05 Aug 2016

Deflating Uber

It seems that the shine has started to wear off of the “giant unicorns”, the largest non-public tech startups with valuations over $1 billion USD. To the point where people are starting to wonder how, exactly, they could short Uber, that unicorn-among-unicorns (perhaps an ‘ubercorn’?).

It’s almost as if people are waking up to the idea that a company that doesn’t own any meaningful capital assets and whose success depends on an easily-duplicated strategy and a mobile app, and whose most recent business innovation is to get into sub-prime vehicle leasing, might not be worth more than BMW, Ford, or General Motors.

That’s not to say that Uber, or ride-sharing generally, is doomed. But the $62.5 billion USD present valuation seems absurd, and there are a significant number of flaming hoops that the company has to successfully jump through in order for common-share investors to get paid out at that level.

The $62.5B number implicitly assumes not just that Uber will continue to be successful as an urban ride-sharing taxi alternative, but that it will be an agent of radical, transformational change in global personal transport. Specifically, it seems to require that the dominant (and admittedly inefficient) model of personal automobile ownership pioneered in the US in the 20th century will collapse, and be replaced with fleets of time-shared robotic cars. Nothing else short of that would result in the $60+ billion valuation.

Taking a bet on autonomous vehicles is one thing, but putting all your chips on the assumption that the public will suddenly abandon its love affair with cars and begin behaving like rational economic actors is quite another.

Reading between the lines, it would seem that Uber’s leadership probably agrees at some level, and that’s why they’re so reluctant to IPO. If they were to go public today, their market cap would probably not be nearly the $60B figure, and individual employees and early-round investors would essentially wiped out due to late-round funding terms. So they’ve chosen to delay the IPO as long as they can, perhaps in the hope that all the long-shot bets will pay off by then. It’s a big gamble.

Uber, by prohibiting secondary sales of its pre-IPO shares, essentially prohibits straightforward short positions, making it a “one-way bet”: you can bet that they’ll succeed, but you can’t bet that they’ll fail – all you can do is not play. Since I don’t take short positions as a rule this doesn’t bother me, but it does further suggest that their valuation is somewhat bogus, and they know it.

My guess is that Uber isn’t going anywhere, but there’s going to be some very serious retrenchment in both their ambitions and in their total valuation in the next few years. I wouldn’t go out of my way to achieve a short position against them, but the lengths to which investors are going to get a piece of their action seems like a classic irrationally-exuberant bubble market.

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