Valuation guru Aswath Damodaran says Uber’s $17 valuation is almost entirely driven by the “narrative” from a small set of investors in its latest funding round and should more likely be around $6 billion.
That number is certainly nothing to sniff about since a $6 billion valuation would put Uber — which doesn’t own any cars or have drivers as employees — on par with Avis Budget Group’s $6 billion market cap, but far below Hertz’s $11.8 billion. And it’s nowhere near $17 billion.
In a blog post, Damodaran, professor of finance at the Stern School of Business at New York University and a widely quoted author and analyst, bases his $5.89 billion valuation of Uber on leaked documents last year and an assumed $1.5 billion in gross receipts annually and $300 million in revenue.
Damodaran pegs the global taxi market at $100 billion, and that doesn’t count markets such as logistics that Uber talks about entering, but Uber has not proven these ambitions are realistic.
He generously estimates that Uber could eventually secure 10% of the global taxi market, and would be able to keep around 20% of the $1.5 billion in global receipts that it generates.
Damodaran has a lot of positive things to say about Uber.
“On the risk of failure, Uber has passed its most critical tests,” Damodaran says in his blog post. “It has a product/service that is generating revenues, has relatively little debt or fixed commitments and most importantly, it has access to capital.”
“In fact, the $1.2 billion in cash that it will raise in its latest round of capital should provide it with enough of a cash cushion to survive leaner times, at least in the near term. As a result, I will assume that there is only a 10% chance of failure in Uber and that the company’s liquidation value will be zero.”
In the blog post and in an interview on CNBC’s Squawk Box [embedded below], Damodaran argues that the $17 billion valuation is “almost entirely driven” by a limited set of investors who came in on Uber’s latest funding round.
“The numbers seem to indicate that Uber is being overpriced by investors who have valued it at $17 billion,” Damodaran writes in the blog post. “Since these investors are presumably sophisticated players, how would I explain their pricing? I will not try, since I did not pay the price, but it is worth remembering that even smart investors can collectively make big mistakes, especially if they lose perspective.”
In the CNBC interview, Damodaran says even under the most optimistic assumptions, Uber might be valued at $10 or $12 billion — but certainly not $17 billion.
Damodaran says the over-optimistic valuation assumes that local legislators will rewrite laws to enable Uber to operate because otherwise Uber would have big expenses in each city to try to spur regulatory reform.
“It’s a company driven almost entirely by the narrative right now,” Damodaran says.
Here’s the CNBC interview: