What Uber needs to do to justify its $18.2bn price tag

What Uber needs to do to justify its $18.2bn price tag

Richard Waters | Jun 08 06:22 | 6 comments | Share

Without seeing Uber’s financials, it’s impossible to say whether its amazing post-money valuation of $18.2bn is deserved. But even if its business is starting to take off, as seems to the case, it still has a long way to go to live up to the hype generated by its latest fund-raising.

Start with revenue and growth. A leaked internal report late last year showed thatthe company’s billings had reached an annualised rate of more than $1.1bn, suggesting net revenue of something north of $200m. That pointed to an acceleration in its business compared to the $125m full-year revenue excepted earlier in 2013.

In an interview with WSJ.D on Friday, CEO Travis Kalanick confirmed that the business was soaring: revenue is now more than doubling every six months, he said.

So, for the sake of argument, let’s assume Uber produced full-year revenue for all of 2013 of something like $165m. Kalanick’s comments suggest it would then be on track for more than $330m in the first half of 2014 and, if it sustains that pace, around $1bn for the year as a whole.

Based on the pre-money valuation for its latest $1.2bn fund-raising round, that would point to a multiple of 17 times this year’s revenues.

This would fit with Kalanick’s claim that the company is still valued at a discount to some high-growth public tech companies, even after the correction that rippled through the stock market in recent weeks. Workday, for instance, is still on a revenue multiple of more than 20, despite a 30 per cent drop in its share price.

And even Twitter still trades at 15 and a half times this year’s revenues. If Uber is growing at the breakneck pace Kalanick suggests, a $17bn valuation seems less outrageous based on this comparison. Of course, tech stocks may still be in a bubble, so the comparisons are of limited value.

The bigger question is whether Uber can sustain this red-hot pace. There was another company recently that turned in an even more remarkable performance before it suddenly hit a wall: Groupon.

At a comparable moment in its history, the daily deals site was growing much faster. From $313m in net revenues in 2010, it jumped to an astonishing $1.6bn the following year.

In common with Groupon, Uber likes to talk about itself in grandiose terms that go well beyond its current business. Rather than being limited to daily deals, Groupon described itself as “the operating system for local commerce” – a none-too-subtle way of trying to suggest that the sky’s the limit when assessing the size of its addressable market.

In the same vein, Uber, rather than limiting its vision to replacing existing taxi companies, says it wants to create a service so great that private car ownership becomes a thing of the past. According to Kalanick, that immediately increases the potential market in a city like San Francisco from $120m (the taxi business) to $22bn (the entire private car business).

If that wasn’t lofty enough, Uber has its eyes on a second giant market: logistics. All those Uber drivers, when not ferrying passengers around, could be fetching things from the store for them or dropping off packages. Becoming the logistics platform for the “last mile” (to borrow a telecoms industry term) would put the company in a hugely valuable position.

Groupon’s fall from grace, however, is a reminder of the dangers of getting distracted by future opportunities and losing sight of keeping existing customers happy today.

Two-sided markets like those run by Groupon and Uber are extremely attractive when they hit on the right formula. In Groupon’s case, that meant local merchants could reach new customers, while consumers stood to save significant amounts of money on local services. The value proposition unravelled when merchants found the discounts weren’t attracting repeat business and consumers grew tired of all those offers from tanning salons.

The Uber formula certainly seems to be working at the moment. Satisfied users of its mobile app have become an important marketing tool. And its drivers are making more money than they would working for a traditional taxi company, at least according to Uber’s own figures.

But is this sustainable? Would customers be as enthusiastic if drivers were slower to turn up, or if the price of its rides went up? Costs could rise for a number of reasons – greater regulation, for instance, or the need to invest more in training drivers or financing fleets of vehicles in order to get more control over the quality of its service.

Me-too services, of which there are a growing number, could also push costs up as the competition for drivers intensifies. Drivers could play rival services off against each other when choosing which fares to take, while consumers could also get used to shopping around by using different taxi apps.

Against that, Uber should benefit from some network effects, at least in the markets where it gets an early lead. The service with the most drivers should see the shortest wait times, attracting the most passengers, which in turn should draw more drivers, and so on. That is a powerful incentive for the dash for growth it is now on, backed by an extra $1.2bn.

Another unknown is whether users of a taxi app would actually look to the same service for deliveries. And would dispatching private cars to collect and deliver low-value items be an efficient way of running a city-wide logistics fleet?

These are all good reasons for Uber to stay focussed on the short term rather than get carried away with notional markets that may or may not materialise one day. As Groupon showed, break-neck growth can dry up quickly when a deal that seemed too good to be true turns out to be just that.