VC's Rebuttal to Uber's Valuation

optrader47's picture
Rank: Monkey | 55

This is an interesting rebuttal to Uber's valuation that was posted here awhile back. What do you think? (link inside the post)

How to Miss By a Mile: An Alternative Look at Uber's Potential Market Size
July 11, 2014: On June 18, Aswath Damodaran, a finance professor at NYU's Stern School of Business, published an article on FiveThirtyEight titled "Uber Isn't Worth $17 Billion." This post was a shortened version of a more detailed post he had written for his own blog titled "A Disruptive Cab Ride to Riches: The Uber Payoff." Using a combination of market data, math, and financial analysis, Professor Damodaran concluded that his best estimate of the value of Uber is $5.9 billion, far short of the value recently determined by the market. This estimate of value was tied to certain "assumptions" with respect to TAM (total available market) as well as Uber's market share within that TAM. And as you would expect, his answer is critically dependent on these two assumptions.

As the Series A investor and board member at Uber, I was quite intrigued when I heard that there was a FiveThirtyEight article specifically focused on the company. I have always loved the deep, structured analysis that Bill Simmons and Grantland bring to sports, and when Nate Silver also joined ESPN, I was looking forward to the same thoughtful analysis applied to a much broader range of subjects. Deep research and quantitative frameworks are sorely lacking in today's short attention span news approach. I could hardly wait to dive in and see the approach.

The funny thing about "hard numbers" is that they can give a false sense of security. Young math students are warned about the critical difference between precision and accuracy. Financial models, especially valuation models, are interesting in that they can be particularly precise. A discounted cash flow model can lead to a result with two numbers right of the decimal for price-per-share. But what is the true accuracy of most of these financial models? While it may seem like a tough question to answer, I would argue that most practitioners of valuation analysis would state "not very high." It is simply not an accurate science (the way physics is), and seemingly innocuous assumptions can have a major impact on the output. As a result, most models are used as a rough guide to see if you are "in the ball park," or to see if a particular stock is either wildly under-valued or over-valued.

http://abovethecrowd.com/2014/07/11/how-to-miss-by...

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Comments (46)

Jul 11, 2014

great post. Sb'ed

Jul 13, 2014

I don't understand how he is getting a TAM of 1.35 trillion. Can someone break it down for me?

nvm, got it. He's saying the car-ownership-alternative market is 6 trillion.... and then takes 12.5% of that. Then he adds 6x the current global taxicab market. Silly venture capitalists.

Jul 13, 2014

Very interesting read. His point is basically that Uber is leading up to a kind of Southwest Effect where not only does it take market shares from existing taxi market at a highly dynamic, nonlinear manner but also gain customers from other markets, such as rental cars. I like his point of the taxi medallion quota system being completely arbitrary and that Uber is much better at reflecting true market efficiency at this regard in term of both supply of drivers and price. That it is possible for Uber and its drivers to maintain or increase the same profit margin while lowering prices through higher and more efficient vehicle utilizations. This compares to taxis where price only goes up.

Also this nugget of gold:

"
In 1980, McKinsey & Company was commissioned by AT&T (whose Bell Labs had invented cellular telephony) to forecast cell phone penetration in the U.S. by 2000. The consultant's prediction, 900,000 subscribers, was less than 1% of the actual figure, 109 Million. Based on this legendary mistake, AT&T decided there was not much future to these toys.
"

It really illustrates why the kind of static analysis where the future is assumed to be just like the past and completely fail to account for disruptive, nonlinear behaviors, as practiced by the corporate/IBD/management consulting world is utterly useless for any company operating in the technology space.

It is amazing that big companies like AT&T continue to spend millions hiring MBBs to produce useless, backward looking reports like this and then make their business decisions based on the junk research. Another reason why the show should be run by engineers and not MBAs.

