Uber is controversial. Though it’s giving city officials headaches, tremendous support from its users has given Uber leverage, when talks of regulation surface. And, at the end of the day, Uber’s $17 billion market valuation is a stark reminder of the company’s success.
Having recently raised an extra $1.2 billion from Fidelity Investments, Uber Technologies Inc. has managed to post a record-setting, pre-money valuation of $17 billion. Given the company’s business model, it seems the sky, as the they say, is the limit.
Maybe readers have heard of UberBOAT?
FiveThirtyEight economics writer Aswath Damodaran argues the company is worth less, however – more like $5.9 billion. He contends the $17 billion valuation only holds water, “If we make some big assumptions about the taxi market and Uber’s place in it.”
According to Damodaran, a business’s true value rests on the shoulders of its “capacity to generate real cash flows.” Moreover, since Uber is still a young company, estimating future cash flow requires “making big assumptions.”
Operating as a third-party provider, connecting app users to partner drivers, Uber’s value comes from its ability to provide a convenient, reliable service. It doesn’t own its own cars or hire its own drivers, and makes its money by taking a 20 percent cut from fares.
So, Damodaran explains:
Uber’s growth potential rests not only on being able to claim a larger share of the car-service market but also on expanding this market by attracting those who use public transportation or drive their own cars.
Damodaran’s argument is based on an assumption that Uber is targeting, what he estimates to be, a $100 billion global taxi and car-service market and has a potential market share of 10 percent. “I estimate an expected growth rate of six percent per year for the next decade, increasing the overall market to $183 billion in 2024,” Damodaran adds.
Putting a number on Uber’s potential market share is complicated by, among others things, regulation and competition.
Related: Cambridge Officials Considering Rules That Would ‘Shut Down’ Uber
Related: Boston Taxi Union Calls on Boston Police Commission to Crack Down on Uber
While Damodaran contends Uber, in the long-term, is a safe investment, he placed the company’s risk-adjusted value a tick below $6 billion after taking into account:
- How much it costs to operate the company;
- How much it spends to grow the company;
- The tax rate it pays;
- And how costly it is for Uber to borrow money or attract new investors.
After setting base estimates, Damodaran concluded, in order for Uber to actually be worth $17 billion, the taxi and car-service market size would need to triple — to $300 billion – and Uber’s market share would have to double – to 20 percent.
And, should competition force Uber to take a smaller cut of fares, it could potentially lead to “devastating effects on its value,” he continued. So if, for example, Uber were to take a 15 percent cut in today’s market, Damodaran’s Uber valuation would drop from $5.9 billion to $4.5 billion.
For most, the difference between $17 billion and $6 billion doesn’t mean too much – those are still billion-dollar figures. But, heavy-hitting investors banking on seeing massive returns from Uber might be a little bit more weary.
Image via Uber
