An Expert in Valuation Says Uber Is Only Worth $28B, Not $62.5B | Hacker News Reader

An Expert in Valuation Says Uber Is Only Worth $28B, Not $62.5B

bloomberg.com

39 pointsHillaryBriss56 comments

In June 2014, Aswath Damodaran (the expert in valuation cited in the article) wrote an article about how Uber should be valued at $5.9B rather than the $17B they had just raised at: http://fivethirtyeight.com/features/uber-isnt-worth-17-billi... If Damodaran's current $28B valuation is "correct," that would imply ~26% annualized returns if you'd invested in Uber at the "unjustified" $17B mark. Not bad. So I'd say his 2014 number missed the mark, in retrospect.

"Expert in valuation" does not imply an ability to magically divine the "true value" of companies. Valuation is as much subjective as it is objective–multiple people creating DCFs for a company can come up with different values. There's also upside (or downside) that isn't purely captured by metrics to date.

This isn't to say that I think Uber is "truly" worth what it raised at. Just to say that valuation isn't an exact science.

As a side note, Damodaran does have some great lectures on how to value companies: https://www.youtube.com/watch?v=znmQ7oMiQrM

I disagree with his valuation, but yes, he is brilliant. People should definitely check out his work.

i think it's important t to keep in mind that the professor's valuation does not include a liquidation preference or other protective provisions that investors pay a premium for.

Uber isn't doing that well in terms of profits. It claims to be profitable in the US, but without audited GAAP numbers, that's questionable. (It's easy to be "profitable" when you get to decide what costs to count.)

Uber claims to make $0.19 per ride in the US. (Unaudited, of course) Average number of daily Uber trips is 1 million.[2] That's $69 million a year. Ongoing companies have a P/E ratio in the 10 to 15 range, so Uber is worth about $7bn to $10 bn as an operating company. Anything higher than that is anticipation of future growth. A huge amount of future growth.

[1] http://www.bloomberg.com/news/articles/2016-04-14/lyft-is-ga... [2] http://expandedramblings.com/index.php/uber-statistics/

Good luck predicting how public shareholders will treat a company like that. Same goes for Airbnb.

Does it really make sense that Twilio has gone up so much since its IPO? Is it likely to crash hard back to earth in the next year? Who knows, maybe it's one part sentiment, one part broad market euphoria, one part hitting their next quarterly numbers, one part story, etc.

If you were to run almost any kind of reasonable attempt at analyzing and valuing Tesla based on what it should maybe be worth via comparables, you'd get a figure dramatically lower than it is today. Do you compare it to a solar company? To Fiat? To GM and Ford? To Porsche? Doesn't matter, every example gets a Tesla worth far less than it is today. Public shareholders disagree however, they think it has a very bright future.

The same has been true of Amazon for most of its existence. Try to apply any of Target or Walmart's valuation ratios to Amazon, and you'd have to reduce the market cap by 3/4 at least. Should Amazon be worth 50% more than Alibaba? Investors think Amazon is going to grow a lot yet.

Does Google's (ever slowing) growth rate really justify a PE ratio 2.5 to 3 times that of Apple? Microsoft hasn't really grown its profit level in years. Should it have a 20 to 25 PE ratio, roughly twice that of Apple? So far as public shareholders are concerned, these things make sense today.

So Uber is really worth $28b, not $62.5 billion? Good luck with that.

>If you were to run almost any kind of reasonable attempt at analyzing and valuing Tesla based on what it should maybe be worth via comparables, you'd get a figure dramatically lower than it is today. Do you compare it to a solar company? To Fiat? To GM and Ford? To Porsche? Doesn't matter, every example gets a Tesla worth far less than it is today. Public shareholders disagree however, they think it has a very bright future.

If Tesla succeeds in finishing the Gigafactory on a reasonable timeframe and delivering a large number of Model 3 cars by the end of this decade, why would it be worth "far less than it is today"?

One of Uber's key advantages in Europe and the US is that fares were significantly cheaper and inventory is quite competitive than what the taxi companies got away with through regulatory capture (medallions and like).

In developing markets like India, the taxi/auto rickshaw premium is actually not much. I estimate that taking an auto rickshaw for my morning commute is only 40℅ or so more expensive than driving on fuel costs alone and when you factor in interest on car loan, insurance, maintenance etc, it would probably be close to cost neutral.

Uber and the local competition Ola are currently premium propositions to this. Local taxis I believe are competitive or slightly cheaper than Uber/Ola.

Sure I happily pay a premium for the comfort of pickup in an air conditioned car etc and there will always be top 2-3℅ who will pay a premium.

But being premium priced to key competition which has much higher inventory on the road means you can't really go after a mass market. In taking a mass market in any industry, convenience has almost never trumped price and availability. Everyone else I know in India who takes these cabs are also in the 2-3℅.

Uber and Lyft have had all three in US. But price is a clear disadvantage in India and availability vs. alternatives is currently not an advantage. I'm not very clear what the scenario was in China but I'd not be surprised if it was similar.

This lack of significant pricing and inventory advantage unlike US/Europe is I'm not sure being taken into account when projecting growth prospects and valuations.