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Jul 14, 2014
brandon st randy:

Also this nugget of gold:

"

In 1980, McKinsey & Company was commissioned by AT&T (whose Bell Labs had invented cellular telephony) to forecast cell phone penetration in the U.S. by 2000. The consultant's prediction, 900,000 subscribers, was less than 1% of the actual figure, 109 Million. Based on this legendary mistake, AT&T decided there was not much future to these toys.

"

It really illustrates why the kind of static analysis where the future is assumed to be just like the past and completely fail to account for disruptive, nonlinear behaviors, as practiced by the corporate/IBD/management consulting world is utterly useless for any company operating in the technology space.

It is amazing that big companies like AT&T continue to spend millions hiring MBBs to produce useless, backward looking reports like this and then make their business decisions based on the junk research. Another reason why the show should be run by engineers and not MBAs.

The issue is that recognizing that backward looking reports aren't the way to go only gets you so far. It still doesn't solve the problem that there's really no basis for predicting and forecasting out potential for these disruptive companies. Are we supposed to accept Bill Gurley's predictions just because:

1) Looking at the past is relatively useless
and 2) These numbers aren't driven off the past?

At best you can come up with a wide range of valuations based off the inherent unpredictability of growth and market size for disruptors, which is ultimately a problem when your job as a consultant/banker/corp dev guy is to come up with a tight range.

Jul 14, 2014
cooldurg:

The issue is that recognizing that backward looking reports aren't the way to go only gets you so far. It still doesn't solve the problem that there's really no basis for predicting and forecasting out potential for these disruptive companies. Are we supposed to accept Bill Gurley's predictions just because:

1) Looking at the past is relatively useless

and 2) These numbers aren't driven off the past?

At best you can come up with a wide range of valuations based off the inherent unpredictability of growth and market size for disruptors, which is ultimately a problem when your job as a consultant/banker/corp dev guy is to come up with a tight range.

Not if you actually understand how the disruptive new technology in question actually works. That requires intimate understanding of the technical details. Hence my point that as a technology company it is imperative to put technical people and engineers in charge of product developments decisions and not finance or sales marketing guys.

Best Response
Jul 14, 2014

The problem is that if Uber drops fares to 50% of a taxi, they have to provide twice as much service as all taxi providers have been offering to get the same revenue. That's assuming they completely run the cabbies out of business and become the only game in town.

So just how elastic is the demand for car rides? If the price comes down by 50%, does demand double? What about all of the people who have cars and parking spots already? And what does Uber do to other high-flying consumer discretionary firms with crazy market-disrupting potential like Zipcar? What does the threat of the next Uber do to Zipcar... err, Uber?

Honestly, I think there could be an argument in 5-10 years that all of these new, cool, high valuation consumer discretionary stocks aren't worth all that much and will just be replaced by a newer, better firm in a just a couple years years. In which case, the answer is to buy boring value stocks that can't be replaced as easily.

If we are facing disruption after disruption in the consumer discretionary market, the one constant is the demand for energy, for commodities, for utilities, for real estate and infrastructure. I think that once investors begin to get this, revenues beyond 2-5 years will begin receiving much bigger discounts and we'll go back to more of a value-oriented equities market. It's fricking scary to short these stocks though, so the best you can do is go long low-beta and value and stay a little underweight on the tech/ consumer discretionary boom.

I'm still shocked that GoPro gets a $3 Billion valuation when Drift makes a better product and has more momentum among some of the most respected guys in extreme sports (at least in hang gliding and motorcycle racing). I don't see how GoPro is going to keep this up with an inferior product and weaker marketing. I'm nearly as shocked and appalled that (the ethics of letting pre-teens send private pictures to boyfriends and girlfriends aside) Snapchat turned down a $3 Billion offer from Facebook.

There's no point in buying the coolest trend. The coolest trend probably just requires plastic or gasoline, but will probably switch in anywhere from 6 months to 3 years to another cool trend that requires plastic or gasoline. In which case, that's good news for Chevron or Exxon or BP or Total, which are all trading at around 12x earnings vs. 100x for most of the high-flying consumer discretionary stocks.

