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Some Research On Uber


Guest ajc
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For anyone with an interest in the business, here are some links:

 

 

A private company research report on Uber, etc from Wedbush         

goo.gl/ncCDKE

 

Some selected growth stats from the company blog                         

http://blog.uber.com/uberimpact

 

An interview with CEO Travis Kalanick                                           

 

 

 

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thank you sir. so for uber, with a $17 bn valuation and $125 mm 2013 revenue, we're looking at 136x revenue. seems reasonable, particularly since they face no competition, regulatory hurdles, or expenses.

 

Hahaha

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thank you sir. so for uber, with a $17 bn valuation and $125 mm 2013 revenue, we're looking at 136x revenue. seems reasonable, particularly since they face no competition, regulatory hurdles, or expenses.

 

 

Yes, but I believe they could start selling bags of peanuts in their cars so that should dramatically increase their earnings power.

 

Joking aside, you're absolutely right that the current valuation is insane.

However, I think it's still a business worth learning about because of the ramifications it will have for existing industries such as the auto manufacturing and auto insurance ones.

 

In my personal opinion, it's also an industry that will change urban travel in the same way that Amazon and others are doing with shopping (there's also an experimental UberJet if I'm not mistaken, which I've heard co-founder Garrett Camp mention).

My tentative take is that I think the efficiencies that can be delivered are greater than in retail though, because cars are an extremely underutilized asset.

 

Also, at the moment I'd say Uber are doing the best job out of everyone though as you rightly indicated that too could quickly change.

Google self-driving cars for example, could be a real future threat if ever done properly and at scale. I'm not sure their investment in Uber would necessarily stop them from doing that.

So yes, this is definitely an interest post and not a pitch.

 

At the very least though, it'll maybe give someone an insight or two into some other industries that could be advantaged or disadvantaged by the company's existence.

And at best... they IPO at some ridiculous price, at some point after which the NASDAQ crashes, by which time some of us are prepared and well-informed enough to make some intelligent investment decisions about the industry and the companies in it.

 

That's all I'm saying, really. I couldn't agree more with what you've posted.

 

 

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Think of this way, Uber is a high margin franchise model with strong networking effect, it has proven that it can wipe out the taxi industry in many places over time in many cities already, maybe the valuation is not so high in 2-3 years. Let's do some math, the U.S. taxi industry alone has a $11 bn in yearly revenues, let's say at steady state, Uber gets 50% of the market and its take is 20% of that so that's $1.1 bil in revenue, PCLN is closest comparable I can think of, its net margin is about 30%. So for U.S. alone, the potential profit is close to $330 mil a year. At $18 bil, you are paying 55x earnings, not factoring in international expansion (already in Europe) and local delivery services. Not cheap but who knows, could be fair if it executes. The 100x returns have already been made by the early investors. By the time it becomes a public company, 1-2x is still possible but the risk is much higher.

 

With its latest round of funding, it is probably game over for Lfty and other competitors.

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Guest hellsten

Uber's blog is "interesting":

http://blog.uber.com/2011/09/13/uberdata-how-prostitution-and-alcohol-make-uber-better/

 

The parts of San Francisco that have the most prostitution, alcohol, theft, and burglary also have the most Uber rides! Party hard but be safe, Uberites!

 

http://blog.uber.com/2012/05/01/on-demand-mariachi-fiestas/

 

On Friday, May 4th we’ll have three SUVs in San Francisco transporting the Bay area’s premiere Mariachi bands along with Tres Agaves margarita mix and piñatas. Requesting your own fiesta is smoother than the most expensive Añejo – all you have to do is press the “Let’s Party” button. Consider this the ultimate Cinco de Mayo pre-game.

 

Uber somehow makes me think of Groupon. Where's the moat?

 

Maybe it's their low-price leadership:

http://blog.uber.com/dynamicpricing

 

On average, over 80% of gross fares end up in the hands of drivers. What’s more, of the percentage that is retained by Uber, a large portion goes to cover variable expenses within the service.

