Uber, the latest darling of the tech world, recently reached the $17 billion dollar mark in valuation –comparable to the combined value of Avis (NASDAQ:CAR) and Hertz (NYSE:HTZ).
Some analysts are using this as the benchmark that the next tech bubble has arrived, citing other correlating factors to the 2000 bubble collapse such as the steady climb of the NASDAQ composite. Others claim that Uber is properly valued, and may even be a bargain.
Michael Hiltzik of the L.A.Times points out that to reach $17 billion, you have to assume worldwide demand for Uber’s business model equivalent to US demand, a 50% worldwide market penetration, and a 10% increase in current profit margin. Hiltzik suggests the likelihood of this is slim and therefore Uber is vastly overvalued.
Not everyone agrees. Andrew Ross Sorkin writes in the New York Times that Uber's convenience is literally expanding the market to people who have seldom, if ever, used taxis or limos before. Shervin Pishevar, former managing director at Menlo Ventures – and an investor in Uber – suggests Uber’s real value lies in the “the digital mesh” it is building, “a grid that goes over the cities. Once you have that grid running, in everyone’s pockets, there is a lot of potential for what you can build as a platform.”
Thus, while Uber is driving peer-to-peer transportation today, it could form the basis for other distribution and logistics networks in the future. Pundits like Sorkin and investors like Pishevar are saying, in essence, that the intrinsic value of Uber is in the infrastructure, and the transportation component is proving that the infrastructure works.
Uber faces threats from potential competitors, as they have a fungible offering – although their greatest threat is probably regulations compromising their business model. Every city poses a different regulatory challenge.
Regardless of whether Uber is properly valued, what other evidence exists of a growing tech bubble? Talk of an impending bubble always sparks a good debate, and today is no different in that regard.
Wary folks include David Einhorn, the founder/president of Greenlight Capital. He suggested in an April letter to stockholders that we were already in a tech bubble, citing "rejection of conventional valuation methods" and oversized IPO's based more on buzzwords attracting venture capital than on rational analysis. While the recent Uber valuation had not taken place yet, Einhorn would surely look at Uber as proof of his point.
Meanwhile, the chief domestic equity strategist with Goldman Sachs, David Kostin, made a strong case in April that broader circumstances are different from the 2000 tech bubble, and those arguments still appear to be valid. His context was the sell-off earlier in the year that drew comparisons to the popping of the 2002 bubble – but the argument is valid with respect to the presence of a bubble at all.
Kostin claimed that the overall market valuation is not as far off as it seems, with a forward P/E ratio of around 16X, compared to the 25X value prior to the popping of the 2000 bubble. Further, price/book ratios are less than half of the 2000 peak.
Kostin cited other differences like relatively lower growth expectations, far lower interest rates, fewer IPOs overall, and lower 3-year and 5-year trailing returns compared to 2000. However, his most compelling argument is the relative market balance. For example, the tech component of the S&P 500 currently chips in 19% of both the earnings and the market valuation. In 2000, it contributed only 14% of the earnings while composing one-third of the valuation.
It is difficult to see how Uber can navigate the potential threats from regulation and competitors to carve out enough of a market to retain its value through transportation services alone. It may be worth $17 billion as an overall platform, but it must expand into other logistics applications quickly to avoid being outflanked by potential competitors in those fields.
To us, Uber seems more likely to meet the fate of Groupon, which is still viable but currently worth a little more than 25% of its starting value of $16.6 billion.
However, looking at the market as a whole, Kostin's argument seems valid. If we are in a bubble, it seems to be in the early stages and not affecting the entire market. Uber may be an extreme case, but it is not representative of overall irrationality.
While the NASDAQ is continuing its march forward, it will take it until sometime in 2015 to regain its all-time-high of 5,048.62. Should NASDAQ increases continue and collective market overvaluation begins to negate Kostin's arguments regarding P/E ratios and market balance, then it will be time for serious concern around the year's end.
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