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Jul 15, 2014

Weaker marketing? I can count the people who have heard of, and probably use, this "Drift" device (hell I never heard of it until 120 seconds ago) on one hand... And GoPro has weaker marketing? Ok bud. Not defending Gopro, as I don't own one, but your statements are grossly wrong.

Jul 15, 2014

Completely agree. Keep in mind that GoPro is also trying to move towards a media company, similar to what RedBull has done. GoPro already has very strong branding and if they successfully perform the shift it will simply get stronger.

Jul 18, 2014
IlliniProgrammer:

The problem is that if Uber drops fares to 50% of a taxi, they have to provide twice as much service as all taxi providers have been offering to get the same revenue. That's assuming they completely run the cabbies out of business and become the only game in town.

So just how elastic is the demand for car rides? If the price comes down by 50%, does demand double? What about all of the people who have cars and parking spots already? And what does Uber do to other high-flying consumer discretionary firms with crazy market-disrupting potential like Zipcar? What does the threat of the next Uber do to Zipcar... err, Uber?

Honestly, I think there could be an argument in 5-10 years that all of these new, cool, high valuation consumer discretionary stocks aren't worth all that much and will just be replaced by a newer, better firm in a just a couple years years. In which case, the answer is to buy boring value stocks that can't be replaced as easily.

If we are facing disruption after disruption in the consumer discretionary market, the one constant is the demand for energy, for commodities, for utilities, for real estate and infrastructure. I think that once investors begin to get this, revenues beyond 2-5 years will begin receiving much bigger discounts and we'll go back to more of a value-oriented equities market. It's fricking scary to short these stocks though, so the best you can do is go long low-beta and value and stay a little underweight on the tech/ consumer discretionary boom.

I'm still shocked that GoPro gets a $3 Billion valuation when Drift makes a better product and has more momentum among some of the most respected guys in extreme sports (at least in hang gliding and motorcycle racing). I don't see how GoPro is going to keep this up with an inferior product and weaker marketing. I'm nearly as shocked and appalled that (the ethics of letting pre-teens send private pictures to boyfriends and girlfriends aside) Snapchat turned down a $3 Billion offer from Facebook.

There's no point in buying the coolest trend. The coolest trend probably just requires plastic or gasoline, but will probably switch in anywhere from 6 months to 3 years to another cool trend that requires plastic or gasoline. In which case, that's good news for Chevron or Exxon or BP or Total, which are all trading at around 12x earnings vs. 100x for most of the high-flying consumer discretionary stocks.

+1, and one where we can be on the same side of an argument

Jul 18, 2014
IlliniProgrammer:

There's no point in buying the coolest trend. The coolest trend probably just requires plastic or gasoline, but will probably switch in anywhere from 6 months to 3 years to another cool trend that requires plastic or gasoline. In which case, that's good news for Chevron or Exxon or BP or Total, which are all trading at around 12x earnings vs. 100x for most of the high-flying consumer discretionary stocks.

+1sb.
That's what I always try to find (not only with plastic or gasoline) with sexy/hot/high growth sectors, there's always someone somewhere in their cost structure, capital expenditures etc to whom the companies will have to go to. Not just them, but a lot of other corporates, too. From auditors/lawyers to oil and gas companies to merchant marines. In fact with all this frenzy going on in Silicon Valley and the tech space in general, there might be a sector which is a direct beneficiary regardless of the outcome, battery manufacturers perhaps ? (no idea, could be richly valuated as well)

Colourful TV, colourless Life.

Jul 18, 2014
IlliniProgrammer:

The problem is that if Uber drops fares to 50% of a taxi, they have to provide twice as much service as all taxi providers have been offering to get the same revenue. That's assuming they completely run the cabbies out of business and become the only game in town.

So just how elastic is the demand for car rides? If the price comes down by 50%, does demand double? What about all of the people who have cars and parking spots already? And what does Uber do to other high-flying consumer discretionary firms with crazy market-disrupting potential like Zipcar? What does the threat of the next Uber do to Zipcar... err, Uber?

