User/Subscriber Economics: An Option Stance Of Uber's Value

In the calendar week since I posted my Uber valuation, I have got received many suggestions on what I should have got done differently inward the valuation, amongst many of you lot contention that I was beingness a over optimistic inward my forecasts of total market, marketplace part in addition to margin improvements in addition to some of you lot positing that I was also pessimistic. I don't claim to have got whatsoever certitude most these numbers but the spreadsheet that I used to value Uber is an opened upward one, in addition to you lot are welcome to convert your suggestions into valuation inputs in addition to brand the valuation your own. In exactly the lastly few days, though, I have got been watching an declaration unfold amidst people that I respect. most whether the ground for my depression valuation for Uber is that I am using a DCF model, amongst the critics making the instance that valuing a fellowship based upon its expected cash flows is an former economic scheme framework that volition non yield a reasonable approximate of value for novel economic scheme companies, driven less past times infrastructure investments in addition to returns on those investments, in addition to to a greater extent than past times user in addition to subscriber economics.  I have got long argued that DCF models are much to a greater extent than flexible than most people laissez passer on them credit for, in addition to that they tin live modified to reverberate other frameworks. So, rather than deflect the criticism, I volition assay to build a user based model to value Uber in addition to contrast amongst my conventional valuation.

Aggregated versus Disaggregated Valuation

If you lot are doing an intrinsic valuation, the regulation that the value of a concern is the introduce value of the expected cash flows from that business, amongst the discount charge per unit of measurement adjusted for risk, cannot live contested. That is truthful for whatsoever business, manufacturing or service, pocket-sized or large, former economic scheme or novel economy. Since that is what a discounted cash flow valuation is designed to do, I have got to believe that what critics detect objectionable inward my Uber DCF model is non amongst the model itself but inward how I estimated the cash flows for Uber, in addition to adjusted for risk. I followed the aggregated model for discounted cash flow valuation where I estimated the cash flows to Uber every bit a company, starting amongst its revenues in addition to working through the consolidated expenses in addition to total reinvestment each yr in addition to discounted these cash flows at a cost of upper-case alphabetic quality that I estimated for the entire company. Along the way, I had to brand assumptions most a total marketplace that Uber would driblet dead after, the marketplace part that I hold off the fellowship to arrive that marketplace in addition to the operating margins inward steady state. 

Disaggregated Valuation

Value is additive in addition to you lot tin value whatsoever fellowship on a disaggregated basis, breaking it downwards into dissimilar divisions/businesses, geographical areas or past times units:

• Business Units: In a total of the parts valuation (SOTP), you lot tin pause a multi-business fellowship into its private concern units in addition to value each unit of measurement separately.  I have got a newspaper where I depict the procedure of doing a SOTP valuation, using United Technologies, a conglomerate, every bit my example. If that SOTP valuation is much higher than the value that the marketplace attaches to the company, you lot may rattling good detect an activist investor targeting the fellowship for a pause up. 
• Geographical Groupings: When valuing a multinational, you lot tin pause the company's operations downwards geographically in addition to value each geographical grouping (Asia, Latin America, North America, Europe) separately, non solely using dissimilar assumptions most growth in addition to peril inward part but fifty-fifty dissimilar currencies for each region. 
• Unit-based Valuation: More generally, when valuing whatsoever company, you lot tin assay to value it on a unit-basis, edifice upward to its value past times valuing each unit of measurement separately in addition to and so aggregating across units. Thus, a pharmaceutical fellowship tin live valued past times taking each of the drugs that are inward its portfolio, including those inward the pipeline, in addition to valuing that drug based upon its cash flows in addition to peril in addition to and so adding upward the values across the entire portfolio. Influenza A virus subtype H5N1 retail concern tin live valued past times valuing private stores in addition to adding upward the shop values in addition to a subscription-based fellowship tin live valuing past times valuing a subscription in addition to multiplying past times the publish of subscriptions, electrical flow in addition to forecasted.

I may live misreading the critics of my Uber valuation but it seems to me that some of them, at to the lowest degree are making the declaration it is meliorate to value Uber, past times valuing an private Uber user first, in addition to and so scaling the value upward to reverberate non exactly the publish of users that Uber has today (existing users) but also novel users it expects to add together inward the future. 

Aggregated versus Disaggregated Valuations: Weighing the Trade offs

Valuation on a disaggregated the world allows you lot to live much to a greater extent than flexible inward your assumptions, allowing them to vary across each grouping but at that spot are 4 reasons why you lot seldom consider them proficient (or at to the lowest degree proficient well) inward fellowship valuation.

1. Law of large numbers: As companies larn larger in addition to to a greater extent than diverse, at that spot is an declaration to live made that you lot are meliorate off estimating on an aggregated the world rather than a disaggregated one. The ground is statistical. To the extent that your estimation errors on a unit of measurement the world are uncorrelated or lightly correlated, your estimates on an aggregated degree volition live to a greater extent than precise than the unit-based estimates. For example, you lot volition have got a much meliorate adventure of estimating the aggregate revenues for Pfizer correctly than you lot practise of estimating the revenues of each of its dozens of drugs.
2. Information Vacuums: Information on a disaggregated the world is hard to larn for private businesses, geographies, products or users, if you lot are an investor looking at a fellowship from the outside. If you lot are doing your valuation from within the fellowship (as an possessor or venture capitalist), you lot may live able to larn this information, but every bit you lot volition consider amongst my Uber user valuation, fifty-fifty insiders volition human face upward limits.
3. Missing Value Pieces: When valuing a fellowship on a disaggregated business, it is slow to overlook some items that are consequential for value. In total of the parts valuation, for instance, analysts are so caught upward inward estimating the values of private businesses that they sometimes forget to value "corporate costs", which tin live a multi-billion drag on value.  
4. Corporate Structure: There are some items that are easier to bargain amongst at the aggregate level, because that is where they touching on the business. Thus, you lot tin model when taxes come upward due in addition to the termination of losses easier when you lot are valuing an aggregated concern than when you lot are valuing it on a disaggregated level. Similarly, if you lot are concerned most legal penalties or corporate governance, these are meliorate addressed at the aggregated level.

It is truthful that aggregation comes amongst costs, starting amongst the blurring of differences across disaggregated units (business, geographies, products, users) every bit good every bit the missing of competitive advantages that apply solely to some units of the concern in addition to non to others. It is also truthful that using an aggregated valuation tin termination inward a procedure that is disconnected from how the owners in addition to managers at user-based companies intend most their companies in addition to thence cannot aid them inward managing these companies or valuing them better.

