The dividend discount model. Free cash flow to equity. Free cash flow to the firm. Comparable price/earnings multiples. All of these heavy math valuation models are some of the techniques analysts can use to value what the stock of a publicly traded company should be priced at. Although the ride hailing company UBER has transformed the way we think about transportation, attempting to put an actual ‘worth’ on the company is much more difficult. Many of the above mentioned valuation techniques can be essentially worthless for a multitude of reasons when trying to put a value on what UBER should trade for in the public market.
UBER’s investment bankers brought the company to the New York Stock Exchange for its IPO (initial public offering of shares to investors) on May 4 for a price of $45. With 175,000,000 shares available, the investment banking groups of Morgan Stanley, Goldman Sachs and others valued the firm at approximately $82.4 billion. This $45 price was even at the low end of UBER’s targeted price range which was hoped would spare the stock plunge that LYFT suffered several weeks earlier.
For a business that has grown into the world’s largest ride-hailing company over the past 10 years, UBER’s top and bottom line figures have been anything but successful. In its preliminary S-1 filing to list as a public company, the firm noted some particularly staggering negative figures: Operating losses of $3 billion in 2019, resulting in net profits of negative $1.8 billion. Slowing revenue of growth of 42% in 2018 compared to growth of 106% in 2017. A loss of nearly $1 billion alone during the first quarter of 2019 on revenues of roughly $3 billion.
If UBER keeps up this rate of losses in 2019, it could lose $4 billion on $12 billion of revenue. This would be over double the losses it incurred in 2018.
Just from a rideshare perspective, UBER has been incredibly unprofitable in the US (its biggest and most mature market). Internationally, it has been struggling as well. UBER has already withdrawn operations from China, Russia and Southeast Asia and is struggling mightily in Brazil. To be fair, UBER is not the lone global loser in the ridesharing business with LYFT, Didi Chuxing (China), Ola (India) and Grab (SouthEast Asia) posting profits in the red as well.
So, how does a ‘simple’ rideshare company that has been losing gigantic sums of money for years, growing revenues and earnings at a slower clip recently and is actually losing market share to its competitors in the rideshare space deserve a value of 82.5 billion dollars?
The answer lies in what the future ‘may’ bring.
This future, according to UBER, is filled with growth opportunities in anything that involves transportation. For example, the company states that they are still in the early stages of capturing what they believe is a $12 trillion potential market that includes personal mobility, food delivery and freight shipping (for context, the World Bank estimates that global GDP was $80 trillion in 2017; so UBER is essentially saying that they can capture 15% of total global economic activity).
UBER’s belief is that the new urban paradigm will continue to move away from individuals owning their own car or other method of transportation (and even use less public transportation) and instead rely on private, shared, on-demand services. The ease and comfort of having the discounted personal transportation that UBER provides will continue to replace expensive cars and their substantial recurring costs of gasoline, insurance and repairs. What UBER is predicting is that in cities around the world this form of transportation will continue to prove attractive and spread to other forms of logistics, such as trucking, food delivery, shipping and even drone delivery. Instead of taking a percentage of the ride-hailing market, UBER anticipates taking an even larger portion of the total miles traveled.
In fact, in his pitch to investors before the IPO, CEO Dara Khosrowshahi compared UBER’s current stage of development to Amazon, the giant online retailer. Amazon began by selling books in 1997 and has evolved into selling a variety of goods and services, making it one of the largest companies in the world. Instead of trying to sell anything like Amazon, UBER is making the push that it can transport anything. UBER has recently increased its foray into food delivery, freight shipping and short-term electronic bike rentals to demonstrate that it can transport any and all items. According to UBER, if Amazon can sell practically everything, UBER can move practically everything.
To get on board with UBER’s vision of being the ‘carrier of anything’ in the future, the company has to do much more to convince stock investors that it can make money and actually be profitable. Wall Street analysts described UBER’s S-1 filing document as being ‘hazy’ and ‘meager’ as to if and when the company plans on achieving their goals of transportation dominance.
In fact, one of the clear takeaways from the IPO filing was that the firm may never even make a profit: “We have incurred significant losses since inception, including in the United States and other major markets. We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability.”
But wait a minute. In defense of UBER, remember that Amazon didn’t make an annual profit until six years after it went public. Even then it took some time before investors could see a sustainable pathway to profitability. The company went public at $17 and now trades at almost $2000. Anything is possible according to UBER, and this is what they are banking on and trying to get through to investors…….give the company time and the money will come (it is hoped).
Can this ‘anything’ be self-driving cars that could possibly catapult UBER into a sustainable growing revenue machine into infinity? Is it conceivable that UBER could develop autonomous-vehicle technology which may allow the company to increase its margins keeping the vast majority of the money that riders pay?
A company’s stock price and market value is not based on what its current state of affairs is, but what could possibly transpire in the future. If UBER were valued solely on its current business operations and income statement, its stock value would be zero. However, the company wants investors to believe that rideshare (and possibly food delivery) are just the tip of the ice burg as to what could possibly transpire in the future in terms of transportation services. In my opinion, investors should pay close attention to UBER’s future earnings releases and analyst-backed guidance before taking a foray in what could be a shaky ride into the future.
How much is UBER really worth in the eyes of a professional business valuator? Check out the attached video from Professor Aswath Damadoran at NYU. Damadoran is known as the ‘Dean of Valuation’ and puts a value on UBER in the area of $50 billion, almost 40% less than what the stock market values the company at.