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Morningstar | Potential Underwriters See Uber as a $120 Billion Company, Compared With Our Valuation of the Firm

According to The Wall Street Journal, Uber may go public in early 2019 and potential IPO underwriters may be valuing Uber at $120 billion, only slightly above our July 19 report where we valued Uber at an estimated $110 billion market capitalization.

We found a couple of data points within the Journal article that were somewhat aligned with our prior analysis. While the underwriters’ valuation is comparable with ours, we note that the Journal indicated that Uber's revenue is expected to be $10 billion-$11 billion in 2018, below our prior net revenue estimate of $12.4 billion. In our view, the shortfall from our estimate might not necessarily be due to lower demand, but perhaps due to Uber's gross billings take rate, as we had projected Uber’s 2018 gross billings take rate to be more comparable with 2017. We do expect some pressure to build on that take rate due to the firm’s more aggressive attempt to attract drivers, and if it must meet minimum wage requirements. While we have modeled a decline in take rates after 2018, we think they will remain in the 20%-30% range long-term.

In addition, the banks involved are valuing UberEats at $20 billion, representing around 3 times the $6 billion in gross revenue they expect the meal takeout and delivery service to generate this year. Assuming a gross revenue average growth rate of around 50% the next two years (as the UberEats business is in its early growth stage), such valuation of UberEats represents 2 times and 1.5 times 2019 and 2020 gross revenue, respectively, which we view as reasonable. We note that we expect a 29% 10-year CAGR in gross revenue for UberEats and only a 15% CAGR for Grubhub, which is the market leader in the U.S. Unlike UberEats, Grubhub is not pursuing international markets aggressively.

Overall, we think Uber's core business, the ride-sharing platform, warrants a narrow economic moat rating, as it has displayed moat sources such as network effects and intangible assets. We project that Uber's net revenue will grow at a 27% average annual pace over the next 10 years. We foresee Uber continuing to spend on expansion and research and development but think it will become profitable by 2022. The Wall Street Journal report states that Uber expects to be nonprofitable for at least three more years, consistent with our prior analysis.

We also think Uber may leverage its moaty ride-sharing business and tap into other growth opportunities. In addition to the meal takeout and delivery (UberEats), those opportunities include bike-sharing, freight brokerage, and ride-sharing via autonomous vehicles. In our view, autonomy is the most transformative technology set to affect the world of ride-sharing; we see powerful economic forces driving autonomous vehicle adoption in the ride-sharing industry, from which Uber may benefit. We note that risks remain, such as increased competition not only from Grubhub, but also from companies such as Lyft (which is also planning an IPO early next year), Alphabet (Waymo), General Motors, and Tesla. Further, legal issues, which gave Uber a tainted reputation under former CEO Travis Kalanick, persist, although we believe that under CEO Dara Khosrowshahi, Uber will see better days.

For more detail on Uber, please see our July 2018 report "Uber May Pick Up Investors, Along With Riders, in Its IPO."