On Friday, I read a headline that said that, based on a recent round of financing in which $1 billion was raised, the equity capitalization of Uber is about $51 billion. I thought that was staggering, since I knew that Uber was only a few years old and, well, that’s a lotta value. Its investors included Microsoft and the Times Internet Group of India per the Wall Street Journal.
Uber’s Growth in Value
But first, Uber is only the second venture-backed firm in history to reach a $50 billion valuation. The first was Facebook, and it took seven years for that to occur. Uber reached that milestone in only five years.
Looking at the chart, it appears that Uber achieved about a $2-$3 billion equity valuation in the beginning of its third year in business. In the last year, its valuation, based on subsequent financing rounds has skyrocketed from there to $51 billion. According to the chart, all of that appreciation has occurred in financings during the last year.
Facebook achieved that valuation a year before its IPO in May 2012, but it was already a $3 billion sales business that was profitable at the time. I’m guessing that profitability will elude Uber for some time. But that’s just a guess.
The largest mid-cap company in the Duff & Phelps 2014 Valuation Handbook had an equity market capitalization of $9.2 billion. Uber’s recent valuation places it squarely in the large capitalization sphere.
Comparisons with FedEx
Now to FedEx, certainly a large company and a large capitalization stock, with an equity market cap of $48.4 billion as of July 31, 2015.
Sometimes a little perspective is helpful to understand a phenomonon — or not to understand it. Consider the following table:
FedEx has been in business since 1971 and has changed the world by moving information, mostly at first, and more recently, stuff. Revenues last fiscal year were $47.5 billion. The market is pricing the shares at $1.02 per dollar of sales based on FedEx’s $48.4 billion market cap.
Uber’s $51 billion valuation prices expected revenues for the coming year of $2 billion at $25.50 per dollar of expected revenue. That takes my breath away!
I made a couple of additional comparisons. FedEx has $37 billion in total assets, including $21 billion of net fixed assets, including all those planes and trucks that move stuff, not people. Uber’s total assets are unknown, but are likely less than $5 billion, which, according to the Wall Street Journal article, has raised a total of about $5 billion, including some $1.6 billion in convertible debt. Total assets are probably less than the total raised, because no one has said anything about Uber being profitable to date.
What Do I Understand from this Perspective?
Maybe, what don’t I understand from this short perspective on Uber and FedEx is the appropriate header. We do know the following:
- Some sophisticated and well-heeled investors have put $5 billion or so into Uber, most recently at a valuation of $51 billion. If things go down in flames or Uber simply turns out to be a decent company rather than a long-term phenomenon, they will be fine.
- I wonder how much of future revenues and earnings can be discounted to the present to justify this valuation? The Uber projections would have to be pretty unbelievable and risky. The $51 billion valuation bakes in enormous growth in revenues and earnings.
- But Amazon continues to justify a $250 billion market capitalization having reported a total net earnings of only $625 million in the last four fiscal years. Apparently, others understand things that I don’t.
- I wonder if Fred Smith and his brain trust at FedEx, and they have quite a brain trust, are taking note? They have to be noticing this rapid growth in Uber’s market capitalization. Uber has certainly taken note of the potential in moving stuff.
- Others are undoubtedly taking note. My son, Zeno Mercer, who lives in New York City, tells me he can call Amazon and have stuff delivered to his place within a very short period of time. On-demand services are cropping up everywhere.
What I do know is that ultimately, the value of businesses is about expected earnings (or cash flow), the growth in those earnings, and the risks associated with achieving those cash flows. I’m wondering if the smart money investors who are investing in Uber are overlooking a bit of risk? The next step, where these investors can achieve a return, is an IPO for Uber, which has already been talked about.
What kind of valuation will that bring? I have no idea. But I think I’ll be watching. So, obviously, will a lot of others. We’ll see.
And for Some Light Reading
In the meantime, for more down-to earth reading, try my Ownership Transition Bundle ($35), consisting of my two most recent books, Unlocking Private Company Wealth ($25) and Buy-Sell Agreements for Closely Held and Family Business Owners ($25). It is a bargain relative to the single price of the two books.
So, be well until next time!