These company valuations are just made up as part of the valuation ponzi schemes.

A "valuation expert" means nothing.

Its hard to value a company without a lot of public numbers:

Even he admits here: I am relying on dribs and drabs of information that are coming out of the existing ride sharing companies, almost all of whom are private

Also their cash flow numbers are probably negative at the moment and future cash flow is just a guess.

Basically valuing a business like that is throwing Darts at a board. You need to have predicable cash flow to properly value a business.

I wonder how much ridership data you could infer by reverse engineering the app and systematically querying the API. For example by looking at the rate that cars become available/unavailable and extrapolating rides from that.

> "only worth 28B"

I feel like this statement is telling in and of itself - since when is a $28B startup with Uber's (lack of) revenue and lasting IP considered normal?

Perhaps these numbers have yet a ways to fall.

Uber must be doing billions in revenue, since they handle the payments on all rides ordered through their system. They're not giving free rides after all.

That might be one way to look at it, but I doubt that is relevant. The total money that uber handles would be equivalent to ebay's "gross merchandise volume". The transaction takes place between the rider and the driver and uber is only facilitating it. You wouldn't say that a credit card company has the entire economy as its revenue, so you wouldn't say that all ride charges are Uber's revenue.

The rider and driver can't negotiate prices independently or pay through another service.

Uber determines both the display price offered to the customer and the revenue share paid to the driver, so IMO the total sum of transactions really is all Uber's revenue.

I'd hazard they are making billions in sales. Elsewhere in this thread they are quoted at claiming to make 20 cents per ride, $62 million total, in revenue.

Revenue is the same thing as sales. The $62 million number would be gross profit.

Every time I see an article like this, I wonder whether these experts have put their money where their mouths are. I'm sure there are plenty of Uber investors willing to take the other side of this bet, especially if you think the company is worth less than half of its valuation. Otherwise, it makes it hard for me to believe their opinion.

I wonder whether you saw the article last week about how difficult it is to actually short Uber.[1]

[1]: http://qz.com/707947/investors-have-placed-a-one-way-bet-on-...

Ah thanks, I actually hadn't seen that. Maybe in the future these predictions can be handled by some sort of betting market.

Ideally that would happen in the stock market, of course.

There are always proposition bets but they are generally illegal in most, if not all, markets.

This is depressingly common. I occasionally run across a company which I'm sure will have a lower stock price in a year. The numbers don't add up, the business plan is just unworkable, or it fails the "this tiny company has a higher valuation than Walmart" test.

But about nine out of ten times I can't get shares to short, or my broker can get shares from another brokerage for a large minimum lot and even larger fee. I can understand some smaller companies don't have a large float, but it seems like you should be able to get shares for companies like Uber and Tesla.

Isnt tesla one of the most shorted companies currently? Cant be too hard to short it

I'm not an expert on this stuff, but my understanding is when lots of people sell short it's harder to do the same. It doesn't really make sense to me, since I think when you short a stock those shares get sold, so they're going somewhere.

This line of thinking is wrong. You can't just short a company because you have a reasonable belief it is overvalued when the vast majority of investors think otherwise. There needs to be some event that forces the public to reevaluate their valuation of the company for the short to work.

This.

Shorting is expensive, and you could become insolvent if you short too early.

The market can remain irrational longer than you can remain solvent.

Well, yes. I used to think like this, but when I placed said bets, it turns out that the market was fully capable of remaining stupidly wrong quite a bit longer than I was able to remain solvent. It was shocking to say the least. Even when the facts were obvious - an inexplicable stubborn attachment to remaining wrong. I think there's even a famous quote along those lines - so I'm guessing that I'm not the only one with the experience of learning that you can be correct and still have bad timing.

In my opinion, assigning a value of even $28b to an app that could be duplicated by a single developer in under a week is probably a bad idea. Let's remember that most of the money they've blown has not gone into capital expenditures - there isn't a giant fleet of cars they own that could be sold if they fail, for example. They've spent almost all of the money subsidizing rides to win customers and drivers - both of which could leave the platform for the next great app in a heartbeat. They have not gained any assets as a result of their massive expenditures.

My personal opinion is that anyone investing in this company at any 10 figure valuation - much less 11 figures - is probably poised to lose most of their investment. We've seen through companies like Theranos how billions in perceived value can vanish overnight when business realities and investor expectations are mismatched. While these two companies appear to have reached high valuations through different means - Theranos through fraud and Uber through unprecedented hype - they may ultimately wind up in similar situations.

In my opinion, the key asset Uber has is their driver network. Like you say, anyone can build a similar app pretty quickly, but who will use it if there are no rides available? They've paid so much into user acquisition precisely so it is more appealing for drivers to join the network.

In this light, the CMU investment makes a ton of sense. It's going to be extremely difficult for any other competitor to get the critical mass of drivers that makes grabbing a ride a <5min request, except in the case of driverless cars. GM (as an example) could quickly put them out of business by partnering with google and deploying thousands of self-driving cabs in a city and slapping an uber-like app on it. There's no other way to get that many drivers.