User Based Valuation
Now that nosotros have got set out the pluses in addition to minuses of aggregated versus disaggregated valuation, allow us intend most how you lot would create a disaggregated valuation of a fellowship that derives its value from users or subscribers. In general, the value of such a fellowship tin live written every bit the total of 3 components:

Value of user-based fellowship = Value of existing users + Value added past times novel users - Value drag from corporate expenses

1. Valuing Existing Users
The telephone commutation stair inward a user-based valuation is estimating the value of a user in addition to that value is a business office of many variables: the cash flows that you lot are currently generating from a typical user, the length of fourth dimension you lot hold off that user to role your production or service, your expectations of how much growth you lot tin hold off inward cash flows from a user over fourth dimension in addition to the dubiousness that you lot experience most all of these judgments:

Consider the implications that emerge from this unproblematic framework:

1. The value of a user increases amongst user stickiness in addition to loyalty (captured inward the expected lifetime of a user in addition to the annual renewal rate).
2. The value of a user is directly proportional to the profitability of that user (captured every bit the divergence betwixt the revenues from that user in addition to the cost of servicing that user). 
3. The value of a user is directly proportional to the growth that you lot tin generate inward profits over time, past times either getting the user to role to a greater extent than of your production or service or coming upward amongst other products or services that you lot tin sell that user. 
4. The value of a user decreases every bit you lot driblet dead to a greater extent than uncertain most hereafter cash flows from that user, amongst that dubiousness beingness a business office of the revenue model that you lot role in addition to the discretionary nature of the production or service. Influenza A virus subtype H5N1 subscription-based model, where users concord to pay a fixed amount every period, volition by in addition to large live less risky in addition to to a greater extent than valuable than a transaction-based model or an advertising-based model, that delivers the same cash flows. Influenza A virus subtype H5N1 production or service that delivers a necessity (transportation) is less risky than 1 that meets a to a greater extent than discretionary take away (travel). 

If you lot tin value a user, you lot tin in addition to so approximate the value of an existing user base, past times multiplying the value/user past times the publish of existing users. If you lot have got multiple types of users, amongst mayhap dissimilar revenue models for each, every bit is the instance amongst LinkedIn's premium in addition to regular members, you lot tin value each user grouping separately. 

Value Added past times New Users

The 2nd segment of value is the value added past times novel users that you lot hold off to consider added inward the future. To approximate this value, you lot tin start amongst the value per user from the lastly department but you lot have got to net out the cost of acquiring a novel user, which tin accept the shape of advertising, introductory discounts and/or infrastructure investments to go into novel markets. That cyberspace value added past times a novel user  (value per user minus cost of acquiring a user) then has to live multiplied past times the publish of novel users that you lot hold off to add together each catamenia in addition to brought dorsum to the present, adjusting for both the peril inward the cash flows in addition to the fourth dimension value of money.

Again, I volition concord that this is simplistic but consider the mutual feel implications:

1. The value added past times a novel user increases amongst the value of a user, estimated inward the lastly section. Influenza A virus subtype H5N1 strategy of going for fewer in addition to to a greater extent than intense users may create to a greater extent than value than 1 amongst more in addition to less engaged users, a alert that pursuing user growth at whatsoever cost tin live unsafe for value.
2. The value added past times a novel user decreases every bit the cost of adding users increases. That cost volition live a business office of the competitiveness of the concern (increasing every bit competitor increases) but also of networking effects. If you lot have got strong networking effects, the cost of adding novel users volition decrease every bit you lot accumulate novel users, thence creating a value accelerator for your business.
3. The value added past times a novel user decreases every bit you lot driblet dead to a greater extent than uncertain most user growth. That dubiousness volition live a business office of competitor in addition to whether the technology that you lot have got built your production or service on is sustainable.

Corporate Expenses in addition to Value
To larn from user value to the value of the business, you lot have got to convey inward the repose of the fellowship into your analysis. To the extent that you lot have got expenses that are unrelated to servicing existing users or adding novel ones, i.e., corporate expenses, for lack of a meliorate term, you lot have got to compute the value of these expenses over fourth dimension in addition to cut down your value every bit a fellowship past times this amount:

While at showtime sight, this special may aspect similar wasteful that should live eliminated, it represents both a danger in addition to an chance for immature companies. It is a danger to the extent that bloated corporate expenses tin drag a company's value down, but it tin live an chance insofar every bit it is at the the world of economies of scale. If corporate expenses stand upward for necessary expenses to driblet dead along a concern going, in addition to they grow at a charge per unit of measurement much lower than the growth charge per unit of measurement inward users in addition to revenues, you lot volition consider margins improve chop-chop every bit a fellowship scales up.

Valuing Uber: Influenza A virus subtype H5N1 User based Model

Can Uber live valued using a user-based model? Yes, but it volition require assumptions most users that are, at best, tentative in addition to at worst, based upon fiddling information. While I volition assay amongst the express information that I have got on Uber to practise a user-based valuation, I volition larn out it to somebody who has access to to a greater extent than information than I practise (a VC invested inward Uber or an Uber manager) to tweak the numbers to larn meliorate estimates of value.

Deconstructing the Financials

The numbers that nosotros have got on Uber's operations are minimalist, reflecting both its standing every bit a private fellowship in addition to its full general secretiveness. In 2016, according to the financials that other (dated) reports suggest Uber's contribution margins (revenues minus variable costs) inward its most profitable cities ranges from 3-11% of gross billings in addition to its contribution margin inward San Francisco, its longest standing in addition to most mature market, is 10.1%. Bringing inward these noisy in addition to various estimates together, hither are my estimates of user statistics:

These numbers are stitched together from various sources in addition to vary inward reliability, but based upon my judgments, I pause downwards Uber's operating expenses inward 2016 into 3 categories: to service existing users (48.17%), to larn novel users (41.08%) in addition to corporate expenses (10.75%); the lastly approximate is a shot inward the dark, since at that spot is no information available on the value. The annual turn a profit from an existing user, based on 2016 numbers, is most $50.50 (Net Revenues - Expense/user) in addition to the  cost of adding a novel user is most $238/75, in addition to both volition live telephone commutation inputs inward my valuation.

Valuing Existing Users

To value Uber's existing users, I role the framework developed inward the lastly section, inward conjunction amongst the estimates that I obtained from the express fiscal information provided past times Uber. I valued existing users, assuming 4 additional parameters: a lifetime of fifteen years for users, an annual renewal likelihood of 95%, a compounded growth charge per unit of measurement of 12% inward annual revenues from users expanding their user of Uber services in addition to a growth charge per unit of measurement of 9.9% a yr inward annual user servicing expenses (on the supposition that 80% of the servicing cost is variable). Assuming a cost of upper-case alphabetic quality of 10% (in the 75th percentile of U.S.A. firms), the resulting value per user in addition to the overall value of existing users is shown below:

Download spreadsheet

The value per existing user is most $410 in addition to the overall value of Uber's forty 1000000 existing users is $16,412 million. Not surprisingly, this value is sensitive to user stickiness (as measured past times user lifetime) in addition to user growth potential (as measured past times the growth charge per unit of measurement inward annual revenues):

In a marketplace where investors swoon at user numbers, this tabular array makes an obvious point. Not all users are created equal, amongst to a greater extent than intense, viscous users beingness worth a corking bargain to a greater extent than than transient, switching users.

Value Added past times New Users

To approximate the value added past times novel users, I start amongst the value per user (estimated inward the lastly department to live $410), which I grow at the inflation rate to larn expected value per user over time, in addition to role the cost of acquiring a novel user from 2016 (about $240/user). Assuming a growth charge per unit of measurement of 25% a yr for the adjacent v years, 10% betwixt years 6 in addition to 10 in addition to overall economical growth later yr ten, I approximate the value added past times novel users over time. (With those growth rates, I to a greater extent than than quadruple the publish of users over the adjacent 10 years to 164 million.) In coming upward amongst value, I assume that novel user growth is to a greater extent than uncertain than the value created past times existing users, in addition to role a 12% cost of upper-case alphabetic quality (at the 90th percentile of U.S.A. firms) to larn today's value.

Download spreadsheet

The value added past times novel users, based upon my estimates, is $20,191 million. That value is sensitive to the cyberspace value created past times each novel user (value of a novel user minus the cost of adding a novel user) in addition to the growth charge per unit of measurement inward the publish of users:

This tabular array illustrates the betoken made before most how some companies volition live meliorate off trading off higher value added per user for lower user growth, since at that spot are clearly lower growth/ higher value added scenarios that dominate higher growth/lower value added scenarios inward terms of value creation.  

