Some Research On Uber

[Guest hellsten]

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?

 

What are the odds that a marketplace for taxis can become more valuable than something like eBay (market cap 61.23B), which includes PayPal:

https://www.google.com/finance?q=ebay

 

Seems unlikely even if Uber starts selling Macadamia nuts.

 

As of 2012, PayPal's total payment volume processed was US$145 billion.[26] and accounted for 40% of eBay's revenue, amounting to US$1.37 billion in the 3rd quarter of 2012.

http://en.wikipedia.org/wiki/PayPal

 

On April 18, 2012 eBay reported a 29% Q1 revenue increase to $3.3 billion compared to their Q1 in 2011. Net income was reported to be at $570 million for the quarter.

http://en.wikipedia.org/wiki/EBay

 

I wouldn't be surprised if Uber's fees came down to 10%, all they need to achieve this is a bit more competition:

 

Ebay charges 10%:

10% of the total amount of the sale

Maximum fee is $250

 

http://pages.ebay.com/help/sell/fees.html

[PatientCheetah]

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?

 

I didn't make a valuation call. That's the odd that VCs are paying. VC's business model is to make at least 40-50 independent bets. Most will go to 0 and a few will be 100x. The average VC returns are in the teens.

 

Uber is probably the best business model that has come out since Facebook. Is this really crazy relative to Facebook valuation from just a few years ago? No one knows how things will work out in the future so no one is betting the farm on anything. Its all part of a much larger portfolio. If I have to access to this round, I will be happy to gamble 1-2% of my portfolio with the full knowledge that I can lose the whole thing. Higher beta higher uncertainty = smaller bets. I bet you don't play poker.

[Guest ajc]

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...

 

That's right. He gets to a valuation of $5.9 billion which is pretty much 1/3rd of the latest valuation.

 

One criticism I have is I think his valuation posts tend to be somewhat lacking on the business model side of things.

I still really like them, but my argument here is that there are 3 existing business models that need to be used to best judge Uber's moat and none of them really got a proper mention.

 

Those 3 are FedEx/UPS, eBay/Amazon Marketplace and a company like Mastercard.

 

The FedEx/UPS comparison relates to the reasons why those two have strong moats and excellent market shares (far higher than 10%) in their key segments.

It comes down to a virtuous circle where people tend to use the service with greater reach, lower prices and the fastest speeds more and more often which then drives greater efficiencies and savings.

Those 1, 2 or maybe 3 businesses then dominate the market. So, I don't believe it's an industry that lends itself to too much competition.

Here is something on Uber's approach towards that - http://www.businessinsider.com/ceo-travis-kalanick-on-ubers-pricing-formula-2013-11.

 

The eBay/Amazon Marketplace aspect also leads to new buyers and new sellers going where the existing ones already are.

If I want the most rides and highest wage as a new driver I go to Uber, because they've got the biggest consumer base.

Similarly, consumers do the same when looking for speed, quality and low prices.

These are almost winner/s-take/s-all type situations where dominant companies end up with a disproportionate share of the new, first-time users and drivers.

That makes them bigger, cheaper and easier to use.

 

(Those logistics and marketplace comparisons are clearly kind of double-counting so they're not both full effects, but there's a hybridization at work so both apply.)

 

Finally, with Mastercard there's the running-the-back-end-and-taking-a-commission aspect.

Uber has been toying with vehicle-financing to give them more control over their fleet which I think is maybe a good idea, but essentially once established Uber is an asset-lite royalty-type business.

Price of gas goes up and cost of travel increases, Uber profits from that without even having to grow.

Plus, they're the low-cost service provider so they take market share away from others in that situation as consumers look for cheaper options.

It's like having a FedEx or UPS moat, but with only a fraction of the costs and a decent commission on each shipment delivered.

 

So over the long-term, I tend to view Uber's business and the industry dynamics more favorably than he does even if I think his work is great for the most part.

 

 

[randomep]

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?

