Why Uber IPO Is Overvalued: Aswath Damodaran

Many members of the 2019 class of tech unicorns have been closely watched as investors seek to bet on future market giants.

Ride-hailing giant Uber anticipates that the price of its initial public offering will be between $44 and $50 per share, which would give it a valuation of up to $91 billion, accounting for stock options and restricted stock.

This is lower than the $100 billion valuation that it was expected to aim for, but still makes it one of the largest offerings in history. One of the nation's leading valuation experts, NYU Stern professor Aswath Damodaran, says the high-profile IPO is worth closer to $60 billion.

Why Uber Is Overvalued

  • Overestimating potential market size
  • Operating in the red
  • Big numbers hide key issues
  • Complexity in valuing company

Source: Aswath Damodaran's blog

Uber's Exaggerated Market Story

In a detailed blog post titled “Uber’s Coming out Party: Personal Mobility Pioneer or Car Service on Steroids,” the widely followed market watcher provided a detailed analysis of Uber’s 285-page prospectus. He highlights the fact that due to the length and data-intensive nature of the disclosure, it has been largely “useless” to investors, who have latched on to key statements such as “we may not achieve profitability.” Damodaran says he views such statements as “evidence that lawyers should never be allowed to write about investing risk.”

Damodaran, known as “Wall Street’s Dean of Valuation,” argues that while Uber, just like its number one rival Lyft, has attempted to market itself as a transportation services company, promoting an image of itself as a “personal mobility business” with a potential market of $2 trillion, it remains largely a car services company. He downplays its estimated total market opportunity, which includes the cost of all money spent on transportation (cars, public transit, etc.).

“I understand why both Lyft and Uber have to relabel themselves as more than car service companies. Big market stories generally yield higher valuation and pricing than small market stories!” he wrote.

Big Numbers Intimidate

Damodaran adds that while Uber shows gross billings, net revenues, riders and rides all increasing strongly between 2016 and 2018, Uber is still clearly a money loser, and some negative data points remain hidden in the numbers. For example, he notes that Uber’s cost of acquiring new users has been increasing, suggesting a maturation of the ride sharing market, or heightened competition for picking up passengers.

As for valuing Uber, the NYU professor says it’s a much more complicated task than valuing Lyft, given Uber has businesses outside of ride sharing, including its food delivery service Uber Eats and other smaller bets like Uber Freight. Also unlike Lyft, Uber has attempted to expand into markets outside of the U.S. and Canada, “though reality has put a cramp on some of its expansion plans,” wrote Damodaran.

The analyst’s initial top down assessment of Uber valued its operating assets at $44.4 billion, with the addition of Didi, Grab, and Yandex Taxi upping the value to $55.3 billion. Including Uber’s cash balance on hand, as well as the IPO proceeds that will remain in the firm (rumored at $9 billion), and before subtracting debt, Damodaran arrived at an equity value of $61.7 billion. While the share count is “still hazy,” he arrived at a value per share of roughly $54.

However, given the uncertainty about Uber’s total accessible market, Damodaran is more confident in his user-based valuation of Uber, and yielded a total value of $58.6 billion for Uber’s equity, translating into a share price of $51.

Looking Ahead

Damodaran’s warning extends beyond Uber, serving as a bearish signal for investors eager to bet on newly public companies such as Lyft Inc. (LYFT), Zoom Technologies Inc. (ZOOM) and Pinterest Inc. (PINS).

“All four are richly priced,” said the NYU professor in a recent interview with CNBC’s “Squawk on the Street.” “I’m a little scared of Uber at $100 billion. I think both Lyft and Uber are struggling with a way to convert revenue growth into profits. So you are paying $100 billion for a company that still doesn’t have a viable business model. That’s scary.” He gave Pinterest a $14 billion valuation, compared to its $14.2 billion market cap, a $16 billion valuation for Lyft, below its $17 billion market cap, and $7 billion for Zoom, sharply lower than its $16.2 billion market cap.

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