Corporate Expenses in addition to overall Value

The concluding unloosen terminate is the corporate expense component, a publish that I estimated (arbitrarily) to live $1 billion inward 2016. Allowing for the taxation savings that these expenses volition generate in addition to assuming a 4% compounded growth rate, good below the 15.16% compounded growth charge per unit of measurement inward total users, I approximate a value for these corporate expenses (using the 10% cost of upper-case alphabetic quality that I used for existing users):

Download spreadsheet

The value drag created past times corporate expenses is most $10,369 million. Bringing together all 3 components, nosotros larn a value for Uber's operations of $26.2 billion
Value of Uber's Operating Assets:
= Value of Existing Users+  Value added past times New Users - Value drag from corporate expenses
= $16.4 billion + $20.2 billion + $10.4 billion = $26.2 billion
Adding the cash residuum ($5 billion) in addition to the belongings inward Didi Chuxing (estimate value of $6 billion) results inward an overall value of equity of $37.2 billion for the fellowship (and its equity, since it has no debt):

Value of Uber Equity = Value of Operating Assets + Cash - Debt = $26.2 + $5.0 + $6.0 = $37.2 billion

This is unopen to the value that I obtained for Uber on an aggregated basis, but that is a reflection of my agreement of the company's economics.

Pricing versus Valuing Users

As you lot tin see, valuing users requires assumptions most users that tin live hard to make. So, how practise venture capitalists in addition to other early on phase investors come upward up amongst per user or per subscriber numbers? The respond is that they practise not. Drawing on an earlier send service that I had on how venture capitalists play the pricing game, venture capitalists toll users, rather than value them. What does that involve? Very only put, the toll per user at Uber, given its most recent pricing of $69 billion in addition to the estimated forty 1000000 users is $1,725/user ($69,000/40).  To brand a judgment on whether that publish is a high or a depression number, you lot would compare that toll to what you lot the marketplace is pricing a user at Lyft or Didi Chuxing in addition to if naive, debate that the lower the toll per user, the cheaper the company. Using the most recent estimates of pricing in addition to users for the v large ride sharing companies, hither is what nosotros get:

Company	Most Recent Pricing (in $ millions)	# Users (in millions)	Price/User
Uber	$69,000	40.00	$1,725.00
Lyft	$7,500	5.00	$1,500.00
Didi Chuxing	$50,000	250.00	$200.00
Ola	$3,000	10.00	$300.00
GrabTaxi	$4,200	3.80	$1,105.26

If you lot follow the user valuation inward the lastly section, you lot tin consider why this pricing comparing tin live dangerous. The aggregate pricing that you lot larn for private companies reflects non solely existing users but also novel users, in addition to dividing past times the existing users volition laissez passer on you lot much higher numbers for companies that hold off to grow their user base of operations more. Even if every fellowship is correctly priced, you lot should hold off to consider users at companies amongst less cash flows per user, lower user growth, less intense in addition to loyal users in addition to to a greater extent than dubiousness most hereafter cash flows to live priced much lower than at companies amongst intense in addition to viscous users, amongst to a greater extent than growth potential.

The Bottom Line

If your declaration against using discounted cash flow valuation (at to the lowest degree inward the aggregated shape that it is ordinarily done) is that you lot have got to brand a lot of assumptions, I promise that this procedure of valuing users brings habitation the reality that you lot cannot escape having to brand those assumptions. In fact,  the assumptions that you lot take away to brand to value a fellowship on a disaggregated the world (based on users or subscribers) are ofttimes to a greater extent than involved in addition to complex than the ones that you lot have got to brand inward an aggregated valuation. That said, I practise concord that looking at value on a disaggregated the world tin non solely laissez passer on you lot insights most value drivers but also most questions that you lot would desire to inquire (and larn answered) if you lot are thinking most investing inward or edifice a immature fellowship whose value is coming from its user or subscriber base. 

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Attachments

1. Uber User-based Valuation
2. Uber aggregated DCF

Previous Posts on Uber

1. A Disruptive Cab Ride to Riches (June 2014)
2. Possible, Plausible in addition to Probable: Big Markets in addition to Networking Effects (July 2014)
3. Up, Up in addition to Away: Influenza A virus subtype H5N1 Crowd Valuation of Uber (December 2014)
4. On the Uber Rollercoaster: Narrative Tweaks, Twists in addition to Turns (October 2015)
5. The Ride Sharing Business: Is a Bar Mitzvah instant coming? (August 2016)
6. Uber's Bad Week: Doomsday Scenario or Business Reset (June 2017)

Uber's Coming Out Party: Personal Mobility Pioneer Or Auto Service On Steroids?

After Lyft’s IPO on March 29, 2019, it was exclusively a thing of fourth dimension earlier Uber threw its chapeau inwards the world marketplace position ring, in addition to on Friday, Apr 12, 2019, the fellowship filed its prospectus. It is the outset fourth dimension that this company, which has been inwards the intelligence to a greater extent than oftentimes inwards the terminal few years than almost whatever publicly traded company, has opened its books for investors, journalists in addition to curiosity seekers. As someone who has valued Uber alongside the tidbits of information that have got hitherto been available well-nigh the company, to a greater extent than often than non leaked in addition to unofficial, I was interested inwards seeing how much my perspective would change, when confronted alongside a fuller accounting of its performance.

Backing up!
To larn a feel of where Uber stands now, just ahead of its IPO, I then reversing the company’s sweat to add together dorsum stock based compensation. The fellowship is clearly a coin loser, but if at that spot is anything positive that tin live extracted from this table, it is that the losses are decreasing every bit a per centum of sales, over time.

The Rider Numbers
One of Uber’s selling points lies inwards its non-accounting numbers, every bit the fellowship reported having 91 1 M 1000 monthly riders (defined every bit riders who used either Uber or Uber delivery at to the lowest degree 1 time inwards a month) in addition to completing 5.2 billion rides. To pause downwards those daunting numbers, I focus on the per passenger statistics to come across the engines driving Uber’s growth over time:

Uber Prospectus: Page 21

There is practiced in addition to bad intelligence inwards this table. The practiced intelligence is that Uber’s annual gross billings per passenger rose almost 28% over the 3 twelvemonth period, but the sobering companion finding is that the billings/ride are decreasing. Boiled downwards to basics, it suggests that the growth inwards overall billings for the fellowship is at to the lowest degree partially driven past times existing riders using to a greater extent than of the service, albeit for shorter rides. It could also reverberate the fact the novel riders for the fellowship are coming from parts of the earth (Latin America, for instance), where rides are less expensive.  Finally, I took Uber’s expense breakdown inwards their income statement, in addition to used it to extract information well-nigh what the fellowship is spending coin on, in addition to how effectively:

Uber Prospectus: F-4 (income tilt inwards appendix)

I brand some assumptions hither which volition play out inwards the valuation that yous volition come across below.

1. User Acquisition costs: Using the supposition that user alter over a twelvemonth tin live attributed to selling expenses during the year, I computed the user acquisition cost each twelvemonth past times dividing the selling expenses past times the number of riders added during the year.
2. Operating Expenses for Existing Rides: I have got included the cost of revenues (not including depreciation) in addition to operations in addition to back upward every bit expenses associated alongside electrical flow riders. 
3. Corporate Expenses; These are expenses that I assume are full general expenses, non straight related to either servicing existing users or acquiring novel ones in addition to I include R&D, G&A in addition to depreciation inwards this grouping.

