cars for decades,
it's nothing new. What happens when every existing taxi company has an app?
Because that's what's happening.

Then what we have is Uber/Lyft/whatever trying to avoid any regulation, while
everyone else with the same thing are actually doing it. So disruptive!

~~~
pbiggar
> We've had taxis and black cars for decades, it's nothing new.

People drank coffee before starbucks.

~~~
andyroid
Not sure about the point you're trying to make, but if you somehow think
Starbucks is "disrupting" coffee consumption, please think again.

[http://en.m.wikipedia.org/wiki/List_of_countries_by_coffee_c...](http://en.m.wikipedia.org/wiki/List_of_countries_by_coffee_consumption_per_capita)

------
segmondy
I've given up on valuing start ups. I've come to realize that I'm not that
smart after I didn't agree with Facebooks valuation. These companies are worth
whatever the market/people agree to pay for it. It doesn't have to make
rational sense. I've accepted this, because I don't argue when someone wants
to pay $10 million for a painting because it's the only copy that exists and
is a thousand years old. So why argue when it comes to the value of a company
determined by the market? If the owner insisted that his company is worth that
much, we might have a disagreement, but with the market saying Uber is worth
$17 billion? $17 billion it is.

~~~
AnimalMuppet
Come back in five years. You may find out that Facebook was not in fact worth
as much as people thought. That doesn't mean that you were wrong (except in
the very near term). And, if you aren't going to jump on the bandwagon based
on the greater fool theory, then figuring out that the market is temporarily
wrong is a good way to avoid losing a lot of money.

~~~
contingencies
I came here to post _Neither is Facebook_ but found this thread, instead.
Basically, there's a lot of people tasked with finding places to invest money
who need to look busy and the US - nay - the west - is pretty dry on real
productive organizations right now. Software slash services has become the
excuse for capitalism, and fundamentally we're just delaying the inevitable.
Growth has stopped. Resources are finite. It's official.

------
vikramhaer
Great write-up. For those interested and not already aware, Damodaran's own
site has lots of great posts on finance and valuation. This article seems to
build on his original analysis done here:
[http://www.aswathdamodaran.blogspot.com/2014/06/a-disruptive...](http://www.aswathdamodaran.blogspot.com/2014/06/a-disruptive-
cab-ride-to-riches-uber.html)

------
wellboy
Uber might become the first $1T company in the world and it's not about
processing taxi fees at all.

It's about that self-driving cars are already safer than humans. In 5 years
potentially, nobody would drive their cars by themselves anymore, because
self-driving cars are 5 times safer than humans driving them. For that reason,
people would have to pay 5 times more for insurance if they want to drive the
car themselves --> nobody would drive cars by themselves anymore.

Then, where do you order get these self-driving Google cars? You order them
through
Uber([http://techcrunch.com/2013/08/25/uberauto/)and](http://techcrunch.com/2013/08/25/uberauto/\)and)
that's why they can raise at a valuation 100x of their $200M revenue
([http://techcrunch.com/.../leaked-uber-numbers-which-
weve.../](http://techcrunch.com/.../leaked-uber-numbers-which-weve.../)).

Uber menttioned that the ground transportation market in San Francisco is
around $22B and this is for 800,000 people ([http://qz.com/218717/what-people-
who-think-uber-is-worth-17-...](http://qz.com/218717/what-people-who-think-
uber-is-worth-17-billion-believe/)). Now multiply this by 10,000 so that you
are at 8B people and you have a market of 220 trillion dollars. Now that
number is probably a bit too high, but that's why Uber is valued at $17
billion right now.

------
calbear81
I didn't see anything about how UberX/Lyft been able to create new demand via
much lower fares when compared to taxi cabs.

I very very rarely ever took a cab and preferred to walk, bus, or drive
because of the cost. Now with UberX and Lyft, I often just call one because
the cost is 35 - 50% less than what a cab costs and the experience is so much
nicer with app payment and pleasant drivers (feedback loop).