Honestly, I think there could be an argument in 5-10 years that all of these new, cool, high valuation consumer discretionary stocks aren't worth all that much and will just be replaced by a newer, better firm in a just a couple years years. In which case, the answer is to buy boring value stocks that can't be replaced as easily.

If we are facing disruption after disruption in the consumer discretionary market, the one constant is the demand for energy, for commodities, for utilities, for real estate and infrastructure. I think that once investors begin to get this, revenues beyond 2-5 years will begin receiving much bigger discounts and we'll go back to more of a value-oriented equities market. It's fricking scary to short these stocks though, so the best you can do is go long low-beta and value and stay a little underweight on the tech/ consumer discretionary boom.

I'm still shocked that GoPro gets a $3 Billion valuation when Drift makes a better product and has more momentum among some of the most respected guys in extreme sports (at least in hang gliding and motorcycle racing). I don't see how GoPro is going to keep this up with an inferior product and weaker marketing. I'm nearly as shocked and appalled that (the ethics of letting pre-teens send private pictures to boyfriends and girlfriends aside) Snapchat turned down a $3 Billion offer from Facebook.

There's no point in buying the coolest trend. The coolest trend probably just requires plastic or gasoline, but will probably switch in anywhere from 6 months to 3 years to another cool trend that requires plastic or gasoline. In which case, that's good news for Chevron or Exxon or BP or Total, which are all trading at around 12x earnings vs. 100x for most of the high-flying consumer discretionary stocks.

The reason this is wrong is because Uber may be able to build up a high enough barrier to entry through network effects where it can control a very large part of this entire market, while IOCs do not at all have a monopoly, have constantly rising costs, have lost out to NOCs/independents for quality resources, and are having to increasingly take on higher risks just to keep production flat. Not really a believer in Uber at $17 B, but the comparison is a bad one.

People forget that back in the day companies like Amazon were also massive multiple, negative earnings stocks trying to create new end markets and that ended up being home runs for those who bought in.

Jul 14, 2014

To quote from one of the comments, Sunil R. " I'd be very curious to hear your perspective on competition and quality of supply. At some point, it feels like Uber, Lyft, Sidecar and others will have to compete for the same crop of drivers (people with clean records, with safe cars, who can get you from point A to point B safely). That has to be a finite number of drivers per metropolitan area."

Jul 14, 2014

I wonder if Damodaran's valuation was low because he is valuing this from a purely fundamental standpoint, and not factoring in the intangibles into that value?

I really have no right to say this, but I wonder if he is getting "outdated"?

Jul 14, 2014
MutualMonkey:

I wonder if Damodaran's valuation was low because he is valuing this from a purely fundamental standpoint, and not factoring in the intangibles into that value?

I really have no right to say this, but I wonder if he is getting "outdated"?

In his class he certainly recognizes a "growth" component to a valuation. I'm sure he's gotten MANY calls wrong before. He's told student a few of them. But that's not important. It's about getting more right than wrong.

Jul 17, 2014

That's laughable, fundamentals still are what produce value. A company is worth nothing more than either its assets or its future cash flows.

Jul 17, 2014

I'm just saying that obviously the market sees it differently, so why?

I agree though that uber is grossly overvalued

Jul 17, 2014
guyfromct:

That's laughable, fundamentals still are what produce value. A company is worth nothing more than either its assets or its future cash flows.

Or the value that another company perceives in it,if your company offers a product or service that is prized by another entity.
Hence why Google spent $1.6 B to acquire Youtube even thou the company had little hard assets and negative cash flows.

Jul 15, 2014

There's nothing disruptive about Uber's technology itself.

Jul 15, 2014

Anyone ever just think a high valuation that makes the front page of every finance website on the planet is a pretty good marketing move?

I downloaded the fucking thing just to see what $17b looked like.

