Uber Technologies Inc. listed on the New York Stock Exchange on 10 May 2019. Wild speculation about the value of the 9th largest IPO in history has been all over the media for a few months. Last year, investment bankers, jockeying for some action in the fee income, talked up the value of the in the media, suggesting a value as high as $120bn.
Although markets are not perfect, neither are they gullible and Uber listed at a valuation of $79bn. Its debut was unfortunately badly timed as markets fell on Friday over concerns of the impact of trade war between China and the USA. The company’s market capitalisation after day one of trade declined to below R70bn, a considerable drop from its listing value.
Our objective in this document is to research and lay out all the necessary facts about Uber and to ultimately provide the reader with a long-term valuation that is realistic, credible and competitive for Uber Technologies Inc. using available information about the company and industry.
Uber’s mission statement is ‘To bring transport – for everyone, everywhere’. Their vision statement is: ‘Smarter transportation with fewer cars and greater access. Transportation that’s safer, cheaper, and more reliable; transportation that creates more job opportunities and higher incomes for drivers’
Uber’s main product and therefore business, can be described as a ride-hailing platform, through the Uber smartphone application, that allows users to access rides on demand at inexpensive prices, with flexibility of use and safety. It, in effect, enables users to request a ride/taxi via a location based application on their phones and connects drivers and passengers directly rather than through a call centre.
We estimate a global market potential for Uber at $330bn per annum, with a significant global market penetration of 40% in 5 years. We place a valuation of $76.4bn on the Uber business which approximates its IPO valuation on 10 May 2019 of R79bn.
Uber is the largest hail-riding company globally, and is expected to more than triple its revenue over 10 years. This will be driven by:
- Continued strong global growth in the ride hailing market (including related logistics, such as Uber Eats and Uber Freight) forecast at rate of 10% p.a. compounded, and
- By international expansion and/or consolidation. Its leading market position and size in the transport market coupled with the retention of some $9bn of the IPO funds allows Uber to grow, in our view, to 40% of the expanded global industry. We estimate its current share of the global market at 25%.
The continued high sales growth, coupled with a low capital re-investment requirement, will result in a positive operating leverage culminating in a 22.5% operating margin by 2022. The recent $500bn investment by Toyota into Uber at a valuation of $76bn, further underpins our forecast and views on its prospects.
The valuation model adopted is the Discounted Cash Flow (DCF) method, which discounts the expected future free cash flow of Uber, initially, over a 10 year growth period, and then determining the future cash flows beyond the 10 year growth period, known as the Terminal Value. The present value of these cash flows has been determined by discounting the future free cash flows at a cost of capital of 8%, based on the median of US companies.
Multiple scandals damaged Uber’s brand in the early years and forced co-founder Travis Kalanick to resign as CEO. Kalanick’s early “win at all costs” strategy caused significant controversy and negative publicity for the company.
Under the stewardship of Dara Khosrowshahi as CEO, and people such as former attorney general Eric Holder and Arianna Huffington the company has taken steps to revamp its troubled management and corrupt culture.
The significant competitive advantage that Uber has by being first-to-market with its ride-hailing platform has ensured a large market share of around 70% in the USA. The IPO has increased Uber’s financial muscle and the Artificial Intelligence revolution will offer enormous benefits to leading technology companies. Much like Facebook, Apple, Google, and Amazon were first-to-market and continue to dominate, Uber we believe will remain the dominant player in the ride-hailing industry. It will take a brave person to bet against them.
Uber Technologies Inc. is a multinational transportation network company that offers a peer-to-peer system that allows users to request transport and allows other users to offer said transport and has recently branched out in using their network to allow customers to order food and drivers will go fetch and deliver the food to the customer.
The term “hail-riding business” has been adopted to describe this industry that has significantly disrupted the traditional transport sectors of care hire, taxi, trains and buses.
- Uber Technologies Inc. was founded in 2009 by Garrett Camp and Travis Kalanick and was initially called UberCab. The idea stemmed from Camp having recently spent a lot of money on private transport and he wanted to find a way to make transport cheaper for everyone.
