Last week, when Uber’s latest investment round closed, its investors valued the company at $17 billion—a record high, and huge for a relatively young company with annual sales in the hundreds of millions of dollars.
There’s no question Uber, which connects private drivers with people looking for rides, is a fast-growing concern that serves a real need in the market. But Aswath Damodaran, a New York University professor who makes a habit of publicly analyzing start-up values, says that the number is likely wishful thinking and a more accurate valuation is probably closer to $6 billion. Helpfully, however, he explains how you might get to the higher number.
Damodaran starts with three key assumptions: That the global taxi market is roughly a $100 billion a year business, that Uber can gain 10% of that market, and that it will be able to continue keeping 20% of customer payments, as it does now (the rest goes to the driver). But he helpfully gives us this matrix to see what would happen if you kept that 20% of gross receipts constant but increased the market size, or Uber’s share of it:
Basically, to get to $17 billion or more (the yellow boxes above), you need to believe either that the market for car services is much bigger than Damodaran’s estimate, or that Uber will be able to capture far more than 10% of it, or a mix of both. These are tricky propositions, especially considering the wealth of competition (both old-school taxis and newer competitors like Lyft). And assuming that Uber can hold on to 20% of gross receipts may be generous, too, since regulation could increase its costs, or competition could oblige it to pay its drivers a bigger cut.
But wait, you say—Uber is about so much more than just car services. The company has delivered air conditioners, Christmas trees and ice cream in the past, and made noise about building a platform oriented more towards general logistics than mere car services. Damodaran recognizes that this “disruption option” exists, but wonders if it is truly worth the $11 billion separating his valuation from that of Uber and its investors.
In any case, CEO Travis Kalanick told the Wall Street Journal (paywall) that “we didn’t pitch the logistics business in this fundraising.” Instead, he says, he thinks the car-service market is indeed going to be much larger than current estimates. Why? Because, basically, Ubers are so convenient that lots of people will use them instead of buying cars:
[I]t’s not about the market that exists, it’s about the market we’re creating. So what is that vision?…It’s a reflection of our mission to turn ground transportation into a seamless service. Basically make car ownership a thing of the past…If you just looked at San Francisco, the ground transportation market in just San Francisco—where people pay to get in a car and go somewhere, whether they own the car or otherwise—is $22 billion.
If Kalanick is right, that would indeed bolster Uber’s valuation. But it would also add ZipCar, Avis, Ford and even public transit systems to Uber’s list of competitors. That’s not to mention the other companies, like Google and Tesla, seeking to jump into that market with self-driving and electric cars, respectively. That probably lowers Uber’s chances.
A final possibility, of course, is that $17 billion really is too high a valuation—but that investors are willing to overpay because it gets them preferred stock, which would guarantee them a return if there is a big IPO or acquisition down the line. But that privilege would come at the expense of common stock holders—unless, of course, Damodaran is wrong about Uber’s prospects and Kalanick is right.