New York: It already has a valuation higher than 80% of the companies in the S&P 500, and a finance professor at New York University says Uber Technologies Inc. has no more room to run when it comes to market value.
According to Aswath Damodaran, a professor who specializes in equity valuation at NYU’s Stern School of Business, Uber is running up against the roadblock that has thwarted many upstart businesses: Profit.
“Disruption is easy but making money off disruption is difficult, and ride sharing companies would be exhibit 1 to back up the proposition,” he wrote in a recent blog post. “While the ride sharing option is here to stay and will continue to grow, ride sharing companies still have not figured out a way to convert ride sharing revenues in profits. In making this statement, though, I am relying on dribs and drabs of information that are coming out of the existing ride sharing companies, almost all of whom are private.”
After crunching some numbers, he believes that Uber’s true valuation is actually south of $30 billion, less than half of the $62.5 billion it was pegged at in its most recent round of funding. Here are a few reasons why Damodaran believes the prospects for Uber’s business aren’t as rosy as they might seem.
Growth may continue, but revenues are concerning
While Damodaran thinks Uber and riding sharing will continue to expand, albeit at a slower pace, he’s concerned about whether revenues will follow. China especially worries him given Uber’s recent sale of its operations in that country to Didi Chuxing, its biggest rival there. The decision to exit “even if it was the right one from the perspective of saving itself from a cash war, will reduce its potential revenues in the future.”
In the other places where Uber does continue to operate, there are often large discounts for riders and other special promotions. This is proof that the business model is challenged, according to Damodaran. “I believe that a significant portion of their expenses are associating with maintaining revenues rather than growing them,” he says. “In effect, it looks like the business model that has brought these companies as far as they have in such a short time period are flawed, because what allowed these companies to grow incredibly fast is getting in the way of converting revenues to profits, since there are no moats to defend.”
A “Bar Mitzvah Moment”
Damodaran says that young companies all face a point in time that he calls the “Bar Mitzvah Moment,” when the focus shifts from growth to evidence that the business model can be profitable. In his mind, that moment is right now for ride sharing. “After an initial life, where investors have been easily sated with reports of more ride sharing usage (number of cities served, rides, drivers etc.), these investors are starting to ask the tough questions about how ride sharing companies propose turning these impressive usage statistics into profits.” (Uber says it already has become profitable in at least a few of its markets.)
Operating could get more expensive
Right now, Uber and other ride sharing platforms don’t have to consider their drivers as employees, but that could change. On top of that, there are constant regulatory hurdles that add to expenses. “Seattle’s decision to let Uber/Lyft drivers unionize may be the precursor of similar developments in other cities and higher costs for both companies,” Damodaran writes. “On the legal front, cities continue to throw up roadblocks for the ride sharing companies.”
Big players could jump in and challenge them
Did someone say Apple Inc. or Alphabet Inc? Elon Musk, anyone? A number of massive players in the public market have hinted at entering this space, and that could present Uber with some problems.
“The ride sharing companies have clearly won the first phase of the disruption battle with the taxicab and car service companies and have been rewarded with high pricing and plentiful capital. The next phase will separate the winners from the losers [among] the ride sharing companies and it is definitely not going to be boring,” Damodaran concludes. Bloomberg