The practiced intelligence is that the expenses associated alongside servicing existing users has been decreasing, every bit a per centum of revenues, indicating that non all of these costs are variable or at to the lowest degree straight linked to to a greater extent than passenger usage. Also, corporate expenses are showing prove of economies of scale, decreasing every bit a per centum of revenues. The bad novel is that the cost of acquiring novel users has been increasing, at to the lowest degree over this fourth dimension period, suggesting that the ride sharing marketplace position is maturing or that contest is picking upward for riders.

More than ride sharing?
Uber is a to a greater extent than complicated fellowship to value than Lyft, for ii reasons. The outset is that Uber is non a pure ride sharing company, since it derives revenues from its nutrient delivery service (Uber Eats) in addition to an assortment of other smaller bets (like Uber Freight). In the graph below, yous tin come across the development of these businesses:

Uber Prospectus: Page 114

It is worth noting this tabular array patch suggests that patch some of Uber’s to a greater extent than ambitious reaches into logistics have got non borne fruit, its foray into nutrient delivery seems to live picking upward steam. Uber Eats has expanded from 2.68% of Uber’s cyberspace revenues to 13.12%. There is some additional information inwards some other portion of the prospectus, where Uber reports its "adjusted" cyberspace revenue in addition to gross Billings past times business, and it does facial expression similar Uber's cyberspace have got from Uber Eats is lower than its have got from ride sharing:

Uber Prospectus: Pages 102 & 103

While it is clear that Uber's ride sharing customers have got been quick to adopt Uber Eats, at that spot are subtle differences inwards the economic science of the ii businesses that volition play out inwards time to come profitability, particularly if Uber Eats continues to grow at a disproportionate rate.

Unlike Lyft, which has kept its focus on the States of America in addition to Canadian markets, Uber's ambitions have got been to a greater extent than global, though reality has set a crimp on some of its expansion plans. While Uber's initial plans were to live everywhere inwards the world, large losses have got led Uber to abandon much of Asia, leaving mainland People's Republic of China to Didi in addition to South Eastern Asia to Grab, alongside Republic of Republic of India existence the 1 large marketplace position where Uber has stayed, fighting Ola for marketplace position part in addition to who tin lose to a greater extent than money. The fastest growing overseas marketplace position for Uber has been Latin America, every bit yous tin come across inwards the graph below:

Uber does non render a breakdown of profitability past times geographical region, but the magnitude of the losses that they wrote off when they unopen their Chinese in addition to South East Asian operations suggests that the States of America remains their most lucrative ride sharing market, inwards terms of profitability. 

The Road Ahead : Crafting a even out and value for Uber

1. H5N1 Top Down Valuation
In valuing Lyft, I used a top-down approach, starting alongside States of America shipping services every bit my total accessible marketplace position in addition to working downwards through marketplace position share, margins in addition to reinvestment to derive a value of $13.9 billion for its operating assets in addition to $16.4 billion alongside the IPO proceeds counted in. Using a similar approach is trickier for Uber, since its determination to live inwards multiple parts of the logistics describe organisation in addition to its global ambitions take away assessment of a global logistics market, a challenge. I did an initial assessment of Uber, using a much larger total marketplace position in addition to arrived at a value of $44.4 billion for its operating assets, but adding the portions of Didi, Grab in addition to Yandex Taxi pushed this number upward to $55.3 billion. Adding the cash repose on mitt every bit good every bit the IPO proceeds that volition remain inwards the theatre (rumored to live $9 billion), earlier subtracting out debt yields a value for equity of well-nigh $61.7 billion.

Download spreadsheet

The part count is all the same hazy (as the multiple blank areas inwards the prospectus indicate) but starting alongside the 903.6 1 M 1000 shares of mutual stock that volition termination from the conversion of redeemable convertible preferred shares at the fourth dimension of the IPO, in addition to adding inwards additional shares that volition termination from selection exercises, RSUs (restricted stock units issued to employees) in addition to novel shares existence issued to raise some $10 billion inwards proceeds, I brand it at a value per part of well-nigh $54/share, though  that the updated version of the prospectus, which should come upward out alongside the offering price, should allow for to a greater extent than precision on the part count. (Update: Based upon intelligence stories today (4/26/19), it looks similar the part count volition live closer to 1.8 billion to 2 billion shares, which volition termination inwards a value per part closer to $31-$33/share).

2. H5N1 Rider-based Valuation
The incertitude well-nigh the total accessible market, though, makes me uneasy alongside my top downwards valuation. So, I decided to attempt some other route. In June 2017, I presented a unlike approach to valuing companies similar Uber, that derive their value from users, subcribers or members. In that approach, I began past times valuing an existing user (rider), past times looking at the revenues in addition to cash flows that Uber would generate over the user’s lifetime in addition to thence extended the approach to valuing a novel user, where the cost of user acquisition has to live netted out against the user value. I completed the assessment past times computing the value drag created past times non-rider related costs (like G&A in addition to R&D). In the June 2017 valuation, I had to brand do alongside minimalist item on expenses but the prospectus provides a much richer pause down, allowing me to update my user-based valuation of Uber. The valuation pic is below:

Download spreadsheet

This approach yields a value for the equity of well-nigh $58.6 billion for Uber’s equity, which 1 time to a greater extent than depending on the part count would interpret into a part cost of $51/share. (Update: Based upon intelligence stories today (4/26/19), it looks similar the part count volition live closer to 1.8 billion to 2 billion shares, which volition termination inwards a value per part closer to $30/share).

Value Dynamics
The benefits of the rider-based valuation is that it allows us to isolate the variables that volition determine whether Uber turns the corner chop-chop in addition to tin brand plenty coin to justify the rumored $100 billion value. The value of existing riders is determined past times the growth charge per unit of measurement inwards per-user revenues in addition to the cost of servicing a user, alongside increases inwards the quondam in addition to decreases inwards the latter driving upward user value.  The value of novel riders, inwards the aggregate, is determined past times the increment inwards passenger count in addition to the cost of acquiring a novel rider. One troubling aspect of the growth inwards users over the terminal 3 years has been the increment inwards user acquisition costs, possibly reflecting a to a greater extent than saturated market. In the tabular array below, I guess the value of Uber's equity, using a arrive at of assumptions for the growth charge per unit of measurement inwards per user revenues in addition to the cost of acquiring a novel user:

Download spreadsheet

There are ii ways that yous tin read this table. If yous are a trader, deeply suspicious of intrinsic value, yous may facial expression at this tabular array every bit confirmation that intrinsic value models tin live used to deliver whatever value yous desire them to, in addition to your suspicions would live good founded. I am a believer inwards value in addition to I come across this tabular array inwards a unlike light.

• First, I stance it every bit a reminder that my guess of value is just mine, based on my even out in addition to inputs, in addition to that at that spot are others alongside unlike stories for the fellowship that may explicate why they would pay much to a greater extent than or much less than I would for the company. 
• Second, this tabular array suggests to me that Uber is a fellowship that is poised on a knife's edge. If it just continues to just add together to its passenger count, but pushes upward its cost of acquiring riders every bit it goes along, in addition to existing riders do non increment the usage of the service, its value implodes. If it tin larn riders to significantly increment usage (either inwards the shape of to a greater extent than rides or other add together on services), it tin uncovering a way to justify a value that exceeds $100 billion. 
• Third, the tabular array also indicates that if Uber has to pick betwixt spending coin on acquiring to a greater extent than riders or getting existing riders to purchase to a greater extent than of its services, the latter provides a much bigger bang for the buck than the former. 

