Uber will not be worth $120B when it goes public

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by Simon Tiu, Class of 2020

Uber will not be worth $120B upon IPO. Uber is the highest-valued private startup in the world. With initial analyst estimates ranging from $90 – 120B, its hotly anticipated IPO is the next major chapter in the battle for transportation market share. Lyft, Uber’s primary competitor in the United States, recently completed its initial public offering with mixed results. As of this writing, Lyft’s share hovers around $58.26, an unfortunate 17% decline from the $72 IPO price. With two class-action lawsuits and a myriad of questionable assumptions in press releases and the S-1, Lyft’s public problems are just getting started. What does this all mean for Uber?

While we await Uber’s final offering price and share count, here’s what you should know from the massive 285-page S-1, which is surprisingly readable (kudos to the folks at Morgan Stanley and the other underwriters).

  • According to the prospectus, Uber is in the “personal mobility business” with an estimated total addressable market of $5.7 trillion. If you’re gawking at that number, join the club.

To be fair, these TAM estimates are always sky-high. The idea here is to work your way down to something more relevant, while using the TAM and SAM to justify higher valuations. Top-down approaches are widely prevalent in Venture Capital and can lead to some huge numbers. On balance, though, this estimation seems like a pretty big stretch.

To be fair, these TAM estimates are always sky-high. The idea here is to work your way down to something more relevant, while using the TAM and SAM to justify higher valuations. Top-down approaches are widely prevalent in Venture Capital and can lead to some huge numbers. On balance, though, this estimation seems like a pretty big stretch.

  • Uber’s growth has been pretty incredible. From 2016, we learn that gross billings are up 160%, net revenue is up 211%, riders are up 102%, and trips are up 187%. The fact that Uber exhibits a higher growth in trips book relative to riders could be used to argue that Uber is on its way towards realizing some scales of economy.

  • Uber is losing a ton of money. Last year, Uber reported an adjusted EBITDA loss of $1.847 billion. Ouch. Professor Aswath Damodaran, a well-respected finance professor at NYU Stern, further adjusted this number by adding back depreciation and amortization and undoing adjustments from stock-based compensation to get an adjusted EBIT loss of $2.445 billion. While recent evidence may suggest otherwise, company profitability, at least on the unit level, was historically expected before going public. As Uber says in the S-1, “it’s a new day.”

  • Uber has been able to upsell riders on additional services; however, its billings/trip is decreasing, suggesting shorter trips on average. Riders, by the way, are defined as users who used an Uber service at least once a month. On balance, the most efficient way for Uber to grow is by upselling existing customers rather than obtaining new ones. While both will be necessary in the future, unit economics are better as existing customer LTV increases.

  • Uber Eats is growing well, but margins in the Uber Eats business are relatively low compared to the core business.

This is just the tip of the iceberg. The prospectus is filled with great facts and interesting perspectives on the world from Uber’s point of view.

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When all is said and done, Uber will likely be priced relative to Lyft. Since we have Lyft numbers now, it should be fairly straightforward to estimate an enterprise value for Uber. I should note that Lyft and Uber are not directly comparable, especially due to Uber’s ambitions in Uber Eats (see Professor Yannelis, I was paying attention!).

On almost every metric, Uber is a much, much larger company than Lyft:

As of this writing, Lyft’s stock price is $58.36, giving us the following multiples. After applying these same multiples to Uber, the following enterprise values were calculated:

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So on a multiples basis, we can expect anything from 28 – 103B. Yes, that’s a ridiculously huge range, but even so, I feel comfortable saying 120B is out of reach. Don’t feel too bad for the VCs who invested last round though, they’ll still do well. Here are some other things you can mention to impress your VC friends:

  • TV analysts, especially CNBC, have been making a huge deal about a small statement on page 27 of the prospectus: “we may not achieve profitability.” While not meaningless, it’s not something to really be worried about. This is a legal document after all.

  • Uber has been losing abroad. In fights with Singapore-based company Grab, China’s Didi, and Russia’s Yandex Taxi, Uber has conceded market share, settling for revenue share or departing completely.

It’s an exciting time to be watching the IPO market! Please feel free to contact me if you’d like to add additional commentary or disagree with me.

The opinions expressed in this publication are those of the author. They do not purport to reflect the opinions or views of my employer or university.