Last Friday, transportation network provider Uber announced that it raised an additional $1.2 billion of primary capital, raising its valuation to $17 billion. In just one year, Uber’s perceived value has quadrupled; furthermore, the company is a mere four years old. Now, Uber operates in 128 cities, in 37 countries, around the world and is worth more than rental car competitors Avis (CAR) and Hertz (HTZ). The company is growing at a phenomenal rate and investors are taking note. In fact, Uber is gathering capital investments at a rate similar to Facebook (FB). Likewise, Uber is also second to Facebook when comparing pre-IPO valuations (Facebook was valued at $50 billion by Goldman Sachs). Although Uber executives have not released any plans to go public, if the company is following Facebook's path, it is only a matter of time until Uber does so. With this possibility in mind, investors should understand Uber's fundamentals, along with its growth prospects.
The Uber Model
For those unfamiliar with the company, Uber is a mobile application-based transportation company that connects users with certified Uber drivers. One must simply download the application onto their mobile device, create an account, input their credit card information, and request a ride. By using its pre-existing location feature on the mobile device, Uber identifies your current location and summons the nearest driver. The application interface provides the user with live ETAs, estimated fare payments, car type, and name of the driver. Uber further simplifies this process by automatically billing your credit card on file, instead of forcing you to pay cash. If more than one rider is using the Uber application, it even provides them with the ability to split the cost. From the driver's perspective, the service is equally convenient. Uber drivers use their own cars for transportation, and sign into Uber's driver network at will. Thus, some Uber drivers work part-time, while others drive for Uber full-time.
How Uber Makes Money
Note: Uber is not yet a publicly traded company. The financial information I’ve gathered comes from a leaked financial dashboard published by Techcrunch.com. However, Techcrunch has verified the credibility of its source.
Uber acts as a middleman that facilitates transactions between drivers and riders. Uber’s revenues come from the 20% commission fee the company collects on every ride. According to the leaked financial dashboard from December 2013, it is estimated that Uber is generating over $1 billion in gross bookings per year. Thus, given its 20% fee, Uber may realistically produce $213 million in annual revenues (assuming the number of bookings remains constant). According to the December 2013 numbers, Uber receives approximately one million ride requests per week, and its drivers fulfill about 800,000. Furthermore, during the five-week period detailed in the leaked dashboard (10/14/2013 to 11/25/2013), there were nearly 400,000 new Uber users and the company's revenue grew 11%. I believe that the value and total number of bookings will continue to rise as Uber continues to expand; thus, I expect Uber’s yearly revenue will increase as well. Moreover, as Uber accepts more drivers, the company will also be able to improve its 80% ride-fulfillment percentage, further increasing its revenue.
First and foremost, Uber faces competition from the traditional taxicab industry. In many of the cities where Uber operates, taxicab drivers are subject to tight regulations that limit the number of taxis on the road, set prices, and provide rigid service conditions. As Uber rises in popularity among consumers, due to relatively lower prices and accessibility, the market demand for traditional taxicabs has fallen by as much as 40% in some of these cities. Around the United States, taxicab drivers are urging legislators to subject Uber drivers to a similar set of restrictions, so as to level the playing field. In some cases, taxicab drivers are even protesting the offices of Uber. Fortunately for Uber, it appears that state legislators are siding with the San Francisco start-up. Last Thursday, Colorado Governor John Hickenlooper signed into law the first ride-sharing legislation in the country. The legislation, titled SB125, embraces ride sharing and acknowledges it as a form of modern mainstream transportation. In addition to traditional taxicab drivers, Uber also faces competition from companies such as Lyft and Sidecar, which use similar application-based transportation networks. Both Lyft and Sidecar offer similar rates for both drivers and riders; however, Uber controls the largest portion of the market. Compared to the 128 cities in which Uber currently operates, Lyft operates in only 60, while Sidecar operates in a mere 8.
An Uber Future
Although Uber clearly dominates the “mobile-app transportation network,” a valuation of $17 billion indicates that investors believe the company will become much more efficient and profitable. Uber provided a glimpse into its potential as a logistics company with the recent introduction of UberRUSH. UberRUSH, which currently operates in Manhattan, is a service that dispatches bike couriers to deliver goods instead of people. Uber may simply be “testing the waters” of municipal logistics. However, I believe the company has the means to be a global delivery force. Firstly, the same location technology that Uber uses to match drivers with riders could be easily reemployed to track pickups and deliveries. In addition, Uber already has access to a massive pool of potential delivery drivers. If provided similar rates, Uber drivers will be equally likely to deliver packages instead of people. Furthermore, with its most recent valuation, the company also has the financial means to make Uber global logistics a reality. Whether or not Uber fully commits to the logistics market is still to be seen. Regardless, I believe that Uber is a company that will remain at the forefront of transportation innovation. If Uber ever conducts an IPO, the company is a sound investment decision.