- In 2010 a man named Ryan Graves became the first employee of the company when he responded to a tweet sent out by Travis and was given a general management role and between 5 and 10% of the company and was soon named as the company’s CEO but after 10 months Kalanick took over the role of CEO.
- The Uber app finally launched in San Francisco in 2011 but it only allowed users to order a luxury car that were more expensive than regular taxis.
- In 2011 they shortened their name to Uber from UberCab to appease taxi companies in San Francisco.
- In July 2012 they unveiled their product – UberX – which was a service that allowed the general public to work for uber as a driver if they passed the background check, using a car that met certain requirements. This then allowed these drivers to connect to customers to offer cheap transport. Prices were initially close to those of normal taxis and was 35% cheaper than UberBLACK.
- In early 2013 they were operating in 35 different cities.
- In April 2013 Uber allowed drivers to use their personal cars. This caused prices to drop massively, upsetting UberBLACK and taxi drivers because they couldn’t compete with the cheaper competition.
- In August 2014 Uber unveiled UberPOOL which is a carpooling service. Which has steadily begun being implemented around the world since then.
- In August 2014 Uber Unveiled UberEATS which is a food delivery service.
- In September 2016 Uber unveiled its first self-driving car services to select individuals in the city of Pittsburgh.
- In December 2016 Uber stated to test a self-driving car in San Francisco but soon after they were forced to stop all tests in California due to a problem with registration for many of their cars being revoked. They then moved the tests to Arizona where customers could get picked up in these self-driving cars.
- In March 2018 the death of a pedestrian led to tests of their self-driving cars being stopped
- In December 2018 Uber restarted their testing with permission from the authorities.
- In March 2019 Uber was found to not be criminally liable for the death of the pedestrian in 2018.
Dara Khosrowshahi, the CEO of Uber manages the fast growing company. He had previously held the same position in Expedia, an online travelling company. Dara has also held positions of Chief Financial Officer of IAC Travel and the Vice President of Allen & Company. The experience he gained and the hard work put in resulted in him being one of the highest rated CEOs on Glassdoor.
Chief Financial Officer, Nelson Chai, once worked as the President of the CIT Group for more than five years, the CFO of Merrill Lynch & Co and the CEO of the Warranty Group, an insurance and warranty provider. He also graduated with a Master of Business Administration from Harvard Business School. He serves on the boards of US Fund for UNICEF and the University of Pennsylvania School of Arts and Sciences.
Tony West is the Chief Legal Officer, Senior Vice President and Corporate Secretary at Uber. He deals with the legal, compliance, ethics and security functions. Previously, he was the Corporate Secretary and Executive Vice President of PepsiCo. He was the Senior Official in the Obama administration and the Associate Attorney General of US. He graduated from Harvard College with an Honours and obtained a law degree from Stanford Law School.
The Chief Operating Officer is Barney Harford who once held the position of CEO and board director of Orbitz Worldwide. Harford is responsible for global ridesharing strategy, operations, marketing, and customer support. He was the Strategy Consultant with Kalchas Group and the board director of United Airlines & Realself. Barney obtained an MBA from INSEAD and an undergraduate degree in Natural Sciences from Cambridge University.
Chief People Officer, Nikki Krishamurthy, is in charge of human resources, recruiting, workplace, and diversity and inclusion teams. She was most recently the Chief People Officer at Expedia Inc. and the Vice President of Expedia Local Expert. Nikki played HR roles at WaMu and PNC Financial Services Group. She obtained a BA in psychology from Rutgers University.
Products and Services Offered
Uber’s main product can be described as a ride-hailing platform, through the Uber application, that allows users to access rides on demand at inexpensive prices, with flexibility of use and safety. It, in effect, enables users to request a ride/taxi via a location based application on their phones and connects drivers and passengers directly rather than through a call centre.