Jul 15, 2014

Damodaran's valuation still seems more reasonable to me. The linked analysis is very interesting as a read and gives much food for thought, but the writer is basically implying that both Uber and its "industry" have a 100% chance of being incredibly successful. Lobbies can't hurt it, driverless cars can't hurt it, new entrants can't hurt it, bad management can't hurt it, governments can't hurt it, improvements in public transportation can't hurt it, demographic changes can't hurt it, etc and etc. That's not valuation. That's hope.

Damodaran's analysis isn't especially deep (nor it claims to be), but avoids the mistake of assuming extremely low probability events will happen for sure. Even qualitatively, E(X)P(X) must be taken into account somehow.

To be fair, the author does use words such as "might" and run a few scenarios, but no matter what happens his conclusion is that everything will go extremely well. It's like running scenario analysis with the columns "great", "truly awesome" and "best possible imaginable thing".

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Jul 15, 2014

Using global market for Uber doesn't even make sense. In countries like US, you have large areas with low population density where some underemployed college kid isn't going to sit around waiting for one ride to come thru. You can see it in many smaller towns or airports where there is very limited taxi service. The market just isn't there. And in developing countries (lets say Africa), there is no check system for driver security, etc. and it won't be there anytime in near future.
Similar to the low population density, using 'cheaper' Uber for one way commute to somewhere far away or from suburb becomes challenging. How does the driver get back to his home base? Does he drive back empty or hang out in new location to make money? Taxi drivers make up for it with higher fees. And no way it takes over the rental car business, especially for corporate travel. For $40/day I could drive a car from LA to Seattle and back like he proposed, and use it to get to client site or dinner or gym during my stay, vs paying through the nose for every single Uber or single cab ride. That's why people rent cars from airport instead of taking cabs every time.
I kind of skimmed through the rest but he talks a lot about geographic density, etc. which is really why it works in big cities like NYC, SF or DC/Boston. Unfortunately rest of America is the actual car buying market. On a bright side, he didn't consider other markets Uber could fundamentally change (for example, the bike guy for Seamless, FedEx/UPS drivers with high union cost, inefficient USPS - sky is the limit for this guy).

Jul 15, 2014

-Lyft is hopeless in its current guise. Uber's 'professional' image is what separates it from its direct competitors.
-Uber's real strength is that they don't need to own any cars themselves.
-All cab and black car companies need to do is come up with their own app you can order and pay for rides with.
-Once that happens Uber needs to be able to reliably undercut cabs on price. Can Uber still make money if that's the case?

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Jul 16, 2014

Companies like Uber and GoPro (and so many other funded start-ups) make me think that marketing hype is the most important part of business and that it trumps logic, basic economics or even the actual utility of the product.

Jul 16, 2014

Not sure if you guys read the comments below that blog, they are so funny - a huge circle-jerking exercise with people congratulating each other on successfully defending Uber's rather uber valuation.

Seriously folks, do you really think that a current investor and board member of Uber will give the company a fair valuation??

When you are entrusting a valuation based on projections 5-10 years down the road, you are officially a speculator.

Jul 17, 2014

Look at this comment: "Great analysis, and I agree that Uber is undervalued at $17B. "

Stopped reading right there. These guys are insane.

Jul 16, 2014

The head of Google Ventures sees the long term value of Uber would be at least $200b ...
http://valleywag.gawker.com/let-no-man-leave-this-...
Google doubled down in this latest round of valuation after investing already investing in Uber earlier.

Also scroll down for hilarious comments and photoshopped pictures with plenty of conehead references.

Jul 17, 2014
Jul 19, 2014

But in order for Uber to deserve the valuation it has... it has to have a higher gross margin than the IOCs and on top of that take over the entire car service market. I don't see that happening. Meanwhile, Zipcar, the Uber proponents' golden child a mere five years ago, is going to get completely cannibalized by this model. And Uber will get replaced by Google Cab in 5-10 years just like Zipcar is getting replaced today.

