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.
On the one hand, Amazon monopolizes some product categories. It has had almost no net margin for two decades. In those 20 years it has failed to pay a single penny in dividends to stockholders. All of this is not to mention kindle and Amazon's relationship with literary world.
On the other hand, people are generally happy with Amazon. Customers like everything funneled into one interface and they eat prime shipping up like candy. I do too. Yum.
Its execs and white collar employees generally seem well fed and happy. There are some questions about the conditions of its fulfillment center workers but honestly I think they will all be replaced by robots in the next 10-20 years as robot prices come down.
Amazon is a giant corporation governed by an non-democratically elected board operating in very opaque ways.
But, Amazon is also essentially a not-for-profit organization that agrees not to get nonprofit tax protection in return for being allowed to operate with less oversight.
EDIT: Oh. I just looked it up, it turns out Amazon doesnt pay much tax...
That's not very surprising. Public companies typically don't pay out cash dividends if they think they can get better a return for their shareholders by investing that money into growing their business. And for shareholders, getting returns in the form of long-term capital gains instead of dividends generally lowers their tax liability.
1) It attracts investors who are looking for a short gain, and not interested in the long-term success of the company
2) It becomes a seasonal expense that investors expect. If dividends stop, it sends a bad signal to the market.
They succeeded without doing anything unusually unethical in the marketplace.
If be relatively average ethically and a corporation worth billions isn't a model for success in a capitalist society, what is? Honestly?
* Is the company good for workers?
Some fulfillment center workers say "no". From what I know of the company and people who work there I'm going to say a solid "probably yes" it is good for workers.
* Is the company good for the owners?
I'm saying "no" on this one because the average amazon stockholder has only made money from Amazon by speculating the price would continue to rise as it always has and sold it off at some point.
* Is the company good for the customers?
It probably does squash out some competition (and thus choice), but overall I'm going to say "yes" it is good for the customers because people generally seem happy with Amazon.
* Is the company good for suppliers / producers of content/goods?
I honestly cant answer this one.
* Is the company good for society?
I think I'll say "yes" to this one because they offer competition to other industry giants with AWS, new phone, etc. I am not a fan of kindle or their work in that industry.
By the way I like the phrase "unusually unethical".
Producers? Yes. Wholesalers? No. Amazon will do its best to cut you out if it is a noticeable amount of money.
> By the way I like the phrase "unusually unethical".
Hah, thanks. I wish I had higher expectations but I think capitalism makes that hard.
As for the rest, I mostly agree.
The investors "value" it at $17 billion because there is a remarkable lack of investment opportunities in general, and an unremarkable lack of investment opportunities with the payoff potential that modern investors are chasing.
If everyone wants to strike it rich and become the next billionaire (or, if you're already a billionaire, then a multi-billionaire), you'll invest absurd amounts of money into whatever you can find. Mundane opportunities might take decades to double your wealth, if not more. And what else are you going to do, spend it?
This doesn't just mean that bizarre concepts that aren't worth anything soon get obscene valuations, it means more modestly smart ideas get obscene valuations too, supposing their true worth is as of yet undetermined.
Too much money to invest, not enough opportunities = weird shit.
The only reason it isn't discouraged is because the behavior of crazy investment becomes its own semi-unintentional pump and dump scheme. The initial investors can strike it rich, even if Uber's not really worth $17 billion in the long run... just so long as the second-wave investors think that it's really worth $20-something billion.
Investment really isn't even investment anymore, so much as it is gambling
$15 to $30 is not a practical delivery service.
I can get my whole shopping list from a grocery store delivered same-day for $10.
https://www.instacart.com/faq ? $4.
Uber has a very, very long way to go before they become a serious competitor in that space.
http://breakawaycourier.com/courier-delivery-rates/ quotes $12 minimum in Manhattan (compared to the $15 minimum of Uber's courier service in Manhattan) which is comparable in price. I suspect a bike messenger would be quicker than a car messenger in Manhattan, but that's conjecture.
My local grocery store can deliver inexpensively (or even for free) because they're making a hefty markup on my coffee and bottled water. Similarly, Instacart appears to add markup into the price of it's items: "Yes, Instacart prices are our own and vary from the store’s price" (from the site you quote.)
So, it seems that $15 to $30 could certainly be a practical delivery service.
Similarly, the "hefty markup" at my local grocery store is....drum roll please...the same price I pay at the store.
Similarly, I can get similar same-day service from other shops in the general area if I buy sufficient quantities of goods. Admittedly, it requires a phone call and slightly more effort but they are frequently willing to split the bill for the courier to make the sale.
