Investors drooling over Uber

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There appears to be enough attraction for the investors in the company’s growth rate and profit margins

In what appears to be an increasing interest in the company’s valuation, Uber is once again raising money. The previous round was last summer when a $1.2 billion deal had left the company valuing at $18.2 billion (post-money) and as if this wasn’t a shocker itself, the new valuation is of course going to be higher than this one. This apparently brings a “a new tech bubble” confirmation as the observers have noted that this valuation is somewhat getting closer to insanity. But it appears that these observers haven’t fully taken into account the details of the valuation of the company.

Just like any other investors, the Uber investors too can be at the losing end. The investment might sound more reasonable than it actually appears if we take into considerations these two options. Firstly, the Uber investors are going to make a purchase of the preferred stock rather than the common stock and this is one point which most of the private market valuation experts miss out. In a preferred stock purchase, the downside of the investor is usually limited.

As compared to the common investors, the preferred investors are higher in the capital structure so they are safe in case of liquidity as they will get all their money back. This appears to be one of the cases where the preferred investors also get a guaranteed return and they get their money back even if the company sells for a much lower valuation than the one at which they invested.

The Uber investors are likely to lose money in the event that the company sells for a valuation of less than $1.2 billion which doesn’t seem likely as it is more than 90% below the $18.2 billion valuation of the deal. This can only happen in case something goes horribly wrong.

The second reason appears to be more important. The financial performance of the company quite easily justifies the $18.2 billion valuation of the previous round and of the current one. The shocker is yet to come as we have been hearing that Uber’s gross revenue is expected to hit a run rate of about $10 billion by the end of next year.

Only 20 percent of the gross revenue is taken by Uber and the rest is distributed to the drivers. This means that $10 billion of gross revenue would equate to $2 billion of net revenue. The growth rate of the company on the other hand is about 300% this year, and it is expected to be another 300% again next year. This again is a shocking escalation and there aren’t many companies who have been recorded to have reached such a growth rate.

And if Uber is on track for a run rate of $2 billion of net revenue by the end of next year, the $18 billion valuation from last summer would be about 10 times forward net revenue. 10 times revenue isn’t certainly a lower multiple but it doesn’t also constitute as a sky high one. This is particularly true for a company only has few costs other than software development, training, marketing, and lobbying. Uber hasn’t given us enough reason to think that it wouldn’t eventually have a profit margin of 20%, 30%, or even more. So for the investors, Uber seems like the perfectly stable company with that kind of a profit margin and growth rate.

source: businessinsider

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