Does Uber’s $80B Valuation Have Enough Gas for the Long Haul?

Uber’s initial public offering, which launched May 10, priced at the low end of its $44-to-$50 range, valuing the ride-sharing company in the range of $75 billion on a non-diluted basis to $82 billion on a fully-diluted basis. Early reports suggested the company sought a $120-billion valuation, which would have valued Uber more highly than General Motors, Ford, Fiat Chrysler or most of the aftermarket car-parts business.

That begs the question of whether such a valuation would be sustainable. In the view of IHT Wealth Management’s Stephen Dudash, who’s skeptical of the company’s valuation even at a much lower figure, probably not.

Writing in Forbes, Dudash noted that Uber lost $1.8 billion in 2018—an improvement over the $2.6 billion it lost the year prior. “Why do these companies hemorrhage cash like this?” Dudash asked. “Is it because they are following the Amazon model, spending money smartly and aggressively to pursue growth, with the dividends, so to speak, to come later? Or is it because the rideshare model does not work?”

The company’s drivers, and those of rival Lyft, put their apps in park in a nationwide if short-lived strike on May 8. They demanded higher pay and greater job security.

With an estimated three million drivers worldwide for Uber alone, yielding to those demands would be “cost prohibitive over the long term,” wrote Dudash. That’s why, he added, “so much is riding on these firms one day developing a fleet of autonomous vehicles that will allow them to slash what is by far their biggest cost burden.”

That day isn’t much closer to reality in 2019 than it was three years ago, when then-CEO Travis Kalanick called the development of driverless cars an “existential” issue for Uber.

“Though this technology is evolving, there’s no indication that autonomous cars are ready to hit the road anytime soon, nor is it clear whether either company is close to developing them on their own,” Dudash wrote.

The latter consideration is especially important, he added. “Were another firm, such as Waymo or Tesla, to do this first, they could start their own ride-hailing company, versus opting to team with an existing player, creating an extra layer of competition.”

Moreover, Dudash pointed out, “even when autonomous cars become technologically viable, it is anyone’s guess how long it would take for regulators to sign off on them, not to mention whether large swaths of the public will feel uneasy about hopping into the backseat of an unmanned vehicle.”

Dudash also downplayed comparisons between Uber and another tech giant that lost money for years before achieving profitability. Comparing Uber’s ancillary businesses like food delivery to Amazon’s gradual diversification beyond selling books online, he noted, “it’s impossible to imagine these units ever approaching the success of Amazon Web Services, the fast-growing, high-margin cloud business that not only accounts for a significant portion of the company’s growth, but is a product of its decade-long spending binge.”

For comments, questions or concerns, please contact Paul Bubny