------
austenallred
Of course Uber isn't worth $17 Billion dollars right now - no one would argue
that. The valuation is based not only on what the company is worth right now,
but on what investors expect it to be worth in the future.

My startup got into an accelerator at a $500,000 valuation. Were we worth that
when we started? Of course not. The hope was that we would be by the time we
got out.

~~~
angersock
Investors are as stupid and biased as any other subset of humanity...they just
have more money with which to display their prejudices.

------
Tarang
Once someone said a company is worth people are willing to pay for it.

------
kylefox
_> > “For my base case valuation, I’m going to assume that the primary market
Uber is targeting is the global taxi and car-service market.”_

Uber is not (only) competing with taxis and car services. They are competing
with _vehicle ownership._

This single assumption dramatically affects the size of market Uber is
serving.

~~~
aetherson
Uber has recently made it irritatingly difficult to figure out what their
rates are, so let's go with Lyft, which has very similar prices. Their SF
rates are $1.35 per mile[1] -- assuming that you never have a waiting fee,
never hit a minimum fare, and never pay during surge pricing (yes, yes, "prime
time tips"), and, mysteriously, never pay their "safety" fee.

If you drive 7,000 miles a year (so, about 5,000 miles less than average),
that's $9,450 dollars per year.

The TCO of a Honda Civic, assuming 15,000 miles a year (more than twice what
we're assuming for the Lyft rider!) is on average a couple thousand dollars
less per year [2].

Rideshare is not a reasonable substitute for car ownership for anyone who is
cost-conscious, and it will never be until and unless autonomous vehicles
exist.

[1]
[https://www.lyft.com/help?article=1263247](https://www.lyft.com/help?article=1263247)
[2]
[http://www.edmunds.com/honda/civic/2014/tco.html?style=20049...](http://www.edmunds.com/honda/civic/2014/tco.html?style=200498302)

~~~
kylefox
Fair point — but doesn't this assume price per mile remains constant over
time?

~~~
aetherson
Well, I was making very conservative assumptions about true cost per mile. The
real cost per mile could decrease substantially before it catches up to the
numbers I put in my post.

And there are some pretty hard lower bounds on this. Drivers gotta eat, man.
At $1.36 per mile, if you get 20 paid miles per hour (which I don't think
anyone genuinely does on a regular basis), that's $26.72 per hour -- gross.
Take away 20% for Lyft, driver's making $21.38 an hour. Take away $2 for gas
for those 20 miles, it's $19.38. Another $1 for maintenance costs, and you've
got a real income, pre-tax, of about $36k for a year of full-time work. There
may be some room for downward pressure on that price, but there isn't a lot.

(In actual fact, I assume that average per-mile prices for Lyft rides are much
higher than $1.36, due to prime time tips and wait time).

------
timr
It's interesting that the author gets to a valuation of ~$6B, because that's
approximately the current valuation of a number of unprofitable internet
startups (Yelp ($5.52B) and Pandora ($5.67B) leap immediately to mind).

I've been joking with my friends that you can probably subtract about $4B from
current internet company valuations to get to the "correct" number given
revenues and market sizes...but really, if you take Yelp and Pandora's current
valuations down to 35% of their current value (35% is the ratio of $6B/$17B),
the number is about right (e.g. $2Bn for Yelp, which gives a price/sales of
~7).

It's a little scary to think that the market for growth stocks may be
overvalued to the tune of 65%, but the ratio passes the sniff test for a lot
of stocks that I'm following.

------
adamzerner
From what I understand, the value of Uber is in 1) user experience, and 2)
logistics technology.

Regarding 1), this isn't much of a barrier to entry. Competitors could easily
copy their UX, curation, app etc. I suspect that this will happen, forcing
Uber and future competitors to lower their prices.

Regarding 2), I don't know much about their technology, but something makes me
question whether Uber will really have that much of an advantage in logistics
technology 10-20 years from now.

Finally, I've always thought that cars are an extremely inefficient way to get
around, especially in cities. I suspect that there will be innovations in
transportation, and that there won't be too big a market for traditional taxis
20 years from now.