Put simply, I promise Dara Khoshrowshahi agency it when he says that Uber has to exhibit a pathway to profitability, but I think that is what is to a greater extent than critical is that he acts on those words. In my view, this remains a business, whether yous define it to live ride sharing, shipping services or personal mobility, without a describe organisation model that tin generate sustained profits, exactly because the existing model was designed to deliver exponential growth in addition to lilliputian else, in addition to Uber, in addition to the other players inwards this game), have got exclusively a express window to gear upward it.

Refreshing the Pricing
Having spent all of this fourth dimension on Uber's valuation, permit me concede to the reality that Uber volition live priced past times the market, in addition to it volition live priced relative to Lyft. That is why Uber has in all probability been pulling harder than almost whatever 1 else inwards the marketplace position for the Lyft IPO to live good received in addition to for its stock to hand on to do good inwards the aftermarket. In the tabular array below, I compare fundamental operating numbers for Uber in addition to Lyft, alongside Lyft's pricing inwards the marketplace position inwards place:

In computing the metrics, it is worth remembering that Uber in addition to Lyft purpose unlike definitions for basic metrics in addition to I have got tried to adjust. For instance, Uber defines riders every bit those who purpose the service at to the lowest degree 1 time a calendar month in addition to the closest number that I tin larn for Lyft is their guess that they had 18.6 1 M 1000 active quarterly riders. Uber is bigger on every unmarried dimension, including losses, thence Lyft. I convert Lyft's electrical flow marketplace position pricing (on Apr 12, 2019) into multiples, scaling them to unlike metrics in addition to applying these metrics to Uber:

Download pricing spreadsheet

In computing Uber's equity value from its enterprise value, I have got added the cash ($6.4 billion of cash on mitt plus the $9 billion inwards expected IPO proceeds) $ in addition to Uber's cross holdings ($8.7 billion) to the value in addition to netted out debt ($6.5 billion). To larn the value per share, I have got used the estimated 1175 1 M 1000 shares that I believe volition live outstanding, including options in addition to RSUs, afterward the offering. Depending on the metric that I tin scale it to, yous tin larn values ranging from $47 billion to $124 billion for Uber's equity, though each comes alongside a catch. If yous believe that at that spot are no games that are played alongside pricing, yous should think again! Also, every bit Lyft's cost moves, thence volition Uber's, in addition to I am sure as shooting that at that spot are many at Uber (and its investment banks) who are hoping in addition to praying that Lyft's stock does non have got many to a greater extent than days similar last Thursday, earlier the Uber IPO hits the market.

Conclusion
I am sure as shooting that at that spot are many who empathise the ride sharing describe organisation much ameliorate than I do, in addition to come across obvious limitations in addition to pitfalls inwards my valuations of both Uber in addition to Lyft.  In fact, I have got been incorrect before on Uber, every bit Bill Gurley (who knows to a greater extent than well-nigh Uber than I always will) My outset in addition to fatally flawed valuation of Uber (June 2014)

My post service on the time to come of ride sharing (August 2016)

My outset user-based valuation of Uber (June 2017)

Dream Big Or Remain Focused? Lyft's Counter To Uber!

This is the 2nd inwards a serial of 3 posts on the ride sharing business. In my first, published inwards both TechCrunch in addition to my blog, I valued Uber, trying to contain the tidings that has come upward out nearly the companionship in addition to its contest inwards the finally year. In this one, I starting fourth dimension plow to valuing Lyft, which is telling a narrower, to a greater extent than focused floor to investors than Uber in addition to also expression at how the pricing ladder inwards ride sharing companies has pushed upward prices across the board. In the finally post, due out on Wednesday, I volition expression at the ride sharing marketplace equally a business.

In my finally post, I valued Uber in addition to admitted that the companionship has made its means to my listing of obsessions. My focus on Uber, though, has meant that I bring non paid whatsoever attending to the other ride sharing companionship inwards the US,  Lyft, in addition to I don’t retrieve I bring been lone inwards this process. An unscientific analysis of tidings stories on ride-sharing companies inwards the finally twosome of years suggests that Uber has dominated the coverage of this business. Rather than persuasion this equally a slight on Lyft, I would fighting that this is at to the lowest degree partially past times design, in addition to that it is purpose of both companies' strategies. Uber is viewed equally the hands-down winner of this battle correct now, but this is exactly 1 battle inwards a long state of war in addition to investors define winners differently from corporate strategists.

Valuing Lyft

To value Lyft, I volition employ the same template that I used for Uber, though the choices I volition brand inwards terms of total market, marketplace share, operating margins in addition to endangerment volition all live different, reflecting both Lyft’s smaller scale in addition to to a greater extent than express ambitions (for the moment).

The Leaked Numbers

The house to start this assessment is past times comparing the ride sharing attain of Lyft amongst Uber in addition to that comparing is inwards the tabular array below:

	Uber	Lyft
Number of cities inwards US	150	65
Number of cities	>300	65
Number of countries	60	1
Number of rides - 2014	140	NA
Number of rides (in millions) - 2015E	NA	90
Number of rides (in millions) - 2016E	NA	205
Gross Billings (in millions $) - 2014	$2,000	$500
Gross Billings (in millions $) - 2015E	$10,840	$1,200
Gross Billings (in millions $) - 2016	$26,000	$2,700
Estimated Growth for 2015	442%	140%
Estimated Growth for 2016	140%	125%
Operating loss inwards 2014 (in millions $)	-$470	-$50

The fundamental differences tin live summarized equally follows. First, Uber is clearly going later the global market, uninterested inwards forming alliances or partnerships amongst local ride sharing companies. Lyft has made explicit its intention to operate inwards the US, at to the lowest degree for the moment, in addition to that seems to bring been precursor to forming alliances (as evidenced past times this tidings story from 2 weeks ago) amongst large ride sharing companies inwards other markets. Within the US, Uber operates inwards to a greater extent than than twice equally many cities equally Lyft does. Second, both companies are growing, though Uber is growing at a faster charge per unit of measurement than Lyft, in addition to that is captured inwards both the issue of rides in addition to gross billings at the companies. Third, both companies are losing coin in addition to pregnant amounts at that, equally they driblet dead for higher revenues. Note that, for both companies, the mass of the information comes from leaked documents, in addition to should so considered amongst skepticism. In addition, in that location are about numbers that come upward from press reports (Lyft's loss inwards 2014) that are to a greater extent than guesses than estimates.

The line concern models of the 2 companies, at to the lowest degree when it comes to ride sharing, are really similar. Neither owns the cars that are driven nether their names and both claim that the drivers are independent contractors. Both companies utilization the 80:20 separate for ride receipts, amongst 80% staying amongst the driver in addition to 20% going to the company, but that surface understanding hides the cutting pharynx contest nether the surface for both drivers in addition to riders. Both companies offering incentives (think of them equally sign-up bonuses) for drivers  to start driving for them or, ameliorate still, to switch from the other company. They also offering riders discounts, gratuitous rides or other incentives to seek them or, ameliorate still, to switch from the other ride sharing company. At times, both companies bring been defendant of stepping over the line inwards trying to teach ahead inwards this game, in addition to Uber’s higher profile in addition to reputation for ruthlessness has made it the to a greater extent than ordinarily named culprit. 

