$120 Billion Doesn’t Make Uber a Real Company
(Bloomberg Opinion) -- Let’s all be honest with one another. No one can confidently predict how most private tech companies will fare when they become grown-up public companies. That goes quadruple for Uber Technologies Inc.
In a financial analysis, it’s perhaps the most confounding technology company of the last decade. It may be the most genuinely novel and disruptive business in many years. It has reshaped people’s behavior in many countries, sparked conversations about the nature of jobs and forced governments and transportation planners to catch up. All that can be true, and Uber still might not last. The company is almost 10 years old, and it exists thanks only to a constant supply of fresh cash from a handful of eager investors. This all might turn out to be a mirage.
Keep that in mind when you read the Wall Street Journal report that investment bankers have sent proposals to Uber valuing the company at up to $120 billion in an initial public offering, which Uber has signaled it plans to hold next year. Yes, that is an eye-popping figure. Only about 40 companies in the U.S. have stock market values of $120 billion or more, Bloomberg data show.
I can’t believe I’m writing this, but $120 billion isn’t a completely nuts valuation for Uber — at least if investors fixate only on the company’s prodigious growth. The tricky thing is I still don’t know whether Uber is a sustainable business given the huge losses it has piled up and the company’s proposed strategy changes. I wonder whether investment banks or even Uber know for sure.
First, let’s drill into that possible valuation. It’s worth noting that those valuation figures tossed around by investment bankers will most likely change, and they may be flinging out half-baked numbers to please the company and its investors, who want big gains on what is already a company with an unprecedented valuation for a private company.
Still, Uber posted nearly $10 billion in net revenue — that’s the company’s share of fares paid by riders — in the last 12 months, according to the bare-bones financial figures that Uber releases each quarter. At Uber’s recent growth rate, its revenue could reach something like $16 billion at this point in 2019. That means if Uber's IPO takes place next fall, a stock multiple of 7 to 8 times its trailing 12-month revenue gets you to a $120 billion valuation.
That’s not a completely crazy multiple of revenue. Twitter Inc., which isn’t growing nearly as fast as Uber at a fraction of its revenue, is trading at about 7 times its revenue for the past 12 months, according to Bloomberg data. Facebook Inc. is around 8 times. At least until recently, IPO investors have been so eager to own chunks of fast-growing tech companies that they have been happy to embrace promising tech companies with quickly climbing sales but a history of losses, half-baked business plans and other red flags. Exhibit A: Snap Inc., although that is far from the only example.
Of course, it’s tough to compare Uber with what has come before because it’s such a weird animal. The closest comparable public companies are those that connect people who want to buy something with people who want to sell something. That’s like eBay Inc. (valued at 3 times its revenue for the last year) or the parent company of Priceline (6 times revenue), but of course Uber isn’t quite like those companies either.
The big challenge is it’s hard to confidently say that Uber’s business works under normal conditions — because conditions haven’t been normal for all of Uber’s life. The company has never had to stand on its own feet financially, thanks to a constant stream of cash in the long bounce back from the global financial crisis. It’s not clear what Uber’s revenue or growth rate would be if it hadn’t been able to burn cash like money is free. Actually, money has essentially been free for Uber.
And it’s still not clear what Uber’s business model will be in the future. The company’s CEO has talked about pushing more would-be riders onto for-rent bicycles and other alternative transportation modes. The financials of that activity will no doubt look much different from Uber’s current business of on-demand car rides. The same goes for Uber’s investment in driverless cars. What do Uber’s financials look like if it’s not taking a cut of rides conducted by contracted drivers, but instead takes the full fare from cars that Uber has to buy and maintain itself? Most companies that go public have lots of question marks about their future. Again, that goes quadruple for Uber.
An IPO tends to be a coin-toss bet, and I suspect many investors would take that bet on Uber under almost any circumstances and with a much crazier valuation than $120 billion. An IPO, however, doesn’t answer the question of whether Uber has long-term viability. The company’s IPO could go off without a hitch and with a landmark stock market valuation. That still doesn’t mean that Uber is a real company.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.
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