Uber Isn’t Worth $17 Billion

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.

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.

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."

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.

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.

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.