These zany predictions of Uber somehow become an order of magnitude bigger than the industry it's trying to disrupt are just that... zany predictions by the same people who claimed everyone was going to sell their car and buy a Zipcar. Or that Pets.com was going to control the market for dog food.

I'm not saying you shouldn't invest in a company that is losing money. I'm just saying that you should think hard and do a whole lot of head scratching if you are paying more to buy a company than any sort of reasonable calculation on the value of the industry you are trying to disrupt.

The market is probably starting to get into bubble territory now. I think stocks in general are starting to get a little bit expensive and a correction is possible, especially if the Fed begins raising rates, bringing back some demand for bonds. When rates start to go up, it will be a setback for value but a disaster for growth. Because growth has so much of its present value in the future, its fundamental value gets hurt a whole lot more by higher rates.

Jul 19, 2014

IP: I'm with you on Uber's valuation and am skeptical about it disrupting something like car ownership. However, I'm kind of curious as to what you believe is the difference between companies like Amazon/Netflix, who have successfully been able to create new markets or disrupt old ones (Amazon being brick-and-mortar retail, Netflix is taking on cable companies and we'll see if they can win) vs the myriad others that fizzle out? Figuring this out is likely the key to unlocking Uber's value

I was a bit young to remember the days Amazon was still young, but after giving it some thought (some very brief, somewhat uneducated thought I may add), my belief is that they were penetrating a market that was selling a relatively undistinguished commodity. When it comes to buying books (I believe that was what Amazon originally was into before selling everything else), people just want the book at the lowest cost and there is nothing unique about buying it in-person vs online. The only thing I can think of where the bookstore has an advantage is if the person HAD to have it right away or cherishes the ambiance of bookstores and casual browsing, but that's probably not the majority of customers/transactions. It's a similar deal with NFLX. Although obtaining the rights to distribute a show is expensive, if you get it and gather enough content that people can watch reliably and for a better price than cable television, people will opt for it. The fact that Netflix has created it's own content that people enjoy furthers their case and has led a fair amount to cut their cable subscription.

With Uber, I think they are onto something with cab service to some extent. People don't really care about a particular cab (at least in my experience) and just want to get from A to B cheaply. The issue is, I don't see Uber as having a significant barrier to entry for the market it's disrupting. With Amazon, it's not cheap to acquire warehouses, etc. to buy and store the inventory and even now they struggle with margins. The content Netflix acquires is probably expensive (trademark issues) and it's even harder to create critically acclaimed programming, which makes it hard for competitors to enter their moat.

Uber's main USP appears to be it's software. I'm obviously ignorant about what it takes to make a program like this, but if I had to hazard a guess, it's not as difficult or costly as the aforementioned examples. Additionally, I feel as though car ownership, which Uber is said to soon penetrate, is a tough nut to crack. Lots of people have a personal attachment to their cars and the car culture is so prevalent in huge markets that it would need to be dramatically more cheap to Uber around for people to make the switch. There may be something with respect to the logistics market (i.e. ubering delivery to your house) that I could maybe buy, but some of the lofty valuations are based on Uber completely changing the world through it's logistics systems, which makes it hard for me to not think it's irrational exuberance.

Is there any method to my reasoning or am I completely off base here?

Jul 20, 2014
Lester Freamon:

IP: I'm with you on Uber's valuation and am skeptical about it disrupting something like car ownership. However, I'm kind of curious as to what you believe is the difference between companies like Amazon/Netflix, who have successfully been able to create new markets or disrupt old ones (Amazon being brick-and-mortar retail, Netflix is taking on cable companies and we'll see if they can win) vs the myriad others that fizzle out? Figuring this out is likely the key to unlocking Uber's value

I was a bit young to remember the days Amazon was still young, but after giving it some thought (some very brief, somewhat uneducated thought I may add), my belief is that they were penetrating a market that was selling a relatively undistinguished commodity. When it comes to buying books (I believe that was what Amazon originally was into before selling everything else), people just want the book at the lowest cost and there is nothing unique about buying it in-person vs online. The only thing I can think of where the bookstore has an advantage is if the person HAD to have it right away or cherishes the ambiance of bookstores and casual browsing, but that's probably not the majority of customers/transactions. It's a similar deal with NFLX. Although obtaining the rights to distribute a show is expensive, if you get it and gather enough content that people can watch reliably and for a better price than cable television, people will opt for it. The fact that Netflix has created it's own content that people enjoy furthers their case and has led a fair amount to cut their cable subscription.

