CECG on the Business Model and Valuation of Uber... I am Chief Economist of CECG, Dr. Carlos Chiu (the leftest photo). Today, I am going to present you with the business model and valuation of Uber. Whats the latest valuation of Uber, US$ 5.9B or US$ 182B? This difference is based on a conservative estimation (the 3rd exhibit from the left) and the latest round VC investments implied market capitalization (the 4th exhibit, respectively. Uber plays the role of matchmaker, matching a driver/car with a customer looking for a ride and taking a slice of the fare for providing the service. Its value comes from the screening that it does of the drivers/cars, its pricing/payment system, and its convenience. The 5th exhibit from the left captures the steps in the Uber business model, with comments on what it is that Uber offers at each stage and whether that offering is unique. In a more concise way, Ubers business model can be put in the following way (the 6th exhibit). After entering Hong Kong on July, UberTaxi service have grown in the second fastest way in the world, just after USA. Nevertheless, the competition against local taxi services providers is just tensified. Thus, HK-based UberTaxi can only compete on the quality dimension, not the cost side. A conservative valuation (US$ 5.9) of Über is shown as follows. The taxi and limo market currently is dominated by small, local players and is regulated in most cities. The cities restrict entry into the market and in return, they regulate the prices that cabs can charge their customers (more effectively in some cities than others). While Uber has only a minuscule slice of the overall revenues currently, the market share that it can aspire to get will depend upon the following factors: 1.The efficiency of the status quo or producers/consumers: Under the existing system, cab drivers get a relatively small share of the taxi revenue pie (5-10%) and customers in many cities (which are under served) either find themselves without taxis, have to wait a long time or have to pay outlandishly high prices (as attested by the carfare from Narita airport in Tokyo into the city). Thus, both cab drivers and customers may be open to a different way of doing business. 2.Competition: Uber uses technology to deliver car services to customers, but it is not the only company that is doing so. Other competitors like Lyft aad Hailo also provide similar services and they have their own deep pocketed investors. As I said up front, I am not familiar enough with these different services to have any preferences, but this article compares the experiences of Wall Street Journal reporters with different services and does not find a dominant one. 3.Regulation: The cities where Uber and its competitors are trying to generate their revenues are regulated at the moment, and the the existing players (taxi owners, taxi drivers in traditional companies, city regulators) will make it difficult for these new players to compete. These difficulties will affect the speed with which these services are able to penetrate these markets and increase the costs of operating in the business. Finally, the valuation of $5.9 B (the 7th exhibit from the left) is a value for the operating assets and any existing cash would have to be added back and debt netted out. Given that neither debt nor cash is likely to be a large number right now, it is directly comparable to the value that venture capital investors are attaching to the company now.
Posted on: Sun, 17 Aug 2014 04:31:28 +0000
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