People are still gawping at Uber’s last round of financing, a $US1.2 billion deal that valued the company at $US18.2 billion (post-money).
Most observers view that valuation as a sign of obvious insanity — further confirmation of “a new tech bubble.”
It’s almost certainly nothing of the sort.
Uber’s new investors could obviously lose money, just like any investors. But, for two reasons, the investment is likely a much more reasonable bet than it might initially appear.
First, Fidelity and the other Uber investors almost certainly bought preferred stock, not common stock.
When you buy preferred stock, your downside is 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 latest investors to lose money, in other words, 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 latest 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.
An industry friend has heard that Uber’s recent revenue growth has been so spectacular that the four-year-old company is doing (or may soon be doing) $US10 billion in gross revenue.
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.
It’s not clear whether the $US10 billion figure is a current run-rate or a projection for this year or next, but if it’s even close to accurate, it’s astounding. For what it’s worth, the number is in the range of numbers that one smart industry analyst, Paul Kedrosky, extrapolated from some information that leaked at the end of last year.
If Uber is doing $US2 billion of net revenue, the $US18 billion valuation would be about 10 times 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, 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, Facebook is trading at nearly 20X revenue (trailing 12-months). LinkedIn is trading at about 15X. Even Google, a huge and relatively slow-growing company, is trading at 6X revenue.
Uber’s revenue, moreover, is growing astoundingly quickly.
Few companies in history, if any, have grown as fast as Uber has.
Travis Kalanick, Uber’s CEO, 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 my industry friend has heard:
Most of Uber’s current revenue comes from only 5 cities.
Why is that startling?
Because Uber is now operating in 130 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 most of those 130 cities are relatively new. And if Uber is generating most of its ~$10 billion of gross revenue from only 5 cities, imagine how big the company will be when the operations in the 125 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.)
Yes, you say. But taxi companies hate Uber. And they’re busy trying to shut it down in some of those cities.
Yes, taxi companies are fighting Uber. But so far, Kalanick tells the WSJ, Uber has only been shut down in 1 of those 130 cities. 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 100+ 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 says 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.
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 revenues are anything close to the figure my industry friend is hearing, Uber’s $US18 billion valuation may end up looking like a steal.
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