With Uber, I think they are onto something with cab service to some extent. People don't really care about a particular cab (at least in my experience) and just want to get from A to B cheaply. The issue is, I don't see Uber as having a significant barrier to entry for the market it's disrupting. With Amazon, it's not cheap to acquire warehouses, etc. to buy and store the inventory and even now they struggle with margins. The content Netflix acquires is probably expensive (trademark issues) and it's even harder to create critically acclaimed programming, which makes it hard for competitors to enter their moat.

Uber's main USP appears to be it's software. I'm obviously ignorant about what it takes to make a program like this, but if I had to hazard a guess, it's not as difficult or costly as the aforementioned examples. Additionally, I feel as though car ownership, which Uber is said to soon penetrate, is a tough nut to crack. Lots of people have a personal attachment to their cars and the car culture is so prevalent in huge markets that it would need to be dramatically more cheap to Uber around for people to make the switch. There may be something with respect to the logistics market (i.e. ubering delivery to your house) that I could maybe buy, but some of the lofty valuations are based on Uber completely changing the world through it's logistics systems, which makes it hard for me to not think it's irrational exuberance.

Is there any method to my reasoning or am I completely off base here?

There's obviously something I can't explain about a company like Amazon or Google. 10-15 years of growth is probably more than just luck. I think the difference is that managers develop a reputation for creating value, and then get license from investors to go out and create more value (not necessarily profits).

I still think that sentiment is way too high in tech and growth right now- it's probably a little too high in value, too. I think we are due for a general market pullback when the fed raises rates, and I think growth stocks will probably get hurt more by rate increases. We will probably get some kind of pullback (affecting both value and growth) even if the fed doesn't raise rates.

Jul 27, 2014

The difference between Zipcar and Uber is that Uber will most likely be bought by the company that cannibalizes them. Namely, Google. Google Ventures is Uber's biggest investor and the two companies have a close partnership besides that (Uber is actually advertised in Google Maps' directions screen. That's unheard of for a company to advertise another company in its core product). And the reason is that the synergies between Uber and a future, driverless Google Cars are enormous. Uber has:

1. The largest dataset on driver demand, preferences, and behavior
2. A ready-to-be-served mass of transportation users around the globe

Basically, Uber is a full-stack, vertically unified company that has deep relationships with each part of the transportation vertical, from user to driver. When Google decides to jump into the transportation market, they will need Uber's data and relationships with customers to have any chance of competing. Uber's data makes it simple for them to figure out pricing, routes and logistics for their driverless cars. In cities where they roll out their driverless cars the Uber users would just switch over from using drivers, and in all the areas where it will takes years or decades to roll out driverless cars Google will have built-in demand that is primed and waiting for them.

The key is that Uber makes the large-scale transportation shift to driverless cars a smoother one, like Expedia/Kayak made the shift from PanAm to low-cost carriers like Southwest smoother. Infrastructural/hardware shifts may seem more important than software/UI ones, but the hardest part about pulling off large-scale technological disruption isn't building the right tech, it's changing the daily habits and behaviors of consumers. Because, ultimately, it's not driverless cars themselves that will fundamentally change the transportation industry. It's the shift from private car ownership (the Fordist mode of transportation) to a drastically more expansive, networked, quasi-public mode of transportation based upon driverless cars. A future with driverless cars will NOT merely replace current transportation behaviors with new driverless tech - the 'taxi industry' in the future will look completely different from what it has historically been in the Fordist era. But the first step towards that post-Fordist future is to get more people engaged in networked, taxi-style modes of transportation, and to pull them away from the old mode of transportation based on private car ownership. That's something that Uber is already and will probably continue to pull off, which makes them extraordinarily valuable to any transportation company that's looking to actually bring driverless technology to market in a revolutionary way. Actually, it might make Uber even more valuable than the driverless tech companies themselves, just how Microsoft eventually became much larger than IBM and the hardware companies.

