June 19, 2014
Uber is a venture capital funded startup based in San Francisco that uses mobile app as a platform to reach out to its customers, thus providing them hire and ridesharing taxi services. The company arranges pickups in dozens of cities around the world.
Recently Uber made news when in June 2014,Uber completed a round of funding, thus valuing the company at around $17 billion. This signifies a huge figure for a startup who does not own cars or other material equipment. Even the drivers who work for Uber have been absorbed as part time and not full time employees. Uber is less about taxi service and more about efficient use of logistics.
There is a possibility that the investors like Fidelity Investments etc who have recently funded Uber can lose money or end up in a loss. However, we can attribute two reasons to negate this possibility.
First, Fidelity and other investors have invested in Uber’s preferred stock and not in the common stock. Preferred investors have the first right to own the liquidated assets in case Uber goes bankrupt. In most probability, investors will get their money back even if the company sells at a valuation which is much lower than the one at which they invested. In case of a preferred stock, the downside risk to investors is limited however the upside potential is generally unlimited.
Secondly, we know that the revenue growth of Uber has been skyrocketing since last four years when the company began operations. Uber’s gross revenue has been touted at $10 billion. Also, Uber only keeps 20% of the revenues and distributes the rest to its drivers.
Going by the mathematics, the net revenue available to Uber after distributing to drivers is $2 billion. This means the current valuation of the company i.e. $18 billion dollars is 9 times the revenue, thus averaging the revenue multiple of Uber as 9.
Considering the market scenario, 9X multiple of Uber is worth appreciating. Just for comparison, LinkedIn is trading at 15X and Facebook is trading at 20X. Uber’s revenue is growing at a tremendous pace. The revenue multiple of 9X has been achieved in merely four years which is indeed a breakthrough in the history of startups.
For the sake of analysis, let’s consider the following worst case scenarios:
We need to take into account the fact that whether users of a taxi app would actually look to the same service (Uber’s) for future deliveries.
Taking all the above reasoning into account, it is advisable for Uber to focus on the short term and aim at sustaining the growth momentum rather than diversify into other business lines (as announced by its CEO, Travis Kalanick in 2012) which may or may not successfully materialize one day.