The bottom line is that this is a low margin business — much more akin to Amazon than Google.

 

Uber is a committed to being a low-price leader.  Some have suggested Uber is a “luxury brand.” This confusion is understandable, as Uber’s initial focus was on traditional black-car services. However, since its launch of the low-priced uberX brandover 18 months ago, Uber has been laser-focused on leading at all price points.

 

Fundamentally, most critics of Uber’s pricing model fail to recognize that Uber is a true marketplace. The majority of leading Internet marketplace companies use dynamic pricing as a solution when confronted with a scarcity of supply.

 

The Amazon of taxis dressed up to be a luxury brand. $1 billion in revenues, and a 2-4% profit margin once they take over the world? That must be worth $17 billion.

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it's about reasonableness and likelihood :) but the main takeaway is that Uber is the kind of companies that we like to own but it lacks a prevailing bias (all Chinese companies are frauds 2011, dot com bubble burst, 09 crush, etc) to make it a homerun

 

what is uber's moat? what is mcdonald's moat? what is facebook's moat? uber is a widely recognized brand, has the biggest user base with scalable infrastructure, it is its network effect that makes very hard for competitor to steal shares - the more users, uber drivers are on the network, the more valuable uber platform becomes.

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Guest hellsten

I think I understand why they are valued at $17 billion. People seem to believe in the Uber story, which is that they can expand globally, and into new areas (peanut sales). All that Wall Street and the early investors need are greater fools to sell to. When Uber is taken public in 1-2 years, or whenever the early investors foresee a dip in growth, the $17 billion valuation will become a $30 billion valuation. The risk-reward is very good for investors who buy before the greater fool. For the greater fool who buys at IPO it's a lottery ticket with a great story.

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Even though this isn't yet an IPO...but who wrote this?

 

"Somewhere in the middle of the Bull market the first common-stock flotations make their appearance. These are priced not unattractively, and some large profits are made by the buyers of the early issues. As the market rise continues, this brand of financing grows more frequent; the quality of the companies becomes steadily poorer; the prices asked and obtained verge on exorbitant. One fairly dependable sign of the approaching end of a bull swing is the fact that new common stocks of small and nondescript companies are offered at prices somewhat higher than the current level for many medium-sized companies with a long market history. The heedlessness of the public and the willingness of the selling organization to sell whatever may be profitably sold can have only one result - price collapse."

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The pick-up times are the key to the moat.

 

In their mature cities, Uber often has them down to less than 5 minutes. In a couple of years, a new entrant with 15 minute pick-up times simply won't get used.

The financial incentives they would have to offer consumers or drivers would be extremely costly if they wanted to establish themselves as a low pick-up time provider over the space of only a few weeks or months.

 

The commitment by Uber to low-pricing and high quality service are also important.

Even if a new competitor did come in some years from now after Uber was dominant in a city then not only would they have to bleed cash and probably get squeezed on price, but they would also need to offer lower prices and higher quality just for the hope that eventually a majority of consumers would switch.

 

So, time waited by consumers is a real switching cost as are the good salaries that drivers on the Uber system get.

 

Those 3 things (pick-up times, low prices and quality) together are their moat, with the pick-up times being the the most vital (though not in a stand-alone way).

Substantially lower pick-up times than others, brings more consumers your way followed by more drivers. If properly managed, this will drive pick-up times even lower, which then attracts more consumers.

 

In the end, no-one wants to use a new start-up service with 15 minute wait times if they already know that Uber provides quality and affordability in 4 or 5 minutes.

You wouldn't do that with your lunch order or weekly shopping, why would you do it with your taxi service?

 

Eventually, I think each major city will only be able to support 3 or 4 of these companies, because the others will end up having pick-up times that are just far too crappy.