 

I didn't make a valuation call. That's the odd that VCs are paying. VC's business model is to make at least 40-50 independent bets. Most will go to 0 and a few will be 100x. The average VC returns are in the teens.

 

Uber is probably the best business model that has come out since Facebook. Is this really crazy relative to Facebook valuation from just a few years ago? No one knows how things will work out in the future so no one is betting the farm on anything. Its all part of a much larger portfolio. If I have to access to this round, I will be happy to gamble 1-2% of my portfolio with the full knowledge that I can lose the whole thing. Higher beta higher uncertainty = smaller bets. I bet you don't play poker.

 

I play almost every week.

[Guest hellsten]

Here's an attempt at reverse engineering Uber's financials:

http://justin-singer.org/blog/2014/06/beautiful-illusions/

 

And a discussion related to the article:

https://news.ycombinator.com/item?id=7879955

 

Someone mentioned tax deductions are not possible:

The standard mileage rate cannot be used if the taxpayer: Uses the car for hire (such as a taxi).

 

And there seems to be issues with insurance (surprise):

14. Personal vehicle sharing program means a business, organization, network

  or group facilitating the sharing of private passenger vehicles for use by

  individuals or businesses.

  [...]

18. There is no coverage under this Section for any person or organization

  while any motor vehicle is operated, maintained or used as part of personal

  vehicle sharing facilitated by a personal vehicle sharing program.

 

There's was also a link to this post which has some interesting information:

https://www.quora.com/Uber-1/How-big-of-a-deal-is-Uber/answer/Justin-Singer

 

According to IBISWorld, the US Taxi & Limousine Services industry will pull down $9.7 billion in revenue in 2013 across five major segments: taxi fares (55%), leases to operators, black cars, limousines, and other, which includes in-cab advertising, party buses, and maintenance.

…

The bad news is that revenues stagnated a long time ago. Five-year growth is an anemic 0.8%, and the next five years don't look much better.

 

US taxi industry:

http://www.ibisworld.com/industry/default.aspx?indid=1951

 

Revenue

$11bn

 

Annual Growth 09-14

3.2%

 

UK taxi industry:

http://www.ibisworld.co.uk/market-research/taxi-operation.html

 

Revenue

£9bn

 

Annual Growth 10-15

0.9%

 

Is it fair to compare Uber to Ebay? Ebay enabled $175 billion in commerce volume in 2012:

 

http://www.forbes.com/sites/greatspeculations/2013/06/03/can-ebay-continue-its-amazing-growth/

 

In 2012, eBay enabled about $175 billion in commerce volume, thus commanding a 19% share in global e-commerce market and almost 2% share in global retail market.

 

Ebay's, including PayPal's, revenue in 2012 was 14 billion. If ~60% was from eBay and the rest from PayPal then eBay alone had revenues of ~8 billion in 2012 on a huge global market.

 

The market size for taxis in the US and UK is ~$20 billion. Even if Uber gets 50% of those markets I find it very difficult to believe they will have more revenue and profit than eBay. Wouldn't their business model give them 1-2 billion in revenue (~20 billion * 50% * 10-20%)?

 

I guess the early investors are not looking too much at what Uber can earn in the taxi industry. They are speculating on what they can earn by selling a dream to late investors at an IPO.

 

Uber could still be a great investment just like Google and Facebook (?).

[Liberty]

Here's a very interesting and very detailed post on Uber by one of the early investors and board members:

 

http://abovethecrowd.com/2014/07/11/how-to-miss-by-a-mile-an-alternative-look-at-ubers-potential-market-size/

 

Regardless of whether you are interested in the company, I think it's an excellent read. Thanks to Whopper Investments for pointing it out.

[jschembs]

Here's a very interesting and very detailed post on Uber by one of the early investors and board members:

 

http://abovethecrowd.com/2014/07/11/how-to-miss-by-a-mile-an-alternative-look-at-ubers-potential-market-size/

 

Regardless of whether you are interested in the company, I think it's an excellent read. Thanks to Whopper Investments for pointing it out.