The other large operating departure is that dissimilar Uber, which is attempting to expand its sharing model into the delivery in addition to moving markets, Lyft, at to the lowest degree for the moment, has stayed much to a greater extent than focused on the ride sharing business, in addition to inside that business, it has also been less ambitious inwards expanding its offerings to novel cities in addition to novel types of automobile services than Uber.

The Narrative Contrast in addition to Valuation

In my valuation of Lyft, I volition seek to contain the differences that I encounter (from Uber) into my narrative:

	Lyft	Uber
Potential Market	US-centric, ride-sharing company.	Global, logistics company
Growth Effect	Double ride-sharing marketplace inwards U.S. inwards side past times side 10 years	Double logistics marketplace globally inwards side past times side 10 years
Market Share	Weak national networking benefits	Weak global networking benefits
Competitive Advantage	Semi-strong competitive advantages	Semi-strong competitive advantages
Expense Profile	Drivers equally partial employee	Drivers equally partial employees
Capital Intensity	Low uppercase intensity	Low uppercase intensity, amongst potential for shift to to a greater extent than uppercase intense model
Management Culture	Aggressive inside ride sharing business, Milder amongst regulators in addition to media.	Aggressive amongst all players (competitors, regulators, media)

In short, the Lyft narrative is narrower in addition to to a greater extent than focused (on ride sharing in addition to inwards the US) than the Uber narrative. That puts them at a disadvantage, at to the lowest degree at this phase inwards the ride sharing market, inwards terms of both value in addition to pricing, but it could run inwards their favor equally the game unfolds. 

The adjustments to the Lyft valuation, relative to my Uber valuation, are primarily inwards the total marketplace numbers, but I exercise brand tiddler adjustments to the other inputs equally well. 

1. Smaller total market: Rather than utilization the total global market, equally I did for Uber, I focus on exactly the U.S. portion of these markets. That reduces the total marketplace size substantially. In addition, I assume that, given Lyft’s focus on ride sharing, that its marketplace is constrained to live the U.S. automobile service market. Notwithstanding these changes inwards my assumption, the potential marketplace nevertheless remains a large one, amongst my guess nearly $150 billion inwards 2025. 
2. National networking benefits: Within the U.S. market, I assume that the increased cost of entry into the line concern that I referenced inwards my finally post service on Uber volition restrain novel competitors in addition to that Lyft volition relish networking benefits across the country, enabling it to claim a 25% marketplace part of the U.S. market. 
3. Drivers driblet dead partial employees: My assumptions on drivers becoming partial employees in addition to contest driving downwards the ride sharing companionship piece of revenues volition parallel the ones that I made for Uber, resulting inwards lower operating margins (25% inwards steady state) in addition to a smaller piece of revenues (15%). 
4. Lyft is riskier than Uber: Finally, I volition assume that Lyft is riskier than Uber, given its smaller size in addition to lower cash reserves, in addition to laid upward its cost of uppercase at 12%, inwards the 90th percentile of U.S. companies, in addition to allow for 10% adventure that the companionship volition non brand it.

The value that I derive for Lyft amongst these assumptions is captured inwards the flick below:

Spreadsheet amongst Lyft Valuation (September 2015)

The value that I teach for Lyft is $3.1 billion, less than 1 7th of the value that I estimated for Uber ($23.4 billion) inwards my finally post.

The biggest danger that I encounter for investors inwards Lyft is that the companionship has to move the close future, where the pressure level from Uber in addition to the nature of the ride sharing line concern volition create hundreds of millions of dollars to a greater extent than inwards losses. If the uppercase market, which has been accommodating in addition to so far, dries up, Lyft faces the existent danger of non making it to ride sharing nirvana. It is a concern amplified past times Mark Shurtleff at Green Wheels Mobility Solutions, a long-time proficient in addition to consultant inwards the ride sharing in addition to mobility business, who points to Lyft's concentration inwards a few cities in addition to cash give the axe equally potential danger signs.

Pricing The Ride Sharing Companies

While none of the ride sharing companies are publicly traded in addition to in that location are so no prices (yet) for me to compare these valuations to, in that location bring been investments inwards these companies that tin live extrapolated at about endangerment to guess what these investors are pricing these companies at. In keeping amongst my subject that toll in addition to value come upward from different  processes, recognize that these are prices, non values.

The VC Pricing

I took at expression the most recent VC investments inwards ride sharing companies in addition to what prices they interpret into.

Company	Last VC circular investment amount (in US$ millions)	Date	Lead Investors	Imputed Pricing for the companionship (in U.S. $ millions)
Lyft	$530.00	15-May	Rakuten, Didi Kuaidi, Carl Icahn	$2,500.00
Uber	$1,000.00	15-Jul	Microsoft	$51,000.00
Didi Kuaidi	$2,000.00	15-Jul	China Investment Fund	$15,000.00
Ola	$310.00	15-Mar	DST Global	$2,300.00
GrabTaxi	$200.00	15-Jul	Coatue Management & others	$1,500.00

* Sources: Public News Reports, Mark Shurtleff
The danger inwards extrapolating VC investments to overall value, which is what the press stories that study the overall prices do, is that the solely fourth dimension that a VC investment tin live scaled upward direct to overall value is if it comes amongst no strings attached. Adding protections (ratchets) or sweeteners tin really speedily alter the relationship, equally I noted TechCrunch in addition to in this post service on unicorns. 

The Drivers of Price

Notwithstanding that concern, is in that location a logic to this pricing? In other words, what makes Uber to a greater extent than than 3 times to a greater extent than valuable than Didi Kuaidi in addition to Didi Kuaidi half dozen times to a greater extent than valuable than Lyft? To answer these questions, I pulled upward the statistics that I could notice for each of these companies:

Company	Estimated Value (Price)	Gross Billing inwards $ millions (2015)	Revenues (2015)*	Operating Profit or Loss (2015)	Cities served (2015)	# rides	Potential Market (in $ millions)	# Drivers
Lyft	$2,500	$1,200	$300	-$100	65	156	$55,000	100000
Uber	$51,000	$10,840	$2,000	-$470	300	1460	$205,000	800000
Didi Kuaidi	$15,000	$12,000	$450	-$1,400	137	2190	$50,000	2600000
Ola	$2,500	$1,200	$150	NA	85	100	$13,000	250000
GrabTaxi	$1,500	$1,000	$50	NA	26	300	$6,000	75000
BlaBlaCar	$1,600	$600	$72	NA	100	NA	$20,000	NA

* The revenues are estimated using the revenue piece that these companies report, but amongst client give aways in addition to other marketing costs, the actual revenues were in all probability lower.

