Uber $3 billion, but how much uber?

Early this month, taxi hailing app Uber completed its latest round of funding and was said to have a valuation of $17 billion. Following that news, New York Times business columnist Andrew Sorkin suggested that the $17 billion figure might be too low, that Uber could be worth more. Sorkin's take can be summarized:

Think about the basic math. There are a lot of numbers floating around about the global revenue for taxis, but here are the basics: In the United States, the taxi business generates $11 billion annually, according to IBISWorld.

In big cities like New York and London, The Financial Times reports that the average person spends $238 a year on taxis. If you extrapolate that Uber could one day control a quarter of the current global taxi market, the investment would turn out to be a home run.

The business is currently in 128 cities in 37 countries and says it is doubling its revenue every six months. (TechCrunch reported Uber’s revenue last year was $213 million on more than $1 billion of bookings; Uber takes a 20 percent cut of all driver’s receipts.)
If Uber were to take just half of the taxi market in the United States — and nowhere else — it would generate more than $1 billion in revenue a year.

The problem with this math that that Uber only gets something like 20% of the fares of the rides that it arranges. So even if Uber arranged a quarter of all the taxi rides in the U.S. -- which is a huge 'if'-- it would get 20% of 25%, or 5%. If the taxi market in the U.S. if $11 billion, Uber's share of that gross would be $550 million. No one believes that Uber grosses this much now-- Techcrunch says the revenue is less than half that-- but it might in the not-too-distant future. Whether it makes a profit now, or is likely to see any profit soon, is anyone's guess. 

Still, a half a billion in gross revenue is quite a bit for a four-year-old company, and Uber is international. But there are also many other Uber-like companies, some big, like Hailo. I have heard that some of the the car services, like Carmel, have their own app. So the technology part seems ubiquitous and not proprietary. Thus a 25% share would seem hard to maintain in an industry with so many small companies, widely dispersed. 

Writing today on Nate Silver's fivethirtyeight.com, Aswath Damodaran, a finance professor at New York University’s Stern School of Business, argues that Uber is actually worth something like $5.9 billion, which is still nearly double what valued at before its latest round of financing. Of course, the "correct" valuation varies wildly depending on what one assumes to be the future size of the taxi market and Uber's share of that market.

Damodaran is skeptical of Uber, or any taxi company's ability to obtain a large share of such a disintegrated market:

The bad news is that the market will be tough to dominate. Unlike technology companies in other businesses, like Google, Facebook and eBay, the network effect and winner-take-all benefits are limited. Having a global network of tens of thousands of cabs doesn’t make a difference to a customer looking for a cab in New York City. That, along with the regulatory restrictions protecting the status quo and the competition Uber faces from Lyft, Hailo and others, lead me to estimate a market share of 10 percent.

Increased competition has already forced Uber to cut its take of gross receipts in some cities. My instincts tell me that Uber’s slice will decrease over time, but I’m going to make the optimistic assumption that the company will find a way to differentiate itself and continue to claim 20 percent of gross receipts.

But even if Uber does get a 20% share of a global $100 billion market, Damodoran doesn't think the valuation makes sense.

The market would have to be three times my estimate — about $300 billion — or Uber’s market share would have to be more than double my base case estimate — more than 20 percent — to justify a $17 billion valuation. The former may hold if you see Uber’s market more expansively than I do, and the latter may come to fruition if you believe Uber will have an easier time overcoming the competition and the regulatory constraints on its growth.

Of course, the money backing Uber is said to be smart money-- Fidelity Investments, BlackRock, Kleiner Perkins Caufield & Byers, Google Ventures, Menlo Ventures and Wellington Management and Summit Partners. Everyone assumes that they must know something that makes their investment make sense. And maybe they do. But even the most successful venture capitalists lose more often than they win. The profit comes from winning big when they do win. Thus Damodoran says, "I wouldn’t be that quick to conclude that smart investors always make smart investment judgments."

A few have made small and even large fortunes in the taxi business, usually after a generation or two of accumulating licenses. But there is no taxi billionaire. It remains to be seen whether Uber's backers become the first.

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In an addendum to the Uber valuation story, the Wall Street Journal today ran an article suggesting a way for investors to profit from Uber even if they are not venture capitalists who have access to Uber shares.  The Journal's idea: Sell Medallion Financial short:

Medallion is a specialty finance company that services loans used to purchase city-issued “medallions” that are required to operate yellow cabs. Shares of the company have slumped more than 18% this year and on Thursday fell to the lowest level since December 2012. The company sports a market capitalization of about $300 million, according to FactSet.

After peaking at $17.85 in November, Medallion shares lost about 1/3 of their value, a decline that has coincided with a rush of short sellers betting that the stock will keep falling.

The Journal figures that shares in the company that lends on medallions is indicative of the decline of the traditional taxi business as it loses out to Uber and its ilk.