I was reading articles on Bloomberg regarding Uber's anticipated IPO of 120 billion and I have a question: Why is the valuation so high if Uber's core business model isn't profitable? They're only up and running because people keep pouring in money. They've been around for so many years yet aren't making any money at all. Why is the valuation so high? I'm only a sophomore and I'm an econ major not a finance major, but could anyone explain this to me?
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It should be based on:
a) the potential value that could be able to generate in the next future, remunerating stockholders b) the market trends/expectation, which are traduced in multiples that are in turn used to determine the company value
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These are the two easy drivers that affect the valuation of Amazon. Investors expectation and market speculation.
You can put as much color as u want but those are the two
Swing and a miss. He said Uber not Amazon big guy
pure speculation plus anecdotal evidence
the academics would agree with you (see aswatch damodaran for more: http://aswathdamodaran.blogspot.com/search?q=uber&sm_au=iQVfvTJbfnWtH…)
however, pre-IPO companies aren't designed to IPO as a "value" stock. if they were a reasonable valuation, they wouldn't go public in the first place, a PE firm would scoop them up or you'd just keep running your business and self-fund. they're doing this for a couple of reasons: their VC investors need to get paid, they need to continue to fund operations, and the market for these things is toppy so it could be good timing wise.
the people clamoring for that valuation are incentivized to get the highest price the market can digest, they get paid based on that and so are very self motivated to massage the #'s to look good. also, people believing the valuation see potential. all it would take for uber to have one of the fattest bottom lines ever is to have autonomous cars. perhaps people see them as more than a DD, but a mobility company, changing the way we view transportation. maybe they get into the car rental business, selling used cars (great margins), parcel delivery (Amazon x Uber anyone?), and they're already in the food delivery game. what people are buying is the platform & the reach, and extrapolating (guessing) that their presence as the most popular platform will lead them to profitability.
all of that being said, I haven't seen the numbers so I can't say for sure where I stand, but buying companies that cannot self fund is not my style
Short answer: speculation that it will one day become profitable enough to justify the valuation, OR (maybe more importantly?) enough investors believing said speculation will last long enough to get their money out.
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