In June 2014, I tried to value Uber and arrived at an estimated value for the firm of $6 billion, an impressive number for a young firm, but well below the VC estimates of value of $17-$18 billion at the time of my post. Much of the reaction was predictable, with readers whose priors were confirmed by my assessment of value liking it and those whose priors were different disagreeing,and sometimes vehemently. Disagreement and debate don't bother me in the least, since they can only advance the valuation narrative, but I do think that putting my narrative and valuation front and center undercut my objective in two ways. First, it made for passive analysis, where you could pick and choose which one of my valuation inputs you agreed with and which ones that you found erroneous, justifying your prior biases. Second, some who disagreed took the easy way out, arguing that it was my use of an intrinsic value (DCF) model that had led me down the wrong path, and that it was therefore unfixable.
Now that Uber is in the news again, with value estimates of $40 billion and higher floating around, I decided to revisit the valuation, but from a different angle. Rather than presenting my valuation, I want to open the process up and I would like to invite you along for the journey. Like a book or movie where you get to write not just the ending but the entire story, I will provide the architecture and you can build your own valuation story (and value) for Uber. The good news is that this valuation will reflect your views (not mine) on Uber. The bad news is that if you don't like the value, you cannot blame me.
When narrative drives value
While my original valuation of Uber was all about the numbers, I followed it up with a post where I argued that, if you disagreed with my value, it was not because you had a problem with my estimates (of growth or risk) but because you were taking issue with my narrative. Underlying my original valuation was a story that I was telling about Uber as an urban cab/limo service company that would continue to attract new users into the market, while maintaining its high profit margins. In response to a post by Bill Gurley, venture capitalist investor (and director) in Uber, where I was accused of missing the story by a mile, I conceded that I knew far less than he did about the company and that his narrative for the company –Â Uber as a car-service for the masses with global networking benefits –Â would lead to a much higher value for the company.
While that may sound abstract, the best way to see the link between story telling and number crunching is to take Uber on the valuation process, with you making your judgments at each step of the way. As you make this journey, a few (gentle) reminders of issues that you will face along the way:
- This is your valuation: Contrary to what you might have been taught in your valuation classes, valuations are not and should never be just about the numbers. To the extent that you will be making choices on these number, this will be your estimate of valuation, reflecting not only what you know about the company (and its products, management, etc.) but also your personal biases (whether you like the company or not).
- You are almost certainly wrong: Lest you view this is an insult, so is my assessment of value and so are the VC’s valuations. It is not because we don't understand valuation or have not done our homework; it is because we are trying to play God and forecast the future.
- You should be open to revisiting it: Following up on the last proposition, it stands to reason that the choices you make in valuing Uber today will not be the choices that you will make tomorrow or a week from now. Keep the door open for changes not just at the margins but in your central narrative.
- Be willing to act on it: There is no point to valuing companies, if you are not willing to act on your valuations. With Uber, it is true that you and I are restricted in what we can do, since the company is still private. However, it is also clear that the explosive growth in the estimated value of the company sets it on a path to being public (sooner rather than later), at which point our valuations will become actionable.
Setting the stage
The first step in valuation is assessing where the company is right now and we start off at a disadvantage, because it is amazing how little we know about the operating details of a company that is in the news as much as Uber. According to the company's website, it operates in 51 countries and in about 230 cities on six continents, and it has also expanded its product offerings, both within the car service market (with U4B, directed at businesses and UberPool, allowing for car pooling)and in new markets (with UberRUSH, its delivery service in New York City).
continue reading: http://aswathdamodaran.blogspot.ca/2014/12/up-up-and-away-crowd-valuation-of-uber.html