 

 

 

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thank you sir. so for uber, with a $17 bn valuation and $125 mm 2013 revenue, we're looking at 136x revenue. seems reasonable, particularly since they face no competition, regulatory hurdles, or expenses.

 

 

Yes, but I believe they could start selling bags of peanuts in their cars so that should dramatically increase their earnings power.

 

Joking aside, you're absolutely right that the current valuation is insane.

However, I think it's still a business worth learning about because of the ramifications it will have for existing industries such as the auto manufacturing and auto insurance ones.

 

In my personal opinion, it's also an industry that will change urban travel in the same way that Amazon and others are doing with shopping (there's also an experimental UberJet if I'm not mistaken, which I've heard co-founder Garrett Camp mention).

My tentative take is that I think the efficiencies that can be delivered are greater than in retail though, because cars are an extremely underutilized asset.

 

Also, at the moment I'd say Uber are doing the best job out of everyone though as you rightly indicated that too could quickly change.

Google self-driving cars for example, could be a real future threat if ever done properly and at scale. I'm not sure their investment in Uber would necessarily stop them from doing that.

So yes, this is definitely an interest post and not a pitch.

 

At the very least though, it'll maybe give someone an insight or two into some other industries that could be advantaged or disadvantaged by the company's existence.

And at best... they IPO at some ridiculous price, at some point after which the NASDAQ crashes, by which time some of us are prepared and well-informed enough to make some intelligent investment decisions about the industry and the companies in it.

 

That's all I'm saying, really. I couldn't agree more with what you've posted.

 

all good comments, and I'd agree uber makes for very interesting valuation exercises...i haven't read all the way through damodaran's piece yet, but he tends to be pretty rational in his assumptions, and yields a value of about 1/3 of the recent capital raise...

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I think I understand why they are valued at $17 billion. People seem to believe in the Uber story, which is that they can expand globally, and into new areas (peanut sales). All that Wall Street and the early investors need are greater fools to sell to. When Uber is taken public in 1-2 years, or whenever the early investors foresee a dip in growth, the $17 billion valuation will become a $30 billion valuation. The risk-reward is very good for investors who buy before the greater fool. For the greater fool who buys at IPO it's a lottery ticket with a great story.

 

Well, ya like Kennedy who said he cashed out of the market when the shoe shine boy was recommending stock picks, I am now looking for something that'll be my tipoff to abandon this market. This is starting to be insane when rational people talk about investing based on the greater fool. Or use slippery slope arguments, like they will take away the taxis, then charge peanuts on each car, then run ads on the app, then this then that and voila it will be only trade at 55x earnings.

 

 

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I think I understand why they are valued at $17 billion. People seem to believe in the Uber story, which is that they can expand globally, and into new areas (peanut sales). All that Wall Street and the early investors need are greater fools to sell to. When Uber is taken public in 1-2 years, or whenever the early investors foresee a dip in growth, the $17 billion valuation will become a $30 billion valuation. The risk-reward is very good for investors who buy before the greater fool. For the greater fool who buys at IPO it's a lottery ticket with a great story.

 

Well, ya like Kennedy who said he cashed out of the market when the shoe shine boy was recommending stock picks, I am now looking for something that'll be my tipoff to abandon this market. This is starting to be insane when rational people talk about investing based on the greater fool. Or use slippery slope arguments, like they will take away the taxis, then charge peanuts on each car, then run ads on the app, then this then that and voila it will be only trade at 55x earnings.

 

I don't understand why people want everything to be rational. The market multiple is at 16x right now. Who knows what the right multiple is and what is the limit on the upside or downside? All we know is that the average is around 15x. George Soros is the master of human psychology. He is happy to ride any bubble and gets out when he sees a shift in psychology. After a stock gets to its fair value, watch how people react to earnings surprises, watch the strength of price momentum, and act accordingly. No need to get attached to anything both long or short. Value investing gives us the courage to buy high quality companies during panics but it is not designed to tell us how to get out close to the top.