------
gfodor
All I can think of when it comes to Uber is that the day that Google announces
their partnership with Uber to bring self driving car services to the masses,
it will be the equivalent to the baptism scene in the Godfather 2 for taxi
drivers everywhere.

------
adamodar
I am flattered that so many of you read my piece and felt the urge to respond.
To begin with, I hope I did not come through as claiming a monopoly on the
truth (and fair value). I tried to make my best assessment of what I think
Uber's value is today, given what I know about the company.

It is true that I valued it as a car service company but that is the only
business where it has a business model that works right now. As many of you
argue, there are potential markets here (moving, car rentals and even car
ownership) that Uber could enter. If that is the argument for the extra $12
billion, the pieces are in place to estimate whether you can justify that
addition. These additional markets (especially car ownership) could make the
potential market much larger, but the question then becomes whether Uber's
business model can be expanded into these businesses, while preserving the its
profitability. Take, for instance, the driverless electric car market which is
the alluring possibility. Even if you are an optimist on this development, I
am still grappling with the role that Uber will play in this market and the
profitability that will ensue. Will Uber continue to play the middleman role,
and if so, who will it be negotiating with? If the electric cars are owned by
Google or some other large entity, will Uber have the bargaining power to
demand a large slice?

In closing, here are three beliefs that I bring to the table. First, I am a
believer that DCF is a tool that can be expanded to cover almost any narrative
you may have. Second, I have no illusions about being right, when there is
this much uncertainty about the future, but I would rather be transparently
wrong (where you can see the assumptions that i have made and change them to
reflect your narrative) than to be opaquely right. (I think that providing
absurdly large valuation ranges as your base valuation is a cop out, as is
making fluffy statements like "I think Uber has lots of potential and is worth
a lot") Finally, I think that there is a big difference between pricing (where
the number you attach to an asset is what people are willing to pay for it
right now) and value. I have a great deal of respect for the pricing process
(which is what delivered the $17 billion for Uber) but I also think that
pricing is driven by mood and momentum, both of which can get ahead of the
facts.

------
OoTheNigerian
What people fail to understand is that Uber, Lyft and co are much more than
the Taxi market. They are in the transportation business.

People like me that would never have taken a taxi in San Fancisco use these
services. They are creating new markets.

When you really think of it, car ownership for a majority of the people is
really silly as most cars are idle 90% of the time.

Car manufacturers should be afraid because once Uber, Lyft and Co start a
subscription business (pay a fixed amount monthly for a generous travel
distance monthly) fewer people we see any reason to own cars.

That will be a good thing.

~~~
NDizzle
You... wouldn't use a taxi, but you'd use Uber?

Why?

Cars aren't going anywhere anytime soon. Any kind of subscription business
won't work in the 'burbs and beyond, which is the majority of the country.

SF reality distortion field in full effect. Yo.

~~~
bcoates
I'm not in SF, but the whole taxi experience is shitty in LA:

1\. Long waits (~10m minimum usually)

2\. Unreliable (they'll take calls and never manage to show up)

3\. Bad attitude/customer service

4\. Constantly trying to rip you off by taking weird routes or trying to use
the meter on flat-rate airport trips

5\. High prices for shitty cars compared to Uber's range of services

I'd ride taxis, but only when I had to. The bus system was a more pleasant and
reliable way of getting from one place to another. Uber has really changed
that. For the 30% of the population that lives in cities it's a realistic
alternative to dealing with a car, particularly if you're not a kid chauffeur.

------
joshdance
Uber is worth $17 Billion because that is how much someone paid for it.*

The question as to Uber will ultimately be worth $17 Billion when those
investors try to sell their shares is another question.

And to that question, the Aaron Levie tweet is a good heuristic - "Sizing the
market for a disruptor based on an incumbent's market is like sizing the car
industry off how many horses there were in 1910."

*of course they only bought part of it, but the easy math of 'they bought x amount for y, so total worth is z'

------
govindkabra31
A very well thought out article.. however, of the future markets that the
author dismissed, "moving services" does not look as unbelievable. (article
says-- "Uber could extend its reach into other businesses such as car rentals,
moving services and even driverless cars, but I don’t see evidence")

Ton of companies-- amazon, google, postmates, insta cart-- are looking for
viable local logistics. And Uber can have a play in that; initial experiments
in New York seemed encouraging.