 

It is a very good read, and shows wonderful thought processes to consider the art of the possible for future markets. As is typically the case with VCs, however, he has no discussion regarding the economics of the business itself. Given his original purpose for the post was to critique Damodaran's conclusions of value, I found his own conclusions a bit lacking. Effectively, he's saying, "hey, look at all these cool things Uber could do to massively grow its TAM. Therefore, Damodaran's value conclusions are wrong."

[JAllen]

Here's a very interesting and very detailed post on Uber by one of the early investors and board members:

 

http://abovethecrowd.com/2014/07/11/how-to-miss-by-a-mile-an-alternative-look-at-ubers-potential-market-size/

 

Regardless of whether you are interested in the company, I think it's an excellent read. Thanks to Whopper Investments for pointing it out.

As is typically the case with VCs, however, he has no discussion regarding the economics of the business itself.

 

 

He probably can't discuss Uber's financials, as he's on the board, has been for years, and Uber is private, right?

found his own conclusions a bit lacking. Effectively, he's saying, "hey, look at all these cool things Uber could do to massively grow its TAM.

 

 

 

Except there is evidence that the TAM is already larger than pre-existing taxi markets, like in SF, where Uber's revenue now exceeds the entire pre-Uber taxi-market here.  Which parts of his arguments do you disagree with?

 

 

I found his arguments to be very convincing.  Maybe it's because I'm an Uber user myself and live in SF, a dense city where it's firmly established and I'm weighing the idea of getting rid of my car and just using Uber, transit and Zipcar/Getaround.  I could use Uber 3 times more per week for $20 each than the number of trips I use my car for and still not pay as much as it costs me to own my car right now.  This is huge, and I believe is the future, at least for the millions of Americans that live in cities.

 

 

 

I was just in Bogota and Panama City where we used Uber tons, because it was so convenient and I trusted that at the very least Uber had more information about the people driving us around than a non-Uber driver.

 

 

Another thing: people say there are no network effects, I disagree with this too.

 

 

If you don't have a ton of demand from riders, your drivers require more payment per trip; but if you have a ton of riders constantly requesting rides like Uber does, drivers have more trips per hour (this is discussed in the link above) so the price can be lower per ride, for both Uber and the driver, and they both make the same amount per hour.  This obviously creates a virtuous cycle by increasing the number of riders and drivers in the network, reducing wait times, and further increasing demand.  Imagine trying to start another Uber right now.  How would you compete?

 

 

 

Why does it bother so many people so much how much others pay for their investments, especially people that haven't actually seen the financials at all and that don't specialize in investing in young tech companies?

 

I believe Uber will be absolutely enormous and the current valuation will seem cheap in a few years, just like Twitter and AMZN now.

[jschembs]

Here's a very interesting and very detailed post on Uber by one of the early investors and board members:

 

http://abovethecrowd.com/2014/07/11/how-to-miss-by-a-mile-an-alternative-look-at-ubers-potential-market-size/

 

Regardless of whether you are interested in the company, I think it's an excellent read. Thanks to Whopper Investments for pointing it out.

As is typically the case with VCs, however, he has no discussion regarding the economics of the business itself.

 

 

He probably can't discuss Uber's financials, as he's on the board, has been for years, and Uber is private, right?

found his own conclusions a bit lacking. Effectively, he's saying, "hey, look at all these cool things Uber could do to massively grow its TAM.

 

 

 

Except there is evidence that the TAM is already larger than pre-existing taxi markets, like in SF, where Uber's revenue now exceeds the entire pre-Uber taxi-market here.  Which parts of his arguments do you disagree with?

 

 

I found his arguments to be very convincing.  Maybe it's because I'm an Uber user myself and live in SF, a dense city where it's firmly established and I'm weighing the idea of getting rid of my car and just using Uber, transit and Zipcar/Getaround.  I could use Uber 3 times more per week for $20 each than the number of trips I use my car for and still not pay as much as it costs me to own my car right now.  This is huge, and I believe is the future, at least for the millions of Americans that live in cities.

