Morning Markets: A new report brings a fresh, potential Uber IPO valuation. Let’s peek at it.
The Uber IPO may be paring itself down ahead of actually happening, according to a new report from The Information. The piece states that the popular ridehailing company may “fetch a valuation of a little less than $90 billion,” a figure “based partly” on figures that Uber provided in early 2018.
The Information goes on to report that Uber’s projections expected its revenue to reach $14.2 billion (net) in 2019, and its EBITDA (earnings before interest, taxes, depreciation, and amortization) to come in at only negative $500 million this year.
The market doesn’t yet know how Uber performed in the fourth quarter of 2018, but we do know how it tallied in the first three quarters of 2018, so let’s see how those numbers could come to be. And then let’s think about how they stack up to that $90 billion figure.
Uber is a quickly growing business. So the further we look into its past, the further from reality we find ourselves. That in mind, let’s take a look at Uber’s most recent financial data that we have access to, namely its figures from the third quarter of 2018. Afterward, we’ll compare our conclusions with the company’s own expectations and valuation.
Leaning on our prior coverage of Uber’s results, the company saw gross bookings (value of services facilitated) of $12.7 billion (+37 percent, year-over-year), net revenue (Uber’s portion of gross bookings) of $2.95 billion (+38 percent, year-over-year), an adjusted EBITDA loss of $527 million (-13 percent, year-over-year)1, and a net loss inclusive of all costs (GAAP) of $1.07 billion (-27 percent, year-over-year).
What to make of all that? We can quickly get some rough full-year projections if we want. All we need to do is multiply each quarterly result by four to generate a yearly figure, and then adjust up by the same percentages that Uber managed in the third quarter. That will give us a super loose projection of Uber in Q3’2019 if it kept pace.
This is just for kicks, mind. If we annualized Uber’s Q3 2018 and presume it grows by the same percentage that it did in the known quarter, the firm kicks out $16.3 billion in net revenue and a $1.83 billion EBITDA deficit. These are not real projections. They merely tell us that if Uber kept on its third-quarter path, it would wind up with more revenue than expected but with a far steeper deficit.
Getting back on my soapbox, there is a natural tension between growth and profit. The faster a company grows, often, the more it sacrifices profitability—at least in the short term. Many companies run deficits in their youth to reach scale more quickly. Once at scale, they can focus on profits.
Uber is not a young company, and its famous pace of growth is now matched with infamous losses. But as we can see in our projections, Uber is expecting a revenue growth decrease and a profitability increase from its prior results.
Sticking our neck out another inch, Uber’s Q3’2018 adjusted EBITDA was about half of its net loss. Perhaps if Uber expects around $500 million in 2019 negative EBIDTA, as reported by The Information, it will lose about a billion in the year, all told. A billion in GAAP losses against $14 billion or so in net revenue is probably fine for Uber; however, as we have already determined that Uber is going to trade growth for profitability, those nagging negative profits will be a drag on the firm.
It’s always better to make money. We’ll come back to that shortly.
Summarizing, if Uber kept its Q3 2018 results going in the future, it would surpass revenue expectations but lose a mountain of money in the process. As such, comparing its prior results and growth rates to now-known future financial expectations, we can see that Uber is likely willing to trade growth for profitability. Now, let’s square all of that back to the $90 billion figure.
The Information did what we normally do here at Crunchbase News, namely run revenue multiples for Uber, and compare it to market comps. I can’t improve on what it came up with, so here’s the riff, with GrubHub as the selected comparison (both are marketplaces, with similar cuts of the pie, and growth): “Grubhub [sic] is currently trading at around five times its projected 2019 revenue. Applying the same multiple to Uber suggests it would have an enterprise value of about $71 billion.”
That feels directionally correct, but not fully fair. Namely, GrubHub is profitable and Uber is not. Uber does have, as The Information points out, investments into other companies like Didi, but I wonder if that is enough to make up the difference between Uber’s money-losing business and GrubHub’s profits.
In GrubHub’s Q3 2018, the company generated $60.1 million of adjusted EBITDA off of $247.2 million in revenue. That’s an adjusted EBITDA margin of around 24.3 percent. Uber’s expected -$500 million in adjusted EBITDA in 2019 off of $14.2 billion in net revenue is a -3.5 percent rate. That’s far worse.
So, we’d probably want to tune Uber’s multiples down off of what GrubHub enjoys, pruning Uber’s valuation down under the $70 billion mark. And the further that figure goes, the harder it is for a cut of Didi (which is struggling at the moment, as we all know), to make up the gap to $90 billion.
All things told, based on what we know, what has leaked, and what we can extrapolate, $90 billion still feels steep—especially after December’s stock market slump..
Adjusted EBITDA is a super relaxed metric, keep in mind. It measures a fraction of unprofitability.↩