Uber offers a range of service tiers, from single riders and groups to executive limo services. UberX being your most common and cheaper ride, UberBlack being the pricier 4 seat rider and UberVan occupying a maximum of 7 riders. UberPOOL, offered in some cities, allows you to share your ride with another person and split the cost. Uber has even introduced a food delivery service, UberEats. This makes it easy for consumers to order from their favourite restaurants and get food delivered to their door.
Uber is planning to extend the offers many services and intends to offer more in the future. Uber is currently working on UberElevate and advanced technologies. UberElevate will be air transport with an aim of reducing traffic congestion, improving the environment with less carbon dioxide emitting and quicker commutes. Advanced technologies taps into self-driving cars and freight trucks that are safe, reliable and cost-effective.
Uber can also simplify business operations with UberFreight which helps to match truckers and shippers in a similar way to matching taxi passengers with drivers and Uber for Business for employee travel or giving your customer rides.
- As the originator or creator of the ride-share platform the company has become the market leader, with significant benefits of scale and a competitive advantage in its platform development. Uber is by far the largest ride–sharing platform worldwide having more than 75 million monthly users (2017) and a 69% market share in the USA;
- Dynamic pricing strategy; Ubers policy of the higher the demand, the higher the price, has proved to be profitable for both drivers and the company;
- Reduced capital investment; as Uber does not own any of its cars, this has allowed it to keep debt levels relatively low and expand freely and quickly into many different markets.
- Uber has diversified into other profitable services such as Uber Eats and Uber freight. The established platform can be used to expand into other transportation industries.
- Uber provides cheaper prices and flexibility of service when compared to traditional meter taxis.
- Ubers driver and passenger rating system has been effective in fostering good relationships with drivers and clients while working bad drivers and passengers out of the system.
- Ubers app and ecosystem are user friendly which encourages people to continuously use the platform.
- Questionable values and management culture caused by multiple scandals have damaged the Uber brand and even forced co-founder Travis Kalanick to resign as CEO. Kalanick’s early “win at all costs” strategy caused significant negative publicity for the company. These included:
- Dirty tactics against competitors, such as spying and false ordering of rides;
- Skirting regulations/licenses and city laws required by the taxi industry;
- User privacy and data breaches;
- Criticism of lack of diversity, racial and gender discrimination and sexual harassment.
- Uber is not yet profitable having made significant losses over the last ten years. Its borrowings are approximately $30bn in 2019.
- Ineffective driver screening has led to a number of crime incidents with customers.
- Driver retention and/or loyalty could be a problem for Uber. Drivers are independent contractors and not employees and therefore have no vested interest to stay with company should they receive better offers from the competitors.
- The retention of some $9bn from the IPO will allow Uber to expand aggressively into new markets;
- Merging with established competitors in cities around the world may be result in significant synergies;
- Mergers with established taxi industries could augment services and avoid competition;
- Driverless technology would make passengers feel even safer and would remove the need for drivers and the associated dispute of whether they are employees or independent contractors.
- By continuing to invest in enhancement to its digital platform, it will continue to grow the competitive advantage gap it has in the platform and will also allow it to work out any bugs within the existing platform.
- Establish processes that will help company to diversify its workforce, improve its culture and build its management team.
- New competition – Although Uber has the traditional transport competitors in almost every geographic location, the arrival of new hail-ride businesses could make a significant dent in its expansion prospects. The necessitated merger with Didi in China is an example of this.
- Lawsuits by drivers – Uber has had approximately 300 000 lawsuits filed against it by drivers disputing the “independent contractor” classification and claiming to be employees and therefore entitled to the benefits under employments laws.
- Government regulation threatens the Uber model as, should they be classified as a transport company rather than a technology company, it could cause them to pay penalties to the taxi industry.
- The controversy that Uber brings as it enters new markets is a headache for authorities. Government or city regulation could prevent Uber expanding in some countries. Threatened by the arrival of Uber established taxi industries are likely to lobby officials to ban Uber as an entrant to the City. They will point to Uber questionable values and past behaviour as a reason to have them banned.
- Certain country may not respect the intellectual property rights of Uber and allow copy-cats to be created.