------
Pxtl
The question is how quickly and effectively Uber can branch out and dominate
all the "Uber for X" concepts that other start-ups are chasing. If Uber stays
in the car service industry? Then yes, they're pointless.

If they develop "Uber for housekeeping"? "Uber for babysitters"? "Uber for
take-out"? Then yes, Uber is worth $17 billion.

------
gdeglin
The author of this article seems to have an impressive background:
[http://en.wikipedia.org/wiki/Aswath_Damodaran](http://en.wikipedia.org/wiki/Aswath_Damodaran)

Given his experience, I'm struggling to understand why he's so quick to
dismiss the possibility that Uber will successfully expand into tangential
markets, or that it's at least reasonable for investors to bet on that
possibility.

In the spreadsheet the author provides, the possibility of growth into
additional markets seems complete ignored. Even if the chance of such growth
was small, surely it should factor in to the valuation to some degree?

------
gojomo
Has Professor Damodaran, the author, reviewed the same internal documents that
Uber's professional investors have seen?

------
chris_va
This article makes a lot of hand-waving, possibly incorrect assumptions to
arrive at its conclusion.

It may or may not be the right conclusion, but it provides very little
analytical insight, and is mostly useless.

~~~
Guvante
Why do you say that, he goes into detail on all assumptions he makes and
includes the data points he used to make his conclusion as well as variants on
all important points to show how they affect the outcome.

If there are incorrect assumptions that he made then point them out, your
yourself are hand-waving by saying vague statements about the article.

~~~
chris_va
Point.

Incorrect assumptions/starting points: * Customers pay Uber, and Uber takes 20
percent of the fare, while the rest goes to the drivers. [actually, this
varies by uber type, and can be significantly less than 20%]

* How you estimate Uber’s future cash flows depends, mostly, on three things: the size of its potential market, the size of Uber’s share in that market, and what percentage of gross receipts Uber takes. The assumptions you make on each question can dramatically affect Uber’s valuation, so let me walk through mine. [This is correct in that small changes can dramatically affect the valuation, and makes some assumptions about Uber being unable to innovate past its current market segment. Estimating these numbers is basically a poorly educated guessing game, and materially changes the analysis, and thus makes the conclusion poorly substantiated]

* For my base case valuation, I’m going to assume that the primary market Uber is targeting is the global taxi and car-service market. [ Most of the arguments in favor of Uber's high valuation are around extending the market, not supplanting it, and thus the author completely ignores the entire basis of the valuation ]

* Assuming taxi revenues in the rest of the world add another $50 billion to this total, I arrive at a total market of $100 billion. [ "Let's just guess at 50% of the market, hand wave." ]

* The bad news is that the market will be tough to dominate. Unlike technology companies in other businesses, like Google, Facebook and eBay, the network effect and winner-take-all benefits are limited. [ Unsubstantiated ]

* That, along with the regulatory restrictions protecting the status quo and the competition Uber faces from Lyft, Hailo and others, lead me to estimate a market share of 10 percent. [ Woof, handwave ]

* My instincts tell me that Uber’s slice will decrease over time, but I’m going to make the optimistic assumption that the company will find a way to differentiate itself and continue to claim 20 percent of gross receipts. [ More handwaving ]

* Other assumptions are going to affect my estimate of Uber’s value: how much it costs to operate the company,3 how much it spends to grow the company,4 the tax rate it pays,5 and how costly it is for Uber to borrow money or attract new investors.6 [ Great, we've determined that small changes in profitability/operating expenses/market size dramatically affect valuation, but let's just guess at all of the major parameters. Not that the author has a better option, just that it makes the conclusion highly suspect ]

Also, though not explicitly mentioned, the author picks an arbitrary return on
capital, 10 year time horizon for NPV, and other makes
assumptions/simplifications that drastically affect valuation.