 

 

 

I was just in Bogota and Panama City where we used Uber tons, because it was so convenient and I trusted that at the very least Uber had more information about the people driving us around than a non-Uber driver.

 

 

Another thing: people say there are no network effects, I disagree with this too.

 

 

If you don't have a ton of demand from riders, your drivers require more payment per trip; but if you have a ton of riders constantly requesting rides like Uber does, drivers have more trips per hour (this is discussed in the link above) so the price can be lower per ride, for both Uber and the driver, and they both make the same amount per hour.  This obviously creates a virtuous cycle by increasing the number of riders and drivers in the network, reducing wait times, and further increasing demand.  Imagine trying to start another Uber right now.  How would you compete?

 

 

 

Why does it bother so many people so much how much others pay for their investments, especially people that haven't actually seen the financials at all and that don't specialize in investing in young tech companies?

 

I believe Uber will be absolutely enormous and the current valuation will seem cheap in a few years, just like Twitter and AMZN now.

 

It doesn't bother me how much people pay for other investments. I agree Uber has network effects, and I didn't mean to imply I thought Gurley should disclose Uber's financials - moreso generally describe the economics of what makes the business so attractive outside out of a massive TAM. The typical network effect has a fixed supply source (i.e. MSFT office, ebay, AMZN, FB), whereas with Uber the supply source will expand as more drivers become interested in joining the network. This should put downward pressure on prices (good for Uber users), which may or may not have a positive impact on Uber drivers. Yes, they reduce deadhead miles, but they also put more mileage on their vehicles at lower rates, decreasing the economic life of a major asset to a given driver, and one which certainly needs to be replaced every few years. So I'm just not convinced that the network effect story, while certainly beneficial to consumers of the service, will benefit the company and its contractors in the traditional manner.

 

Perhaps I'm just a curmudgeon who finds most VCs think their shit doesn't stink, particularly after years of positive reinforcement from the public and private markets.

[peter1234]

So I'm just not convinced that the network effect story, while certainly beneficial to consumers of the service, will benefit the company and its contractors in the traditional manner.

 

Good point about the contractors/drivers.

 

Does it matter for Uber? Don't they take just a cut? As long as their overall cut increases, margins do not matter that much. It is just like an ever increasing franchise fee.

 

I do not think Ebay cares about their sellers as long as their cut keeps increasing.

[jschembs]

Right, but at what point does the network effect cut rates such that Uber becomes less appealing to the marginal driver?

[peter1234]

Don't know, but it 'might' be far off. Maybe even in the neighborhood of Walmart's wages?

;)

[Patmo]

If you want prices to be irrationally cheap some of the time, you have to have them irrationally expensive some of the time too. It's not like anyone is twisting your hand into buying into those things. Humans are emotional creatures, don't fight it just take advantage of it.

[JAllen]

Right, but at what point does the network effect cut rates such that Uber becomes less appealing to the marginal driver?

 

 

Couldn't you lower the prices an amount that increases rides/hour but not enough to actually reduce total driver pay?  I don't know the exact elasticity, of course, but my guess is that a 10% reduction of prices leads to more than a 10% increase in trips. 

[JAllen]

If you want prices to be irrationally cheap some of the time, you have to have them irrationally expensive some of the time too. It's not like anyone is twisting your hand into buying into those things. Humans are emotional creatures, don't fight it just take advantage of it.

 

 

The prices aren't irrationally cheap, they're just cheaper than taxies now, because Uber can offer more rides per hour.

[JAllen]

"Uber/Lyft have profoundly improved San Francisco. They've made large swaths of the city accessible at times they used to be a huge hassle"

https://twitter.com/mat/status/488184644311859202

 

 

It's true.  We would call cab companies and not have any idea if they would come get us or find better rides on the way and never show up.

 

 

[Liberty]

Here's a very interesting and very detailed post on Uber by one of the early investors and board members:

 

http://abovethecrowd.com/2014/07/11/how-to-miss-by-a-mile-an-alternative-look-at-ubers-potential-market-size/

 

Regardless of whether you are interested in the company, I think it's an excellent read. Thanks to Whopper Investments for pointing it out.