Note that almost all of these numbers come upward from leaks, guesses or judgment calls, in addition to that in that location are many items where the information is exactly non available. For instance, spell nosotros know that Ola, GrabTaxi in addition to BlaBlaCar are all losing money, nosotros exercise non know how much. At the endangerment of pushing my information to breaking point, I computed every possible pricing multiple that I could for these companies:

Company	Value/Gross Billing	Value/Revenues	Value/City	Value/Ride	Value/Potential Market
Lyft	2.08	8.33	$38.46	$16.03	0.0455
Uber	4.70	25.50	$170.00	$34.93	0.2488
Didi Kuaidi	1.25	33.33	$109.49	$6.85	0.3000
Ola	2.08	16.67	$29.41	$25.00	0.1923
GrabTaxi	1.50	30.00	$57.69	$5.00	0.2500
BlaBlaCar	2.67	22.22	$16.00	NA	0.0800
Average	2.38	20.54	70.18	$17.56	0.1861
Median	2.08	22.22	48.08	$16.03	0.2205
Aggregate	2.76	22.98	103.93	$17.24	0.2123

On a pure pricing basis, Lyft looks inexpensive on every pricing multiple, in addition to Uber looks expensive on each one, mayhap providing about perspective on why Carl Icahn found Lyft to live a bargain, relative to Uber. Didi Kuaidi looks expensive on whatsoever stair out other than gross billing in addition to GrabTaxi looks inexpensive on about measures in addition to expensive on others.  It is worth noting that these companies bring different revenue models, amongst Lyft in addition to Uber hewing to the 20% piece model, established inwards the U.S. in addition to Ola (which has to a greater extent than of a taxi aggregating model), at to the lowest degree according to the reports I read, follows the same policy. BlaBla is by in addition to large long-distance rides in addition to gets nearly 10-12% of the gross billing equally revenue, GrabTaxi gets solely 5-10% of gross billings, Didi Kuaidi, which had its origins inwards a taxi hailing app, gets no part of a large chunk of its revenues in addition to BlaBlaCar derives its revenues to a greater extent than from long distance city-to-city traffic than from inside urban amount automobile service. Given how modest the sample is in addition to how few transactions bring truly occurred, I volition non endeavour to over analyze these numbers, other than wondering, based on my post service on corporate names, how much to a greater extent than an umlaut would bring added to Über's hefty price.

With all of these companies, the prices paid bring risen dramatically inwards the finally twelvemonth in addition to a one-half in addition to I believe that this pricing ladder is driven past times Uber's success at raising capital. In fact, equally Uber's estimated toll has risen from $10 billion early on inwards 2014 to $17 billion finally June to $40 billion at the start of 2015 to $51 billion this summer, it has ratcheted upward the values for all of the other companies inwards this space. That should non live surprising, since the pricing game almost e'er is played out this way, amongst investors watching each other rather than the numbers. As amongst all pricing games, the danger is that a driblet inwards Uber's pricing volition ratchet downwards the ladder, causing a grade downwards inwards everyone's prices.

Big versus Small Narratives

If narrative drives numbers in addition to value, which is the declaration that I bring made inwards valuing Uber in addition to Lyft inwards these finally 2 posts, the contrast betwixt the 2 is also inwards their narratives. Uber is a large narrative company, presenting itself equally a sharing companionship that tin succeed inwards different markets in addition to across countries. Giving credit where it is due, Travis Kalanick, Uber’s CEO, has been disciplined inwards staying truthful to this narrative, in addition to acting consistently. Lyft, on the other hand, seems to bring consciously chosen a smaller, to a greater extent than focused narrative, staying amongst the floor that it is a automobile service companionship in addition to farther narrowing its react, past times restricting itself the US. 

The payoff of a large narrative is that, if yous tin convince investors that it is viable in addition to reachable, it volition deliver a higher value for the company, equally is evidenced past times the $23.4 billion value that I estimated for Uber. It is fifty-fifty to a greater extent than of import inwards the pricing game, peculiarly when investors bring really few concrete metrics to attach to the price. Thus, it is the 2 biggest marketplace companies, Uber in addition to Didi Kuaidi, which ascendancy the highest prices. Big narratives exercise come upward amongst costs, in addition to it those costs that may dissuade companies from going for them. 

1. It tin distract: Big narratives volition require companies to deliver on multiple measures in addition to that may distract management from to a greater extent than immediate needs. 
2. It tin live costly: Having to grow faster in addition to inwards multiple markets (different businesses in addition to different geographies) at the same fourth dimension volition live to a greater extent than costly than focusing on a smaller marketplace in addition to having to a greater extent than measured ambitions.
3. It tin create disappointments: The flip side of convincing investors that yous tin attain for the heights is that if yous don’t brand it, yous volition disappoint them, no thing how goodness your numbers may be. 

With Uber, yous encounter the pluses in addition to minuses of a large narrative. It is possible that Uber Eats (Uber’s nutrient delivery service), UberCargo (moving) in addition to UberRush (delivery) are all investments that Uber had to brand now, to driblet dead on its narrative going, but it is also possible that these are distractions at a minute when the ride sharing market, which remains Uber’s pump in addition to soul, is heating up. It is undoubtedly truthful that Uber, spell growing at exponential rates, is also spending coin at those same rates to driblet dead on its large growth going in addition to it is non solely likely, but a certainty, that Uber volition disappoint their investors at about time, only because expectations bring been laid upward in addition to so high. 

It is mayhap to avoid these risks that Lyft has consciously pushed a smaller narrative to investors, focused on 1 line concern (ride sharing) in addition to 1 marketplace (the US). It is avoiding the distractions, the costs in addition to the disappointments of the large narrative companies, but at a cost. Not solely volition it cede the limelight in addition to excitement to Uber, but that may atomic number 82 it to live both valued in addition to priced less than Uber. Uber has used its large value in addition to access to uppercase equally a bludgeon to driblet dead later Lyft, inwards its strongest markets.

As an investor, in that location is nil inherently goodness or bad nearly either large or modest narratives, in addition to a companionship cannot driblet dead a goodness investment exactly because of its narrative choice. Thus, Uber, equally a large narrative company, commands a higher valuation ($23.4 billion) but it is priced fifty-fifty to a greater extent than highly ($51 billion). Lyft, equally a modest narrative company, has a much lower value ($3.1 billion) but is priced at a lower issue ($2.5 billion). At these prices, equally I encounter it, Lyft is a ameliorate investment than Uber. 

Block in addition to Draft

It is clear that Uber in addition to Lyft bring really different corporate personas in addition to visions for the futurity in addition to that about of the departure is for exterior consumption. It serves Uber well, inwards its disruptive role, to live viewed equally a flake of a great who volition non walk away from a fight, exactly equally it is Lyft’s best interests to portray itself equally the gentler, to a greater extent than humane human face upward of ride sharing. Some of the difference, though, is management culture, amongst Uber drawing from a really different puddle of decision-makers than Lyft does. If this were a bicycle race, Uber reminds me of the aggressive atomic number 82 rider, intent on blocking the balance of the pack in addition to getting to the complete line first, in addition to Lyft is the lower profile racer who rides exactly behind the leader, using the draft to relieve liberate energy for the finally push. This is going to live a long race, in addition to I bring a feeling that its contours volition alter equally the complete line approaches, but whatever happens, it is going to live fun to watch!

YouTube Version

Ride Sharing Series (September 2015)

1. 1. TechCrunch in addition to On the Uber Rollercoaster: Narrative Tweaks, Twists in addition to Turns
   2. Dream Big or Stay Focused? The Lyft Answer!
   3. TechCrunch in addition to The Future of Ride Sharing: Playing Pundit

Spreadsheets

1. Lyft: Valuation
2. Ride Sharing Companies: Metrics in addition to Pricing

User/Subscriber Economics: Value Dynamics

In my concluding post, I tried valuing Uber past times estimating how much an existing user was worth to the companionship in addition to and so using that release to extrapolate to the value of all existing users in addition to the value added past times novel users. As always, I got many useful comments on what I was missing, what I could practice improve in addition to what could locomote simplified, in addition to I give thank you lot you (really). While I could pass this entire postal service rehashing assumptions, I don't intend to! To me, the most useful business office of valuation is non the destination, i.e., the value that you lot instruct at the end, but the journey, i.e., the procedure of doing valuation, since it is the procedure that allows us to isolate the key drivers of value, which, inwards turn, focuses discussions on those variables, rather than on distractions. Consequently, I decided to revisit my Uber user-based valuation to consider what I could eke out equally implications for user or subscriber-based businesses.

