Analysts don't know what to make of Uber's $100 billion valuation

Key Points
  • Analysts got their first look into Uber's financials on Thursday, but they still are unsure whether they justify a $100 billion valuation.
  • Uber posted an adjusted EBITDA loss of $1.85 billion in 2018 and showed slowing revenue growth.
  • Lyft's debut on the public market has been less than stellar, hitting a new low on Friday.
The chief executive of Uber Technologies, Dara Khosrowshahi.
Adriano Machado | Reuters

After getting a first look at Uber's financials on Thursday, analysts are divided when it comes to Uber's expected IPO valuation of as much as $100 billion. But the one thing they can agree on is that no one really has a surefire way to assess it.

Asked whether the $90 billion to $100 billion valuation at which Uber is expected to price its initial public offering, Wedbush Securities analyst Dan Ives said, "I think it's all in the eye of the beholder and I think its what investors are willing to pay."

Without previous earnings reports to serve as a benchmark or profit to assess, Wireless Fund Lead Portfolio Manager Paul Meeks said the best way to understand the valuation is through its sales numbers. Pricing the stock at six-times sales, which he said would be "a pretty healthy valuation even for an established tech company," Uber's value should really be about $73 billion. Similarly, he estimated Lyft should be priced at $50 per share with a valuation of $14 billion.

"I don't mind when a company, when they go public, if they have losses," Meeks said. But the fact that Uber's losses continues to report substantial losses is what gives him pause. Uber reported an adjusted EBITDA loss of $1.85 billion in 2018 and showed slowing revenue growth, which has raised some concerns for investors and analysts as they watch Lyft's stock sink from its IPO price of $72 to $59.90 as of Friday's close.

Fear of missing out

Ives and Meeks both related Uber's IPO to another famous tech offering that debuted with steep losses: Amazon's.

For Ives, the speculation around Uber's valuation represents "the fear of missing out on the next Amazon."

"That's a huge fear," Ives said. "That was a seminal event in terms of investing in tech stocks in the last 20 years."

While Ives said Uber represents the first stock in the past few years that investors view as having the potential of Amazon-level growth, comparing the two is still a fool's errand.

"That path to profitability is fuzzy. And also comparing Uber to Amazon, it's like comparing a great high school basketball player to LeBron James," Ives said.

For Meeks, the comparison seems to serve as more of a warning for Uber. He noted that offering Amazon Web Services, Amazon's cloud product, was the turning point for the stock and now is key to its profitability. As of its Q4 2018, AWS represented 58% of Amazon's overall operating income.

But Meeks sees less opportunity in Uber's bets outside of its core ridesharing business, like Uber Eats and Uber Freight.

"They'll try to leverage their platform into other things, but the other things will be transport because that's their gig and the transport business has a lot of established players," Meeks said. Eventually, he said, "all freight will be transported by Amazon."

Justifying $100 billion

There are some ways Uber's valuation could be justified, according to the analysts interviewed for this article, but right now, they remain difficult to predict.

DA Davidson Senior Research Analyst Tom White said in order to justify at $100 billion valuation, he is looking for three things. First, he'd want to see evidence that Uber could significantly improve its revenue growth. Second, he'd look for signs that pressure on Uber's margins will not last too long. And third, he'd try to understand if investors are willing to pay a premium for Uber compared to Lyft.

Outside of its ridesharing business, where it directly competes with Lyft, Uber has a chance to differentiate itself if one of its other businesses take off. While Lyft has expanded more slowly, available in just two countries and focused mainly on ridesharing and other mobility areas, Uber has taken a different approach, expanding into 63 countries and taking on other projects. That could ultimately bode well for Uber.

"I think a huge focus is Freight and Eats. Those are key ingredients in the recipe for success," Ives said. "I think the one thing that stood out in the S-1 is just how large the revenue and the opportunity were there relative to what investors were expecting." Uber Eats, for example, grew gross bookings from $1.1 billion in Q4 2017 to $2.6 billion in Q4 2018.

Another road to greater profitability is through automation for its ridesharing business. Currently, Uber only gets a cut of each ride it offers since drivers take a share as well. On top of that, it has to offer steep incentives to both drivers and customers to get them to use their service in a competitive market, something Uber even listed as a risk factor for its business. But if the company some day can cut out the driver and use self-driving cars instead, its road to profitability becomes much clearer.

"If autonomous driving someday becomes a thing, then that could make that business nicely profitable," Meeks said. But he said Uber can't lean heavily on that now since "I don't see it as a mainstream thing for many years."

With little to go off of, investors are likely already looking to Lyft's performance as Uber readies its roadshow.

"For better or worse, these two are sort of tied at the hip," Meeks said.

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Watch: Here's everything you need to know about the 300 page Uber IPO filing

Here's everything you need to know about the 300 page Uber IPO filing
Here's everything you need to know about the 300 page Uber IPO filing