Is Uber Overhyped?
I came across an interesting interview by Aswath Damodaran, the valuation expert, who thinks that Uber’s valuation is a little more than half of its sought $100bn valuation target. According to him, the intrinsic valuation is in the range of $58.6bn to $61.7bn. He bases his valuation on two methods: 1. A top-down valuation that uses total addressable market as a starting point and moves gradually down to market shares, margins, and reinvestment to come up with value; and 2. Bottom-up or User based valuation, in this case, rider based to arrive at a total value of user base adjusted for user acquisition and corporate expenses. The first approach yields an equity valuation of $61.7bn ($54 per share) and the second one yields a valuation of $58.6bn ($51 per share). Now, both of these methods return valuation that is significantly lower than the price target of Uber of $100bn which translates into circa $95 per share.
It appears that there is a big difference in what different experts think Uber’s valuation could be and what it expects to price at. Fred Wilson thinks that Uber could yield valuation in the range of $70bn to $85bn. Lyft’s pricing has been indicative in this respect, it was priced at $72 per share and since its IPO the stock has been down roughly by 20%. Could this be a reality check for Lyft? And, what does this mean for Uber IPO? Uber’s pricing will ultimately be determined by the market sentiment and it is likely that Lyft will be used as a proxy for pricing, even though, these two companies may not be quite comparable (growth, size, geography).
Damodaran thinks that although Uber has been demonstrating an impressive growth trajectory CAGR ’16-’18 (61%) in gross billings and CAGR ’16-’18 (76%) in net revenues and CAGR ’16-’18 (42%) in riders, nevertheless, it has been losing money and a lot of money in the magnitude of 3 to 4 billion dollars per year.
Another question that lingers in everyone’s head is, whether Uber will ever manage to become profitable? For Damodaran there is no clear pathway at the moment to a profitable business model as he does not see how economies of scale are kicking in. Figuring out the business model for Uber means several things from creating stickiness with the users and drivers, which hopefully reduces its CACs, to bundling more of its add-on services such as Uber Eats to increase revenue per user. Autonomous Vehicles is another future trend with the potential to transform its business model, but at the moment it is losing money on it ($125m to $200m per quarter).
One conclusion that could be drawn from the recent IPO bonanza is that market is currently hot, the timing seems to be right and the sentiment is somewhat bullish, so after all, even if intrinsic value is lower and the company is not profitable as long as the market thinks that its growth trajectory is sustainable, it may still be able to hit its price target. We have to wait to see how this plays out.
