Putting it into perspective

Two charts that show why Uber’s valuation isn’t ridiculous

Uber’s latest funding brings the company into the stratosphere of private company valuations.

At $40 billion, Uber is believed to be four times more valuable than Airbnb, Snapchat, Palantir or Dropbox. Its valuation is eight times larger than Pinterest’s, fifty-seven times larger than Lyft’s, 100 times larger than Instacart’s.

The news sent the tech world into a tizzy. People called Uber’s new valuation eye-popping, ridiculous, absurd. Just like Uber’s last round of funding, it was heralded as proof of a bubble, an upcoming crash, the tech apocalypse, etc.

But when you plot Uber’s valuation compared to big public tech companies, it looks less dramatic. [company]Amazon[/company], [company]Facebook[/company], [company]Microsoft[/company], [company]Amazon[/company], [company]Oracle[/company] and others are — as you’d expect from mature companies — much larger by market cap than Uber’s current valuation. Twitter is much smaller. Investors are essentially saying that they think Uber will be nearly as valuable as [company]Yahoo[/company] or [company]eBay[/company] and more valuable than Twitter when it goes public. It’s not a totally outlandish conclusion for them to bet on, given current tech hype and market trends.

Uber’s staggering valuation says more about the changing nature of tech fundraising than it does about Uber investors’ ridiculousness. Companies are staying private longer, choosing to develop their product outside of the prying public market’s eyes. Uber is leading that trend, a pioneer for a new kind of growth model.

Without much precedent, it’s hard to know what Uber’s eventual IPO will look like. It has more money and time to hone its business, so it’s not entirely fair to compare is to the IPOs of yesteryear and call its valuation outsized. We’re playing by a new set of rules.

There’s another way to look at Uber’s valuation. CEO Travis Kalanick isn’t content for his company to remain a car-hailing app. He plans to move into urban logistics and shipping, doing everything from delivering food to transporting supplies. When Uber drops off kittens on National Cat Day, it’s not just a publicity stunt — it’s logistics testing.

On that note, perhaps Uber should be compared to public transportation, logistics and automotive corporations. Companies like [company]Ford[/company] and [company]Tesla[/company] are distant cousins to Uber, but given that Kalanick wants Uber to replace car ownership, they may be competitors down the line. The same goes for [company]FedEx[/company] and [company]UPS[/company].

Uber’s valuation puts it at less than half the market cap of UPS, but close to the market cap of FedEx ($51 billion). From an automotive standpoint, the numbers are even more optimistic, with Ford and [company]General Motors[/company]’ market caps not that much bigger than Uber’s valuation. Tesla and Hertz’s market caps, $29 billion and $11 billion respectively, are smaller than Uber’s $40 billion valuation.

Uber’s investors are essentially saying that they think when the company goes public, it will be worth at least half as much as GM and Ford and more than Tesla and Hertz.

12 Responses to “Two charts that show why Uber’s valuation isn’t ridiculous”

  1. Even if the market size is vastly greater, as Bill Gurley persuasively argues in the article cited below, all of these views on valuation ignore the potential for competition from new and existing entrants. Uber is a new, improved way of organizing the use of shared, third-party driven vehicles which could significantly expand the market for this service, but there is no reason to assume that this will continue to be structured as a near monopoly. As the market and density and usage expands in each area, such that there are more drivers and users of this service, why wouldn’t there be numerous services all competing for the same drivers and riders. Each driver could have multiple apps on their phones, as could each rider, or they could keep switching based upon pricing and service. . Price competition will drive down the margins retained by the services, which seems excessive at 30% and could just as easily be 20%, 10%, or 5%, given the nominal marginal costs.

    Looking at another large market which has recently developed, cellular phone service, we now have four competitors beating each other’s brains out in the marketplace, and this in a market with large barriers to entry in the form of spectrum ownership and expensive infrastructure networks. There would seem to be at most moderate barriers to entry in the Uber market, once a critical mass of size could be reached by each competitor. Why won’t this look like the on-line air travel or hotel businesses for example, or real estate brokers for that matter, with numerous competing services tapping the same inventory and customer base?

  2. Yingkuan Liu

    Agree with previous commenters. Not very insightful and smart article.
    Yabber about Uber valuation, not even mention the overall addressable US taxi/limo market Uber is currently in. Here’s a freebie for the author. US overall taxi/limo market is estimated at 11B annually. If Uber dominate ALL of them, they got their 20% cut of about 2B annual revenue. Yeah I know, Uber going to be in public transportation, global expansion, car rental biz, yada, yada and yada. But please… Be realistic, one step a time, they are not even dominate Taxi business in US and with hundreds of millions dollars revenue still losing shirt. So don’t tell us 40B valuation is not ridiculous. Perhaps Mr. Kalanick should say he plan to use 29B of that that 41B to acquire Tesla. Will be a great story and public fuzz…

    • Except that Uber is on track to be at $10B revenue by end of 2015. It would seem that the valuation (private – meaning preferred stock valuation) is based on fundamentals of the actual company, not just the laggard existing industry they’re changing. Before Apple joined in, there was a market for both music players and smartphones. Should they have measured their potential in those markets by existing sales? Not really. Henry Blodget’s article still is the best one on this:

      http://www.businessinsider.com/ubers-revenue-2014-11

  3. Jonathan Curtis

    With all due respect, this is not a very intelligent article. Comparison’s of Uber’s equity value to other companies with no reference to actual valuation multiples based on revenue, growth and profitability are useless. Yes, Uber is big and raised a lot of $$$…so what? The real question is whether or not Uber’s long-term fundamentals justify the valuation…and obviously the investors who have access to that information think it does!

  4. Agree. Uber is a clever and useful software app disrupting a highly atomistic, ma and pa business, Fedex/UPS are vast enterprises representing massive capital investment and co-ordinated logistical infrastructure. No comparison.

  5. This is the worst valuation justification article I have ever read. This lack basic logical thinking – not to mention how as investor someone would evaluate Uber for investment worthiness.

  6. Heh, there is no analysis that shows why that is really material. Now, for a decent analysis, try this on for size.

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

    Bill Gurley is talking his own book as an investor – but its completely factual, not breathy hype nonsense, and intelligent analysis. Personally, I learned a ton more from this than the article above.

    Given that one google search and click produces this level of insight publicly available for more 4-5 months, I respectfully suggest DeAmicis and Carson do a bit more digging before the next time they claim to publish something insightful about company valuation.

    Unless you like simple pictures and stories with big numbers and no analysis.

  7. Someone who can do math

    Nothing in here actually shows that the valuation isn’t ridiculous though. Saying that Uber may want to compete with fedex someday justifies it being valued more or less the same?
    To put that into some sort of perspective, fedex revenues last year were near enough $8.8Bn. Ubers were apparently around 200M. Or 36 times smaller.