Obviously the above example is a longer-term threat, so to say that anyone can just build an app and outcompete Uber is missing where the real value in Uber lies.

Don't most reported private valuations fail the most basic smell tests? If share rights, liquidation preferences, and seniority are homogenous, doesn't each share need to be summed individually vs multiplying quantity * latest senior price?

A "valuation expert" arguing against a straw man based on a misconception certainly makes you wonder how much expertise they have. Raising capital from an investor who gets preferential terms -at- a valuation is not equivalent to saying that the company is worth that valuation. The comparison chart against public companies is a false comparison for the same reason.

Bloomberg should know better.

28 billion seems a stretch, maybe 4B. How far into the future does a valuation speculate for?

It's not uncommon to project for infinity. When using the discounted cash flow (DCF) method you first use the current business plan to project cash flows (discounting for the fact that future money is worth less than money right now) for as long as you think is reasonable, sum them, then calculate some "final value" for the company beyond the business plan.

Perhaps you think the company won't be around, so it is zero. Maybe you assume is steady-state forever, in which case the infinite sum of discounted cash flows turns into a geometric sum, which has a finite sum.

Uber is no more than an app with little network effect.

If they start making money in a given city, a competitor can sweep in and take the city from them. I know they are planning a monopoly on self-driving taxis. But as of today, the valuation seems to be 3 orders of magnitude off.

> Uber is no more than an app with little network effect. > If they start making money in a given city, a competitor can sweep in and take the city from them.

Odd. I see their network effect as rather strong. Why would a driver use a new competitor app if the customers aren't there? Why would a customer download another app they haven't used before or heard of, especially if the rides aren't there?

Competitors always have it easier because they can see what works and doesn't work from original competition. Which means they can spend less and make more. Which means they can charge less and / or pay their drivers more.

More competition will pretty much always cause every competitor to spend more and make less...

See: https://en.wikipedia.org/wiki/Perfect_competition#/media/Fil...

> Why would a driver use a new competitor app if the customers aren't there?

Because there is almost zero cost for the driver to sign up for yet another app. Already today, many drivers use multiple apps.

> Why would a customer download another app they haven't used before or heard of, especially if the rides aren't there?

He will hear about it and download it if the rides are cheaper.

> If they start making money in a given city, a competitor can sweep in and take the city from them.

Uber uses their network effect to cut prices and force the competitor out. They have done this in a number of cities. No city has ever been "taken" from Uber (in the US at least).

Juno has a good chance in NYC

edit: and Lyft in SF

Uber mainly uses their deep pockets to cut prices.

There are enormous network effects for their carpooling options such as UberPOOL, UberHOP, etc.

But is this their main business?

I don't use the other options if POOL is available and most of my friends are the same way.

Suppose Uber does not exist in 10 years, what will be its legacy?

A lot of people will tell their grandchildren that one day there was a platform you could use to get a ride...

Valuation seems nowadays based on perceived market value. Perception is deception.

"An Expert in Valuation"

Ha, the only expert on the value of an asset is the market, because the market alone determines what something is worth. Everything else is hogwash.

And then something happens and market 'corrects' itself. Before investing, it can be useful to know the post-market-corrected value of any asset.

It can be a lot less, if what happened in China spreads to more operations. Imo, Uber is going to fail very big.

Can you expand on that? What mode of failure do you foresee?

Uber sold its Chinese operations to Didi Chuxing (a ride-sharing service made by Chinese companies), because it couldn't gain a definitive advantage despite spending more than a billion dollars.

OP literally just cited China which means smaller margins in some markets and shut out of some markets entirely, i.e. failure to capture the market

about the only positive thing that can be said for Uber is that people love it, it fills a need, the alternative is to own a car or pay cartels inflated taxi rates, and people must absolutely must get from point A to point B - they have no choice but to fill that need somehow, and also I suppose it could be said that Uber has shown an incredible ability to execute to the extent of lobbying to rewrite antiquated laws and regulations as well as educating consumers and building infrastructure and operations, essentially creating a new service category through innovation, it has uber-high mindshare and strong, honest sales and revenue.

But take away all of that, and what is left? Nothing but a a service people hate and that nobody needs, where their needs are met elsewhere for free, and by a company that has no ability to execute or deliver it or history of doing so or any revenue from doing so. In essence under this scenario the only thing Uber would still have is the ability to convince investors to value it at $60B.

Incidentally, this is the only thing that is necessary for it to have a real, honest-to-goodness value of $60B. All of the first part is not what gives a company its value (though it can't hurt) - the second part is.

Why there would be any sudden shift in sentiment or valuation by investors is not something that anyone has advanced. . . why would they suddenly turn on uber?

Uber's going to fail big because it failed big in China?

I think it's pretty well established that western companies can continue to be extremely successful while failing in China. Google (meaning search, gmail, maps, docs, youtube), facebook, dropbox, twitter, instagram...

Uber got 20% of Didi when it left China. That's hardly a failure.

It is a failure in terms of developing their own business. The 20% stake won't ever translate into a better valuation of the product, just the corporation. As you've recently seen with Yahoo!, this won't save them.

Reply on news.ycombinator.com