Uber Gets Uber-High Valuation

Is $17 billion for a commoditized service too much?
By Antonio Perez
Antonio Perez
Antonio Perez
June 9, 2014 Updated: June 9, 2014

Ride-sharing company Uber Technologies Inc. is the latest technology startup gaining a sky-high valuation from frothy investors.

Last Friday, Uber announced that it closed its latest round of financing, valuing the San Francisco-based company at a pre-money worth of $17 billion. A consortium of investors, led by Fidelity Investments, contributed $1.2 billion to the 4-year-old startup.

According to Bloomberg, the $17 billion valuation is a record for any technology startup in a private placement round, edging other hot startups such as Dropbox and AirBNB. The latest valuation also makes Uber CEO and co-founder Travis Kalanick a billionaire.

Disruptive Technology

Uber allows customers to order taxis and private cars via a smartphone application (app). The app gives customers the name and photo of the driver, and tracks the driver’s location to estimate arrival time.

The company counts professional drivers and amateur drivers among its ranks. So far, customers have raved about its ease of use and convenience.

It’s seriously disrupting—pardon the cliché—the taxi and limousine industry, using technology to displace physical dispatchers.

In turn, Uber customers get lower prices, and Uber drivers get a bigger slice of the fare. It’s a win-win situation.

Excessive Valuation?

The technology firm doesn’t disclose its financial results, so it’s difficult to estimate an earnings multiple based on the valuation.

Nonetheless, Uber’s $17 billion value is unprecedented. The company’s assumed worth equals that of leading global car rental firms Hertz and Avis Budget—combined. Hertz and Avis Budget also have combined annual global revenues of $18.8 billion, which dwarfs Uber’s, estimated to be in the hundreds of millions of dollars per year.

Uber, at its core, is a taxi dispatcher, albeit one without actual people answering phone calls. It doesn’t own any cars, and doesn’t count any drivers as employees. Its only assets are the smartphones it hands to drivers, and its smartphone app, an intellectual property.

But that’s the risk. Uber is selling a service commodity—a taxi ride. Its drivers aren’t employees and its customers aren’t married to it. Unlike Apple, which binds its customers to its hardware and software ecosystem, with a taxi ride there is no loyalty incentive. It’s a means to get from point A to point B.

When another service comes along that offers lower prices, customers will take it. When another service comes along that offers its drivers a higher cut of the fare, drivers will take it. In fact, many current Uber drivers already drive for other companies, such as its competitors Lyft and Sidecar, concurrently.

Uber is probably the most international taxi service in the world. It currently operates in 128 cities in 37 countries. But in the taxi business, geographical scale counts for little. Few people take a taxi from New York to Los Angeles (a la the 2011 indie film “Take Me Home”). Except for marketing, very little is gained from having an international presence—the main reason most taxi companies are local or regional.

But Kalanick has his sights set far beyond taxi transportation. According to the company, it could become a lifestyle and a vision of the future.

“If you can make it economical for people to get out of their cars or sell their cars, and turn transportation into a service, it’s a pretty big deal,” Kalanick said in a recent statement.

That would be a big deal. But it’s far from today’s reality—a recent Uber ride from Brooklyn, New York to the Bronx cost $150. That won’t make too many people rush to sell their cars.

Maybe one day, the pattern will change. But today, $17 billion is just too uber-high.

Antonio Perez
Antonio Perez