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Today I was reading Aswath Damodaran’s blog post Crowd Valuation of Uber . Aswath's text book on Investment valuation is a must have for any person seriously thinking of learning Investment valuation. In his blog post, he has invited his readers to give their opinion on Uber’s Valuation. Following post gives an overview of my valuation of Uber.
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To start with , let me first state that Uber is not publicly traded company , thus we don’t have access to any of its financials or other business details. We need to believe on certain facts published in media that certainly need to be taken with grain of salt. While doing this kind of exercise, there is a high possibility for a person to cross the line from Investment to Speculation. Thus its important for us to again refresh ourselves on basics of “Investment vs Speculation” . What better than the text book SECURITY ANALYSIS by Ben Graham. Chapter-4 is entirely devoted to this topic. The chapter is just 10 pages long. While reading the first two pages of this chapter I could feel Graham is talking about his own experience. Basically he lays down the basic reason of the collapse of stock market in 1929. Following are Graham’s remarks “A more forceful reason, perhaps, might be the statement that the failure properly to distinguish between investment and speculation was in large measure responsible for market excess of 1928-1929”. I sincerely urge you to read this chapter as it will provide you with a great state of mind to value a business like Uber. Because the business has a very limited history to base upon our valuation. What is Uber and who are its customers? To be honest I have never used one, but during this Thanks giving dinner I met someone who had used it in New York area. He and his wife each owned a car, now they just have one car between them and use Uber as a backup. This statement might conjure a great story for this business, because if it can be scaled across USA then Uber’s power can be equivalent to replacing around 75 million cars (assuming 75 million households in USA) . But it will be a great mistake to scale something that’s applicable to New York City and apply it to USA. One of the main reasons my friend opted for Uber is because of the parking problem he used to face and plus the high insurance rates. Uber with its efficient service , provided a somewhat comparable alternative that other cab companies could not provide till date. If we move 200 miles north of New York city to Schenectady, NY (Home of GE Energy) . I can bet that there will be no trace of Uber, because residents there have ample parking spot and crime rate is very low (compared to NYC) and hence people are very comfortable owning a car. In fact if we look at human psychology, we rather prefer having something of our own than sharing it, but we get inclined to sharing when the cost of ownership goes beyond the value it creates. Coming back to the question posed at the beginning of this para - What is Uber and who are its customers?, Uber is a web based Taxi service catering to customers who find it inconvenient to own a car or for some reason cant own a car , but can still afford somewhat a high prized taxi service. What is the potential size of Uber’s customers? Following link gives list of cities that Uber caters to. https://www.uber.com/cities . I peaked at North American cities and could see that its covering around 80 metro areas with an average population of 2 million. Thus one can say that it caters to around 160 million, which is half of USA. I feel Uber has reached the limit as far as growing to additional metro areas. The reason is simple - Its service is only viable if the metro area is above a threshold population. But I can certainly see Uber expanding its user base in the metros its already offering, especially Generation ‘Y’. One very important factor that’s helping Uber is that the recent economic slump affected Gen ‘Y’ the most because most of them had just graduated and entered the job market, thus most of them did not have an opportunity for a stable job which affected their credit rating and thus affected their borrowing strength. This in turn has delayed their ability to own a car and hence has given Uber an opportunity to make them a loyal customer. What is my valuation basis? As per Uber’s web site it’s pretty much in all developed and developing countries. As a fun exercise I clicked on Pune and requested a quote from my parent’s house to Railway station . Uber X was Rs 1,800 and UberBLACK was Rs 2,400. Sounds little bit expensive, but I guess it’s targeted more towards the affluent. But I am skeptical if the Uber will have the same brand loyalty in India or any Emerging economy , because transportation services is very competitive in those areas and folks are very price conscious. So I would simply assume that half of Uber’s worth is the cash it will generate from USA. Thus the total value of Uber’s business will be twice that of the net discounted Free cash it can generate from USA. Average Earnings of an Uber Driver: The base of Uber’s business is its drivers. The more money they make, the more Uber gets, because Uber gets around 20% share of the fare collected by the driver. As I have no experience in Taxi business, so thought of finding a somewhat reasonable source for my answer. I found an answer in quora.com that answers my question http://www.quora.com/How-much-money-does-an-average-Uber-or-UberX-driver-earn-in-a-day-What-about-people-that-drive-full-time-for-Uber The person who posted the reply works over 50 hours a week and manages to get $1,500 / week. He is from San Francisco, which is at the highest end. Thus on an average we can assume that the drivers make around $1,000 a week , which is $52,000 / year. Uber’s share is 20%. Thus from each driver, Uber tends to generate a revenue of roughly $10,000 per year. On an average if we assume around 1000 drivers in each of the 80 metropolitan areas , thus total Uber drivers in USA is 80,000. Estimated free cash Generated by Uber in USA : With 80,000 drivers and $10,000 per driver per year, total cash receipts = $10,000 x 80,000 = $800,000,000, which $800 million. Assuming an operating margin of 25% , its pretax income is 0.25 x $800 million = $200 million. Tax rate of 35% would put its Net operating cash flow from USA at $130 million. Assuming that $30 million will be ploughed back for Capital expenditures , thus the Free cash generated by Uber in USA = $130 million - $30 million = $100 million. Discount Rate and Growth rate: Being a startup business with a very new business model I would give a discount rate of 15%. The initial growth rate of 35% for first 5 years , 20 % for next five years and 12% for next 10 years. Overall Discounted free cash flow in next 20 years : Above we found that the discounted free cash flow of Uber USA was $100 million and we assumed that half of Uber’s worth was its USA business, thus the total base Free cash flow of the business = $100 million x 2 = $200 million. Plugging in the growth rates and discount factors for next 20 years, we get aggregated discounted cash flow for next 20 years as $5.92 billion , which is roughly $6 billion. CONCLUSION : Uber’s Fair valuation is $6 billion (Assuming Base Free cash flow for first year as $200 million , growth rate of 35% for first 5 years , 20 % for years 6-10 , 12% for years 11-20 and discount rate of 15%). Click here to view the excel sheet that has the Valuation model that lists down the different factors for valuation. |
