Digital taxi service Uber is raising money again, which means that people are once again gawping at the company’s valuation.
The last round, last summer, was a $US1.2 billion deal that valued the company at $US18.2 billion (post-money). The new valuation will probably be far higher.
Most observers view that valuation as a sign of obvious insanity — further confirmation of “a new tech bubble.”
Based on what I am hearing about the company’s financial performance, these observers are clueless.
Uber’s new investors could obviously lose money, just like any investors. But, for two reasons, the investment is likely a more reasonable bet than it might initially appear.
First, the new Uber investors will almost certainly buy preferred stock, not common stock — a point that private-market valuation gawpers often miss.
When you buy preferred stock, your downside is usually limited. Preferred investors are higher in the capital structure than common investors (thus the “preferred”), so in a liquidity event, they usually get all their money back, even if the company sells for a much lower valuation than the one at which they invested. In many cases, including, possibly, this one, preferred investors also get a guaranteed return.
For Uber’s last round of investors to lose money, for example, Uber would likely have to sell for a valuation of less than $US1.2 billion, more than 90% below the $US18.2 billion valuation of the deal. Things would have to go horribly, catastrophically wrong for that to happen.
Second, and more important, Uber’s financial performance may easily justify the $US18.2 billion valuation of the last round and a much higher one in this round.
What I’m hearing is that Uber’s gross revenue is expected to hit a run rate of about $US10 billion by the end of next year.
Uber keeps 20% of gross revenue and gives the rest to its drivers. So $US10 billion of gross revenue would equate to $US2 billion of net revenue.
Uber’s revenue growth rate, meanwhile, is about 300% this year, and it is expected to be another 300% again next year.
There are very few companies in history that have grown at that rate at that scale.
And that brings us to valuation.
If Uber is on track for a run-rate of $US2 billion of net revenue by the end of next year, the $US18 billion valuation from last summer would be about 10 times forward net revenue.
Ten times revenue isn’t a low revenue multiple, certainly, but it’s also not a sky-high one. Especially for a company that has few costs other than software development, training, marketing, and lobbying (the latter to stop taxi organisations and local governments from banning it). There’s no reason to think that Uber couldn’t eventually have a profit margin of 20%, 30%, or even more. And with that kind of profit margin, a 10X revenue multiple on a fast-growing revenue stream is perfectly reasonable.
To put the 10X multiple in context, it’s in the same range as the forward multiples for some other hot tech stocks. Facebook is trading at about 10X projected 2015 revenue. LinkedIn is trading at about 8X. This is a point that Uber CEO Travis Kalanick himself made last summer in the Wall Street Journal, that Uber’s deal was actually priced below the multiples of comparable public-market companies. Kalanick also recently said that Uber’s revenue is doubling every six months.
Even if Uber’s revenue growth suddenly slowed, so it only doubled once a year, or once every two years, the $US18 billion valuation wouldn’t seem extreme.
And then there’s another statistic that I’ve heard.
Most of Uber’s current revenue comes from fewer than 10 cities.
Why is that startling?
Because Uber is now operating in more than 46 countries and 150 cities.
If Uber were operating mature businesses in all of those cities, and were unable to generate much revenue in them, this statistic might be cause for concern. But the Uber operations in the vast majority of those cities are relatively new. And if Uber is generating most of its ~$US10 billion of gross revenue from a handful of cities, imagine how big the company will be when the operations in the 150+ other cities really kick in. Not to mention the operations in all the other cities Uber will likely launch in in the next several years.
(In San Francisco, Uber’s first city, the company is now doing several hundred million of revenue. Kalanick has not specified whether this is gross revenue or net revenue, but, either way, it’s impressive. San Francisco is a relatively small city.
I have also heard that Uber’s market penetration in San Francisco is 25% of smartphone users. It seems reasonable to think that the penetration will eventually be much higher — perhaps 50% or 75% of smartphone users.)
Yes, you say. But taxi companies hate Uber. And they’re busy trying to shut it down in some cities.
Yes, taxi companies are fighting Uber. But so far, Kalanick told The Wall Street Journal last summer, Uber has been shut down in only one city. And given how much Uber users love Uber — as evidenced by the company’s supernatural growth rate — it seems safe to say that it won’t be easy for many more cities to shut Uber down. (A dozen or two? Maybe. But that would still leave 125-plus cities).
And all this revenue, of course, is coming from Uber’s taxi business. Uber recently launched a delivery business. We don’t yet know how successful that new business will be, but if it is even a fraction as successful as the taxi business, it will create another massive new revenue stream.
Then there’s one last startling fact.
Kalanick said last summer that Uber is growing even faster now than it was last year, when everyone was ridiculing the $US3 billion valuation that Uber’s prior round of investors paid. In other words, far from slowing, Uber’s revenues are accelerating.
So, to recap (and add a few new tidbits), here’s what I’m hearing about Uber:
* Gross revenue is expected to hit a run-rate of $US10 billion by the end of next year. This would be an increase of 300% over this year, which itself is an increase of 300% over last year.
* Most of the company’s current revenue is coming from a handful of cities
* The company is now operating in more than 150 cities, so as these cities develop, revenue should grow at a prodigious rate for years
* The average-rides-per-Uber-user-per-month are considerably higher than early investors expected. Thus, the revenue-per-user is higher than expected
* Even the company’s most mature markets, like San Francisco, are only partially penetrated
* The company believes it has an opportunity to disrupt the massive rental car market, develop delivery services, and launch other businesses based on its existing infrastructure
* Investors expect Uber to go public at a valuation of $US50-$US100 billion in a few years
From 2004 to 2012, industry observers ridiculed every successive increase in Facebook’s private-market valuation. They dismissed its investors as stupid and declared the price the investors paid as proof of a new tech bubble. And they did the same with Twitter’s valuations, and Google’s valuations, as well as the valuations of many other Internet companies. And yet, in the end, many of these valuations proved cheap.
If Uber’s numbers are close to what I’m hearing they are, Uber’s $US18 billion valuation last summer, and the valuation of the new round now, may end up looking quite reasonable.
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