- The classification of drivers as employees or independent contractors will affect potential growth and profitability. Uber has often been accused of not meeting the minimum wage requirements;
- The unprecedented growth of the Uber worldwide has brought into question, whether the market disruptor is actually creating a net new amount of opportunities or employment or, whether, it is simple taking away from someone else and giving less back to the new job. In other words has it had the effect of creating jobs or not? Is there a positive impact on the GDP of a country? It is a debate in all sectors of the economy as regulators struggle to assess the benefits versus costs of allowing Uber access to its cities. It could easily be argued that the consumers will always seek the cheaper transport and regulators will be hard pressed not to allow them the Uber alternative.
- In developed economies the ease of availability to the Uber platform through consumer smartphones make the frequent use all the more likely. In less developed countries, such as South Africa, growth may be limited due to lack of access to the internet and smartphones.
- The Uber technological platform is critical to its functioning and revenue generation. Technological glitches in the application would have a significant impact on the revenue and profits.
- For effective technological advancements capital must be invested into research and development.
- What is the effect of Uber on the environment? Has Uber resulted in lower or higher CO2 emissions into the environment? While studies vary in their conclusions, we it could be argued that increased urbanisation is the reason for higher car emissions and not necessarily Uber;
- Ultimately though regulation on vehicles may affect Uber if their drivers have to switch to electric cars due to climate change.
- Uber may have to pay special taxes due to its cars producing large amounts of CO2, placing financial strain on the company and drivers.
- Intellectual property laws need to be enforced or Uber will no longer be able to differentiate themselves.
- Uber has to have effective health and safety regulations so as not to be fined by the government. (eg the amount of time a driver can be behind the wheel needs to be limited)
Valuation of Uber
We estimate a global market potential for Uber at $330bn per annum, with a significant global market penetration of 40% in 5 years. We place a valuation of $76.4bn on the Uber business which approximates its IPO valuation on 10 May 2019 of R79bn.
Uber is the largest hail-riding company globally, and is expected to more than triple its revenue over 10 years. This will be achieved through, firstly, strong global growth in the ride hailing market (including related logistics, such as Uber Eats, freight) forecast at 10%pa and secondly, by international consolidation. Its leading market position and size in the transport market will mean it will enjoy strong global networking benefits and will see its revenue share grow to 40% of an expanded global industry. The continued high sales growth, coupled with a low capital re-investment requirement, will result in a positive operating leverage culminating in a 22.5% operating margin by 2022. The recent $500bn investment by Toyota into Uber at a valuation $76bn, further underpins our forecast and views on its prospects.
The valuation model adopted is the Discounted Cash Flow (DCF) method, which discounts the expected future free cash flow of Uber, initially, over a 10 year growth period, and then determining the future cash flows beyond the 10 year growth period, known as the Terminal Value. The present value of these cash flows has been determined by discounting the future free cash flows at a cost of capital of 8%, based on the median of US companies. The risk free rate of 2.1% has been used which is based on return achieved on US Treasury Bonds with a 10 year maturity.
The DCF method is considered the most appropriate valuation model for Uber. A summary of the DCF numbers is attached on Appendix 1.
Our model forecast a global market potential of some $330bn of which we believe that some 50% of this market is in the USA. This implies a doubling of the market in some 8 years at an annual growth rate of 9.4%.
We believe that these forecasts to be a base case scenario. Our positive outlook is under-pinned and driven by the following global socio–political factors:
- Continued global urbanisation and growth of city living;
- Cost of living increase in major cities and space availability for vehicles;
- Rising vehicle costs along with increased fuel costs, has reduced the demand for car ownership;
- Environmental considerations which are being driven by the millennial generation;
- The convenience of pick up and drop off in major cities;
- The affordability and flexibility in comparison to taxi or public transport.