 

For comical relief: http://www.thereformedbroker.com/2014/06/09/turn-down-for-what/

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I think I understand why they are valued at $17 billion. People seem to believe in the Uber story, which is that they can expand globally, and into new areas (peanut sales). All that Wall Street and the early investors need are greater fools to sell to. When Uber is taken public in 1-2 years, or whenever the early investors foresee a dip in growth, the $17 billion valuation will become a $30 billion valuation. The risk-reward is very good for investors who buy before the greater fool. For the greater fool who buys at IPO it's a lottery ticket with a great story.

 

Well, ya like Kennedy who said he cashed out of the market when the shoe shine boy was recommending stock picks, I am now looking for something that'll be my tipoff to abandon this market. This is starting to be insane when rational people talk about investing based on the greater fool. Or use slippery slope arguments, like they will take away the taxis, then charge peanuts on each car, then run ads on the app, then this then that and voila it will be only trade at 55x earnings.

 

I don't understand why people want everything to be rational. The market multiple is at 16x right now. Who knows what the right multiple is and what is the limit on the upside or downside? All we know is that the average is around 15x. George Soros is the master of human psychology. He is happy to ride any bubble and gets out when he sees a shift in psychology. After a stock gets to its fair value, watch how people react to earnings surprises, watch the strength of price momentum, and act accordingly. No need to get attached to anything both long or short. Value investing gives us the courage to buy high quality companies during panics but it is not designed to tell us how to get out close to the top.

 

For comical relief: http://www.thereformedbroker.com/2014/06/09/turn-down-for-what/

 

We want to be rational because this is a value investing forum.

 

I think about it this way. Even if a gambler want to play the great fool game, this game will end badly. Someone mentioned that Uber could double so it could go from $17B to $34B. But suppose it eventually comes down to earth and all stocks will eventually be judged on fundmentals, then suppose that it will eventually go to $500M. So if a gambler wants to take that ride from $17B to $34B to $500M, the stock will go down $2 for each $1 it goes up. In other words, the odds of making money betting disregarding the fundementals in this scenario is 2:1 against him. But of course everyone thinks that they will only be on the ride up and know when to get out.

 

And this scenario has played out many times a decade ago: VA Linux, Netscape, JDS Uniphase, Pets.com, and the list goes on and on.....

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There is an easy solution for small investors - after a stock gets to its fair value, use a progressively higher stops that's wide enough to allow for normal volatility, maybe 15-25%. Doesn't work as well for large investors because liquidity dries up during corrections. In your examples, you have excluded the possibility of selling. Most momentum guys all have predetermined stops - that's why you see accelerated selloffs all the time after key technical levels have been penetrated. Soros and Cohen all made a boat load of money during the dot com bubble and kept it. It's not for everyone and takes substantial trading skill and understanding of mass psychology, and self-control/mental flexibility/decisiveness.

 

Alright, I am going off on a tangent. I will stop now.

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There is an easy solution for small investors - after a stock gets to its fair value, use a progressively higher stops that's wide enough to allow for normal volatility, maybe 15-25%. Doesn't work as well for large investors because liquidity dries up during corrections. In your examples, you have excluded the possibility of selling. Most momentum guys all have predetermined stops - that's why you see accelerated selloffs all the time after key technical levels have been penetrated. Soros and Cohen all made a boat load of money during the dot com bubble and kept it. It's not for everyone and takes substantial trading skill and understanding of mass psychology, and self-control/mental flexibility/decisiveness.

 

Alright, I am going off on a tangent. I will stop now.

 

I thought I was quite clear, roughly speaking, the stock spiked up to $17B, the money is made by the insiders. If the company goes public tomorrow at this valuation, and if it falls back to earth one day, for every $1 dollar of gains, whether realized or unrealized, there is $2 of losses on the way back to sanity. So a trader's odds are 2:1 against him, Soros is that kind of person who gets the gains, all the more power to him, but ordinary folks like me will likely lose, with 2:1 odds.

