Uber Isn’t Worth $17 Billion

http://fivethirtyeight.com/features/uber-isnt-worth-17-billion/

by aaronbrethorst • 12 years ago

71 80 12 years ago

vikramhaer2• 12 years ago

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...

jasondc• 12 years ago

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."

mscarborough2• 12 years ago

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• 12 years ago

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

People drank coffee before starbucks.

beering• 12 years ago

I think the author hit this point by accounting for an accelerated growth of the "underserved" taxi market. He puts it at 6% YOY - what do you estimate it to be?

fraserharris• 12 years ago

SF (Uber's most mature market) has grown 20%+ YOY from 2009 - 2014 based on some rough math:

"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

[1] http://blogs.wsj.com/digits/2014/06/06/uber-ceo-travis-kalan...

vikramhaer2• 12 years ago

I feel like this comment was made without reading the post.

"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.

Pxtl2• 12 years ago

Except that Uber is, currently, a car-service. Now, you can argue that Uber has the potential to be more than a car service, but right now Uber's product is a car service. And there's only so much market for a car service. It's a new kind of car service, but still a car service.

aetherson3• 12 years ago

How many horses were there in 1910? Serious question.

xivzgrev2• 12 years ago

I respect Aaron a lot, but that's an unhelpful comment.

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.

cjf4• 12 years ago

Aaron Levie would seem to be an expert on how to create massive valuations from relatively tiny revenues.

sixQuarks• 12 years ago

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.

gfodor2• 12 years ago

Agreed this type of analysis of Uber is hilarious, your example is the best I can think of. Imagine an article from 1997 with detailed charts and data around the book market, and using that to question Amazon's business model. It's almost charmingly short-sighted.

All you need to know about this article is the phrases "self driving car" and "autonomous car" appear zero times.

kylebgorman• 12 years ago

but "driverless car" does, as you would know if you had RTFA.

zacharycohn• 12 years ago

Uhm... why don't you read paragraph 8 one more time.

Spooky23• 12 years ago

Do VCs have the patience to wait for the availability and legalization of autonomous taxis and transport vehicles?

Amazon basically reinvented the Sears catalog for the modern age, it was business mobile known to work.

NoMoreNicksLeft2• 12 years ago

but the author completely brushed off the entire reason why investors are valuing it at $17 billion.

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.

xivzgrev2• 12 years ago

Totally agree - how many opportunities are there for large-scale investment in private companies with the growth Uber has been seeing?

pkaye• 12 years ago

Are "logistics" companies valued higher than other industries?

eli• 12 years ago

I have no idea, but spending on logistics is several orders of magnitude larger than on cars for hire.

patrickaljord• 12 years ago

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.

venomsnake• 12 years ago

Don't UPS, FedEx, USPS have much more talent and software already deployed.

hyperliner• 12 years ago

"which means future value, not current worth."

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.

Alupis2• 12 years ago

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.

Someone• 12 years ago

That $17 billion is current value, not future value. The investors are paying now.

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).

RV86• 12 years ago

Agreed. I found the article's body did not support its thesis for two main reasons:

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.

opendais5• 12 years ago

It isn't delusional to think otherwise. It is, however, very unlikely.

http://www.businessweek.com/articles/2014-04-07/with-uber-ru...

$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.

ethomson2• 12 years ago

This isn't for grocery delivery, this is to compete with local couriers, and it's priced accordingly.

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.

latj2• 12 years ago

I have mixed feelings about using Amazon as our model of success.

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...

opendais5• 12 years ago

I think Amazon is a perfectly reasonable model of success. Even if I don't particularly like Amazon.

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?

greenyoda• 12 years ago

"In those 20 years [Amazon] has failed to pay a single penny in dividends to stockholders."

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.

Alupis2• 12 years ago

Only in the last paragraph did he mention that Uber may be looked at as a "logistics" company and not a taxi service.

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.

general_failure• 12 years ago

They could even become a FedEx competitor.

Tarang• 12 years ago

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

chris_va2• 12 years ago

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• 12 years ago

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_va2• 12 years ago

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.

gagaga• 12 years ago

I'd say this is a well thought out analysis, especially compared to other articles that make it to the front-page.

"Snapchat is Intrinsically Worthless" https://news.ycombinator.com/item?id=6671371

OoTheNigerian• 12 years ago

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• 12 years ago

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• 12 years ago

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.

mrweasel• 12 years ago

Interesting, I would never use Uber over a taxi, at least here in Europe. I really agree with the taxi drivers, Uber needs to follow the same rules they do, the rules are there for a reason. I don't know how it works in the US, nor do I really care, I want a taxi and not depend on having to buy a smartphone to get it.

Pxtl2• 12 years ago

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.

calbear81• 12 years ago

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).

gfodor2• 12 years ago

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.

austenallred• 12 years ago

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• 12 years ago

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

joshdance• 12 years ago

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'

kylefox2• 12 years ago

> “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.

sshconnection• 12 years ago

I made a similar argument in a prior comment. Particularly once driverless vehicles take off, the economics of vehicle ownership shift massively. Uber will be able to maximize utilization of vehicles and deliver them quickly due to coverage. The idea that network affect doesn't matter here is incredibly short sighted IMO.

aetherson3• 12 years ago

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 [2] http://www.edmunds.com/honda/civic/2014/tco.html?style=20049...

kylefox2• 12 years ago

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

jdh• 12 years ago

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• 12 years ago

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.

gojomo2• 12 years ago

This is a true and important point from the new investors' perspective. However, it is also the case that the insiders, taking the dilution and granting the preferences, believe a greater-than-$17B whole-enterprise valuation is attainable or even likely.

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.

govindkabra31• 12 years ago

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.

segmondy• 12 years ago

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• 12 years ago

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• 12 years ago

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.

adamzerner• 12 years ago

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.

wellboy• 12 years ago

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 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.

gojomo2• 12 years ago

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

gdeglin• 12 years ago

The author of this article seems to have an impressive background: 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?

timr2• 12 years ago

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.

adamodar• 12 years ago

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.

Uber Isn’t Worth $17 Billion

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