The IPO will enhance Uber’s ability to grow its global footprint in the ride-hailing business. The substantial cash injection from the IPO will arm the start–up disruptor’s directors with significant fire power (some $9bn) to take-on and/or amalgamate and/or purchase Uber copycat models around the world. Uber’s Indian rival Ola is a classic example of a potential merger in the fast growing market of Asia. While there are many obstacles for such a merger including overcoming anti-monopoly regulation and socio-political issues, the fact that a major funder of both companies is Softbank Vision Fund of Japan, makes the deal inevitable in our view.
The merger of Uber business with Grab in South East Asia and with Yandex in Russia is supportive of our view. This strategy ensures consolidation and profitability in those geography’s. We forecast that Uber will continue on this strategy to grow and solidify profitability by merger or acquisition to consolidate the global market of share-riding. It is for this reason that we believe the global Uber market estimate of $300bn, with a 40% market share to be realistic in 10 year period.
In addition, the add-on potential of business models such as Uber Eats and other logistic opportunities, in our view, underpin the market potential. Further underpin is the continued world move towards urbanisation, making traffic and commuter movement of paramount importance for city management and for enhanced quality of life of its citizens.
STRATEGIC OPTIONS AVAILABLE
Keep the Autonomous Vehicle investment alive: artificial intelligence is evolving and Uber has the opportunity to incorporate it in its business operations. One opportunity that had arisen for Uber was the investment in driverless Autonomous vehicles. Uber has to get the timing of its investment and strategy in this array right as it could not only bring them great financial benefits but also increase the demand for and use of their platform. The success of this invention will put Uber a step ahead of its competitors because it will expand its customer base through even cheaper prices.
Increase efforts put towards profitability: Uber has experienced massive growth in its initial form of business operation and in its extension into other industries and operations. Uber, however, has not been profitable for the past years as it has made losses of $3 billion in 2018. Uber has to come up with strategies that ensure that ultimately the company will repay investors with profits.
Expansion of geographies: Uber always faces the opportunity of availing its platform to more international regions. Uber should look into investing in markets in India and Southeast Asia; these markets are small and cash-draining in the short term but can potential generate great returns in the long run. Uber should also decide which international markets it wants to reign over in the long run and then give those markets great amounts of attention and investments while focusing less on those that do not generally possess the potential to bring high returns in the long term.
Diversifying into other profitable services: Uber has in the past made a strategic decision to extend its platform beyond just the personal mobility industry. It was ventured into the food delivery and logistics industries though the creation of Uber Eats and Uber Freight. The company also expanded its offerings under personal mobility which Uber Pool and New Mobility; e-scooters and dockless e-bikes. Uber is an innovative company and is continuously coming with ideas of how it can expand and tap into new industries.
RISK AND RISK MANAGEMENT
Uber has received great amounts of negative publicity and media coverage in the past, particularly in the early years. It continues to be at risk of receiving more negative media coverage as past occurrences that tainted the company’s image may occur again. As the company lists, its reputation now hangs in the perception of the market and cannot afford further scandals.
Uber has incurred significant losses in the past 10 years. The company will now under the scrutiny of the financial markets and will need to show that it can turn the business into a profitable venture. It will need to monitor and assess the gearing levels regularly and ensure that it does not disappoint the markets by not achieving financial guidance.
Uber is making substantial investments in new offerings, developments and technologies including Autonomous Vehicle Technologies, and investments in these spaces are expected to be increased in the future. Uber faces the risk of these products failing in development and failing to commercialize there, and not bringing expected returns. These is no assurance that that consumer demand for these products will exist and be sustained at the anticipated level or that any of the future developments and technologies will gain market acceptance.
There is a huge risk that Uber could experience security or privacy breaches or other unauthorized access to, use of confidential data, employee data platform user data. Any failure to mitigate or prevent and privacy breaches, Uber may face loss of revenue, there could be business disruptions and this could harm their brand.
Finally, Uber’s platform is highly technical and successful operations rely on the performance and reliability of internet, mobile, and other infrastructure that is not under Uber’s control. Disruptions in the internet infrastructure or failure of telecommunication networks could interfere the speed and availability of their platform.
Uber however, has invested significant resources to develop new products to mitigate the impact of potential interruptions to mobile communications systems.