What is it? A $41bn taxi firm called UBER. That's a lot of money for a taxi business.
What size is the global taxi market? Estimates put it at between $50 - $100bn. What share of that market can Uber expect to capture and how can that justify a value of $41bn?
Well consider what Amazon was when it started; a seller of books online.
What else can you buy for $41bn? On the stock market, you could buy the French car industry (Renault and Peugeot-Citroen) which is worth about $30bn and you would have change left over; from the airline industry; you could buy British Airways, Iberia, Ryan Air and Lufthansa – together for a value of about $30bn. The biggest car-hire firms; Hertz and Avis – together worth $16.5bn. Maersk, the largest container shipping company in the world, is worth $43bn. The Ford Motor Company, which sells about 8m vehicles a year is worth $60bn, so Uber is worth over 2/3 of that value. Uber has been in existence for a little over 5 years.
The value of a company on the stock market should be the discounted value of the future cash flows of the company.
In the taxi business what does it cost Uber to operate? The cost of all those cars must add up. The actual cost to Uber is zero, Uber’s drivers provide the cars, whether they are luxury Lexus’s or regular Toyotas. The cost of maintenance and cost of depreciation is borne by the drivers. Uber provides the software for the whole system to operate and Uber takes a 20% cut of every fare. The Uber driver keeps the rest.
Uber operates in 260 cities in 54 countries at the moment. They have 162,000 drivers in the US and the number of new drivers is doubling every 6 months. There is huge scope for Uber to expand within the taxi industry (they only operate in 3 UK cities at the current time), but the venture capitalists and private equity companies are not pouring money into Uber for it just to be a taxi company. That would not be worth $41bn, even though there are no particularly strong incumbents and there are a large number of local monopolies that can be displaced.
Paris taxi drivers strike against Uber
London taxi drivers strike against Uber
New York Taxis – The price of a medallion (an individual licence to drive a taxi in New York) peaked in 2013 at $1.05m. This has fallen by nearly 25% to $805,000 currently, due to competition from Uber.
Uber pricing – luxury drive pricing for London
Uber prices can change in peak periods
Just running a taxi service is not going to justify a value of $41bn, so investors are looking for Uber to go beyond the taxi business, just like Amazon didn’t stick to selling only books.
What other markets could Uber move into? Not just the taxi sector, but the whole transport industry. Uber could become a logistics company invading DHL and UPS’s marketplace. Spending in the logistics and transportation market in the US totalled $1,330 billion in 2012. If Uber can capture some of that business this could maybe go some way to justifying that $41bn value.
Driverless cars are a big opportunity for Uber. In the not too distant future many of Uber’s cars will be driverless and their service will not just be a taxi service, but a lifestyle choice; households will not need two or three cars anymore, they may only need one car and they could use a driverless Uber car whenever they needed it. This should work out a lot cheaper than having a second car that is a money pit, depreciating by $000’s each year. Uber’s investors can see this coming. The thinking is that many household’s will make much more use of the driverless cars on a when they need them basis rather than owning more than one car. One of Uber’s biggest investors is Google who are actually developing and testing driverless cars now. A question would be who would own the driverless cars. At present Uber’s expansion is being funded by their drivers providing their own cars. With that model Uber gives 80% of the taxi fare revenue to the driver. With the driverless car, Uber would keep 100% of the revenue, but they would have to buy or lease the cars in the first place to take effective ownership.
The driverless car – the future of car transport?
If this vision pans out, Uber will probably face Google as a major rival in the battle for supremacy of this marketplace.
So although the financial media are talking about Uber as a $41bn company, this is not a value reached on any stock market. They are a private company and they have received successive rounds of funding from venture capitalists; $1.2bn in June 2014 that valued the company at $17bn and another $1.2bn in December 2014 that values Uber at $41bn. So the company has received something like $3bn overall to build the business. The venture capitalists are giving Uber the ammunition to go and capture as much of the market as possible and to push into other areas like Amazon did. They are expressing a lot of confidence in the founder, 38 year old Travis Kalanick, who owns about 10% of the company. Uber will eventually float on the stock market, like Facebook and Twitter did, but how much more (or less) will Uber be worth then and how strong a presence will it have in these different markets.
What are your experiences of Uber - do you think this $41bn valuation is justifiable?