Again, Uber is a full-stack company. Driverless cars can replace one part of that stack and fit in smoothly to Uber, but right now neither Google, Tesla, nor definitely any of the traditional car companies are equipped to be full-stack players in the post-private-car future of transportation. I could easily see a world where Uber is bought at an insane price by Uber, Lyft is bought by Toyota, etc.

Granted, I have no idea how you would go about valuing something like this, but it's a fact that Uber right now has the strongest relationships and best data on the customers who will be early adopters to the post-Fordist transportation market. It is very easy for people who don't have an eye on that future market to misunderstand how valuable Uber's demand relationships could be.

Jul 27, 2014

Southwest does not advertise fares via third party companies like kayaks or Expedia. They have always preferred a strictly direct sales model using their own website. Also the current landscape, with the legacy carriers continuing to cut cost and onboard perks, Southwest has ironically emerged as a quasi premium carrier.

Otherwise I basically agree with your thesis. As to how to value Uber for a potential suitor, DCF or standard comp analysis is not the right tool here. Instead it's ultimate acquisition price would largely be contingent upon how much someone like Google value the expansive world wide infrastructure that Uber is rapidly building up versus the efforts that would go into it for Google to replicate the same infrastructure on its own.

Jul 19, 2014

I'm not sure if this is material insider information, but I'm not sure it's all that wise to post rumors like this. Uber's stock is getting traded privately right now and just because Uber isn't regulated doesn't mean there aren't a number of rules around insider information.

Jul 20, 2014

I think the barriers to entry today aren't that large, but grow every day, and the ultimate goal is for them to have such larger scale vs peers that they are able to offer a far cheaper product that is also quicker and more reliable than the competition. New entrants clearly can always enter the market but if they just have longer wait times, more inexperienced drivers who don't know where to go, etc then that creates customer dissatisfaction and is a plus for Uber.

As far as the long term goal of taking share from car ownership, this is clearly happening slowly, and will probably continue to be a marginal tailwind, but is likely only a metropolitan area phenomenon.

The big threat for Uber (like a lot of tech companies) is if Google decided to actually put its money behind the driverless cab market (playing the same shift away from ownership tailwind). This would be the end game for Uber in my mind.

Jul 20, 2014

Uber is simply a taxi booking platform. It will change the car/cab industry just about as much as Expedia changed aviation; it won't fundamentally change anything.

Real change in the car industry will come from Tesla and Google.

But I'm sure that the hype will lead to an amazingly successful IPO and the founders and investors will make out like kings.

Jul 20, 2014

The best outcome Uber can hope for is that they stay far ahead enough in terms of convenience and low prices that Uber becomes people's go-to mode of transportation wherever they are because it's easier to use than getting an app for each cab company.

Of course an app that cab companies across the world joined in on would destroy Uber but the market is very fragmented. There's a business idea for you (not a huge business because you would have to make it cheap for cab companies) that could be worth 9 figures if you get the right salesforce.

Jul 21, 2014

Seoul is planning to ban Uber as we speak.

Jul 21, 2014

Let's just say you had ~$20B and had the choice to buy either Whatsapp or Uber - which has more potential? Which makes more money? Which would you invest in? All things being relatively equal, ppl are going to love the newest thing more than the last and therefore it's easy to conclude that snapuberchat has the potential to be the best app ever

Looking at vaguely related comps is obviously only one narrow way to judge a potential investment, but it's one of the most basic/tempting for people to use, which is why so many people are biased to give [insert: the newest app] huge valuations

Just my .02

Jul 22, 2014
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Jul 23, 2014