Edited to add: 25% more expensive may be comparable, depending on how it scales. The price of a bike messenger goes up significantly if you want a rush, something larger than a legal-size document, etc.
"Your messenger will be on bike or on foot, and will not be able to deliver some oversized items"
It is a bike messenger v. bike messenger situation.
Eh? Seems similar to me.
What I've been getting at here is Uber doesn't have a competitive advantage. It isn't cheaper. It isn't better. It doesn't even have first mover advantage.
Sure, it'll make some money but not enough to justify a massive valuation that it has.
You don't buy a company for $17 Billion in hopes of transforming it into something completely different and maybe making money.
You also don't buy a company based on future best case scenarios where the competition is projected to stay stagnant.
At least you didn't used to buy companies based on these criteria.
That used to be considered bad business.
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.
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.
No it doesn't. The value is today. If it was some future value different from today's value, then someone would be arbitraging on the difference.
Maybe you are trying to say that the value today is based on future performance, which should be obvious.
They will want to make a profit, so they must assume the company, some time in the future, must become worth more than that (stochastically).
People seem to lose their minds when companies get to a certain growth stage, assuming that "anything is possible now!", while ignoring the overwhelming amount of empirical evidence that the larger a company gets, the less likely it is to make dramatic shifts in business. Moreover, companies that don't focus like a laser on their core business tend to fail.
1) The scenarios in which Uber becomes worth 17B or more based simply on its role in the transportation market didn't seem all that unlikely to me.
2) As you mentioned -- the probability of Uber becoming a major force in Logistics/driverless cars/etc. They've got Google behind them after all and many figure that's the end game -- myself included.
It's unfortunate whenever a somewhat reputable outfit like 538 feels the need to clickbait by taking a contrarian position, but then again. I took the bait. Well played, 538.
All you need to know about this article is the phrases "self driving car" and "autonomous car" appear zero times.
they've already spun up 'on demand' services for ice cream, pedi-cabs, mariachi bands, kittens... multiple times. so it's not like they haven't demonstrated they could start new markets.
once driverless cars become common, do you really think people will just have their driverless car sitting at home doing nothing all day? wouldn't it be nice if you could hook your driverless car up to a API that would keep it busy and give you a cut of the revenue? uber could do that.
so now imagine a world where cars now generate revenue for the people who own them, without them needing to hire a driver, find customers, or do anything besides pay for occasional repairs.
17 billion is a bargain.
Now, apparently, gimmick/publicity ‘for a day, in one city’ is “showing you are able to start new markets”? Seriously?
Amazon basically reinvented the Sears catalog for the modern age, it was business mobile known to work.
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.
That is, they are committing to take an extra dilutive hit for any exit less than $17B, but they expect, especially with the new capital, that won't happen, and that instead, the investors will wind up converting to common at IPO/etc.
And, since the insiders know the business better than anyone, that revealed valuation should also have some weight.
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."
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!
People drank coffee before starbucks.
"When we got this company started (in 2009) we were pitching the seed round and we pulled a bunch of research from this report that showed that San Francisco total spend on taxi and limo was like 120 million bucks. But we’re a very healthy multiple bigger than that right now, just Uber in SF. So it’s not about the market that exists, it’s about the market we’re creating." - Travis Kalanick
An investor is trying to think through a fair valuation. If we can't value off of the horse & buggy market, then what are we going to? Henry Ford's H&D (hopes & dreams)?
I think for any company, especially those attacking an established industry, that those markets that have a higher probability of being attacked should be valued higher.
So yes I would say the horse & buggy market, at that time, SHOULD comprise the majority of the valuation for Henry Ford. There are other use cases that could be imagined, but I'd discount heavily.
Then as time goes on, and people start figuring out NEW uses for cars that were not even possible with horses and/or expanding the market, then we can begin weighting those components more heavily. Eventually, the horse & buggy portion will be a minority part of the valuation.
"Uber’s growth potential rests not only on being able to claim a larger share of the car-service market but also on expanding this market by attracting those who use public transportation or drive their own cars." He even mentions that his base case is assuming uber remains in the car-service related business.
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 that's why they can raise at a valuation 100x of their $200M revenue (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-...). 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.
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).
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.
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.
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 .
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.
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).
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.
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.
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.
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.
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.
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.
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'
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.
If they develop "Uber for housekeeping"? "Uber for babysitters"? "Uber for take-out"? Then yes, Uber is worth $17 billion.
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?
It may or may not be the right conclusion, but it provides very little analytical insight, and is mostly useless.
If there are incorrect assumptions that he made then point them out, your yourself are hand-waving by saying vague statements about the article.
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.
"Snapchat is Intrinsically Worthless" https://news.ycombinator.com/item?id=6671371