 

Follow up by Damodaran:

 

http://aswathdamodaran.blogspot.ca/2014/07/possible-plausible-and-probable-big.html

[jschembs]

Granted, I'm working from extremely limited information, but something doesn't make sense to me.

 

Blodget says the current valuation isn't absurd if you consider the $10 billion revenue whisper number he cites. (http://www.businessinsider.com/uber-revenue-2014-6). If true, $10 billion most certainly represents gross revenue, before subtracting the ~80% paid to drivers, which would imply ~$2 billion in net revenue attributable to Uber. He also says most of Uber's revenue comes from five cities (of which I presume SF, where the company is based and has a substantial head start on other markets, is the majority of their revenue).

 

Kalanick claims they're doing "many multiples" more than the $120 MM TOTAL market estimate of spend on taxis and limos in San Francisco. (http://blogs.wsj.com/digits/2014/06/06/uber-ceo-travis-kalanick-were-doubling-revenue-every-six-months/).

 

Now no one knows what many multiples means, but that implies Uber has more than wiped out San Fran's existing taxi and limo market. I grant Gurley's points regarding new market opportunities (soccer moms, use in lieu of rental cars), but even if that were the case, and Uber was generating, say, $300 MM in gross revenue in San Fran, that is only $60 million in net revenue for Uber.

 

Assuming (wild ass guess, I know) Uber generates 40% of their revenue from San Fran implies $150 MM of total net revenue - roughly 115x revenue.

 

Separate angle - Wedbush's article that AJC posted at the beginning of this thread describes the TOTAL U.S taxi market at $11 billion. So Uber capturing the entire U.S. market yields $2.2 billion in net revenue (nearly 8x revenue assuming 100% market penetration). Yes, international opportunities, yes soccer moms, yes disrupting rental cars, but this all seems a bit March 2000ish to me.

[SpecOps]

I live in London and heard of Hailo way before Uber. They aren't the only game in town and international expansion isnt a given when there already incumbents in those markets.

[racemize]

http://www.businessinsider.com/ubers-plans-to-be-cheaper-than-owning-a-car-2015-2?utm_content=bufferdb7fc&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer

 

Thought this was interesting.  I think when driverless cars hit, the uber-like services versus owning a car may dominate in urban areas.

[Guest ajc]

 

If I owned any Uber shares, I'd find a way to sell most of my stake. Since the start of this thread in June 2014, the valuation has gone from 18 billion to 62 billion in late 2015.

I think an 80 billion number is being thrown around in some places for their next round.

 

Some of my concerns are:

 

- Uber and Facebook have avoided falling valuations so far, but I don't expect that to go on forever.

 

- A bit less than 2 years ago, Uber wasn't really in China, India or ASEAN. Now they are, so the growth narrative has less room for expansion. At the time, leaked documents also showed their growth so you could do the math 12 to 24 months out.

 

- A few of the crazier things happening now are that some new investors aren't even being offered the chance to look at the financials, the story of their recent redesign was puffed up and slightly bizarre, Travis Kalanick could've IPOed already and didn't, and their driver issues aren't being handled well even though Lyft has handled theirs. When it's just regulatory capture and being technically legal, it's justifiable, but the growth-related problems are currently somewhat unsettling.

 

- Also, surge pricing should be made invisible and the costs spread across the other 24/7/365 of the year. Before, it was smart and innovative. Now, it's just an issue that a widely-used product shouldn't have.

 

- Finally, the subsidies needed to make your platform the biggest will need to end sometime and car owners are harder to convert than bus or rail users. My sense is that point is closing in at a reasonable pace.

 

Anyway, taking the majority out and buying a bunch of cheap Graham-type stocks with the proceeds would leave room for some upside but also result in fewer capital preservation regrets later (for anyone who hypothetically owned any Uber stock).

Just figured I'd update my thoughts, now that the valuation and facts have changed.