 

I want to play where the odds are in my favour. Munger and Buffett keep preaching that if you keep things simple swing only at the clear strikes investing is easy, i.e., the odds are in your favor. So I am ordinary and I want to go in where the odds are in my favor.

 

That's all folks....

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I certainly wouldn't want to put money into Uber at a $17 B valuation. 

 

But it's possible that there is some M&A strategy going on behind the scenes.  My understanding is that Google Ventures put 85% of their AUM into Uber for a valuation of $3.5 billion.  Google Ventures apparently put more money into this current round of financing.

 

From my perspective, the data that Uber is generating is very strategic for anyone who is interested in mapping and logistics.  One way for GOOG to make sure that Uber isn't acquired by a competitor like AAPL or MSFT would be to jack up the valuation to exorbitant levels.  It's also possible that the non-GV investors/owners are basically positioning themselves for a potential Google take-out of Uber, in which case they will demand a crazy high price from cash rich Google to keep it out of the hands of, say, a MSFT.

 

That's one potential explanation for the sky high valuation.  In any case, none of us individual investors would ever want to put money into that kind of company at such a valuation.

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Also keep in mind that no one paid the full $18 bil price tag - the $1.2 bil is similar to a call option - let's say the outcome is binary, in 1 scenario, Uber is worth $1 bil, and in another, it's worth $100 bil, to break even in terms of expected returns, you only need 1/6 odds.

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Guest wellmont

I don't see $17b as crazy.  rich but not crazy. this is a real company, merging of old and new. Old school curmudgeon, David Bonderman is on the board, and his firm made an investment at $3.5b. It's disruptive. global market. lots of opportunity.

 

Google ventures manages $1.5b. They allocate $300m Per Year. So their 2013 investment in uber was a big percentage of 1 year of allocation, as was their 2014 investment. I don't believe goog would make an investment like this to "jack up the price". that's simplistic. the price would be high with or without google ventures.  Google doesn't control the company and therefore, could not by itself, keep it out of the hands of a competitor. But that's neither here nor there. My guess is that uber will not sell itself. Why? it has a chance to be a massive, and massively successful company on it's own.

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Also keep in mind that no one paid the full $18 bil price tag - the $1.2 bil is similar to a call option - let's say the outcome is binary, in 1 scenario, Uber is worth $1 bil, and in another, it's worth $100 bil, to break even in terms of expected returns, you only need 1/6 odds.

 

You are telling me you think Uber has 1/6 odds of going to $100 bil?

 

How many companies are 100bil today that went IPO in 1990s, and how many tech companies have gone to zero that went IPO in the 1990s? is the ratio 1:6?

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I don't see $17b as crazy.  rich but not crazy. this is a real company, merging of old and new. Old school curmudgeon, David Bonderman is on the board, and his firm made an investment at $3.5b. It's disruptive. global market. lots of opportunity.

 

Google ventures manages $1.5b. They allocate $300m Per Year. So their 2013 investment in uber was a big percentage of 1 year of allocation, as was their 2014 investment. I don't believe goog would make an investment like this to "jack up the price". that's simplistic. the price would be high with or without google ventures.  Google doesn't control the company and therefore, could not by itself, keep it out of the hands of a competitor. But that's neither here nor there. My guess is that uber will not sell itself. Why? it has a chance to be a massive, and massively successful company on it's own.

 

I think you're wrong about the price being high with or without Google.  Like I said before, Uber is a strategic asset that would be worth a lot more in the hands of one of the tech giants, particularly someone focusing on mapping and logistics. 

 

You really think Bonderman wasn't like, oh, well if Google really wants to keep this strategic asset out of the hands of, say, a MSFT or AAPL, we're gonna raise money at a much higher valuation?  I would not at all be surprised if Uber does, in fact, sell itself. 

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