Estimation versus Economic Risk
I volition start past times conceding the obvious. I made a lot of assumptions to instruct inwards at the value of a user at Uber, but I volition expire further. There was non a unmarried fact inwards that valuation, since every release was an estimate. That said, you lot could say that most the valuation of whatever company, amongst the deviation truly beingness i of the grade of doubt you lot face, non inwards whether it exists. At the jeopardy of restating points that I receive got made in my other writing, hither are iii full general points that I would brand most doubt inwards valuation.

1. Estimation doubt versus Economic uncertainty
To bargain amongst doubt inwards a sensible way, you lot kickoff receive got to categorize it. One of the categorizations that I detect useful is to pause the doubt you lot human face upward when you lot are trying to value a concern or an property into estimation in addition to economical uncertainty. Estimation uncertainty comes from incomplete, missing or misleading information provided past times the companionship that you lot are valuing, whereas economic uncertainty is driven past times forthcoming changes inwards the concern that the companionship operates in, equally good equally macro economical factors. Estimation doubt tin dismiss locomote reduced past times obtaining improve in addition to to a greater extent than consummate information but estimation doubt volition stay resistant, no affair how much fourth dimension you lot pose inwards in addition to what information analysis that you lot do. Using my Uber user valuation, it is truthful that some of the dissonance inwards the valuation comes from Uber beingness a private, secretive companionship in addition to but most of the doubt comes from the ride sharing concern beingness inwards a soil of flux, equally regulators in addition to competitors operate out how best to bargain amongst shifting consumer tastes in addition to changing technologies. This has ii implications. The kickoff is that fifty-fifty if you lot had access to to a greater extent than information, either because Uber decides to expire populace or you lot are an insider inwards the company, much of the doubt inwards estimated value per user volition remain. The 2d is that your estimated value volition alter considerably over time, equally the facts on the Earth change, in addition to that volatility inwards value cannot locomote viewed equally a shortcoming of the model.

2. Uncertainty is an integral business office of valuation
One critique that leaves me unmoved is that valuing a concern or an asset, inwards the human face upward of pregnant uncertainty, is pointless because you lot volition locomote wrong. So what? Uncertainty is business office in addition to bundle of doing concern in addition to you lot cannot want it, pray it or analyze it away. As I consider it, you lot receive got ii choices when it comes to uncertainty. You tin dismiss bargain amongst it frontally past times making explicit assumptions or you lot tin dismiss expire into "denial" model in addition to brand implicit assumptions. When I tried to value a user at Uber, I made explicit assumptions most user life, renewal rates in addition to a host of other variables, in addition to I volition cheerfully acknowledge that I volition locomote incorrect on every i of them, but what is the alternative? When pricing a user past times looking at what others are paying for users inwards similar companies, you lot are making assumptions most all of the variables equally well, but those assumptions are implicit. In fact, they are hidden so good that you lot may non locomote aware of your ain assumptions, a unsafe house to locomote when investing.

3. Uncertainty tin dismiss (and should) locomote visualized 
Here is my response to uncertainty. Where information exists but I practice non receive got access to that data, I volition essay to brand my best estimates based upon the existing information, noisy, dated or 2d paw though it mightiness be. Where I receive got access to data, I volition cheque it against other data, mutual feel in addition to economical kickoff principles. Where at that spot is no data, I volition brand my best estimates in addition to to the extent that these estimates come upward amongst probability distributions, my value itself is a distribution, non a number. Illustrating this process, amongst the Uber user valuation:

Excel Add On: Crystal Ball (Oracle), Simulation Output

I receive got made distributional assumptions on iv of my inputs: the portion of Uber's expenses that expire to servicing existing users, the life fourth dimension of a user, the proportion of expenses that are variable in addition to the toll of working capital alphabetic lineament (discount rate) to compute today's value.  Since these distributions are all centered on my base of operations illustration assumptions, it should come upward equally no surprise that the median value of a user ($414) is really closed to my base of operations illustration value ($410). However, at that spot is a broad spread precisely about that value, amongst the numbers ranging a depression of $74, when the user life is short, the expenses of servicing a user are high, most of the costs are variable in addition to the toll of working capital alphabetic lineament is low, to a high of to a greater extent than than $1000 per user, when the reverse weather condition hold. Note that at the electrical flow pricing of $69 billion, you lot are valuing each user closed to $900, at the upper destination of the distribution. 

User Economics: Cost Propositions
It is truthful that the destination game for every concern is to brand coin for its investors. That said, at that spot is a style to over react, when a immature companionship reports a loss, equally was the illustration when Uber reported an operating loss of $2.8 billion for 2016, a few months ago. The pessimists on Uber viewed this equally farther evidence that the companionship was on a pathway to nowhere in addition to that investors inwards the companionship must locomote delusional to attach whatever value to it. The optimists argued that it is natural for immature companies to lose money in addition to that Uber should locomote judged on other dimensions such equally user growth in addition to marketplace potential instead. At the jeopardy of angering both groups, I volition usage my Uber user valuation to scrap that piece I concur amongst the 2d grouping that losing coin is typical at immature companies, I volition also convey sides amongst the kickoff grouping that you lot withal postulate a pathway to profitability amidst the losses, for value to exist.

1. Servicing existing users versus acquiring novel users
In my Uber user valuation, I started amongst the operating losses reported past times the companionship ($2.8 billion), backed into the total operating expenses for the companionship ($9.3 billion) in addition to and so allocated that expense across iii categories: servicing existing user (48.17%), acquiring novel users (41.08%) in addition to corporate expenses (10.75%). While I based this breakdown on the information (on increment inwards users in addition to contribution margins inwards ride sharing) that I had on Uber inwards 2016, that information is dated, noisy in addition to 2d hand. It is exclusively possible that the actual pause downwardly of expenses is dissimilar from my estimate. If you lot are wondering why it matters, since the destination resultant (that Uber lost $2.8 billion) is non changing, at that spot are consequences that you lot tin dismiss consider inwards the tabular array below:

Uber User Value: Existing User versus New User Costs

% of Operating Expenses spent on acquiring novel users	Value of Existing Users	Value of New Users	Uber User Value	% of Value from Existing users
0%	$6,167	$18,147	$24,314	25.36%
20%	$10,619	$19,035	$29,654	35.81%
40%	$15,071	$19,923	$34,994	43.07%
60%	$19,523	$20,811	$40,334	48.40%
80%	$23,974	$21,699	$45,673	52.49%
100%	$28,426	$22,587	$51,013	55.72%

As you lot increment the proportion of the operating expenses that are spent on acquiring novel users, the value of an existing user goes upward because you lot are spending less coin on providing service to that user, but the value of a novel user also increases, equally the cyberspace value added (the difference betwixt the user value in addition to the toll of acquiring a user) goes up. Ironically, equally you lot pass to a greater extent than on acquiring novel users in addition to less on servicing existing users, the proportion of your value that comes from existing users increases.
User Value Proposition 1: Influenza A virus subtype H5N1 money-losing companionship that is losing coin providing service to existing users/customers is worth less than a companionship amongst equivalent losses, where the primary expenses are coming from client acquisitions.

This is, of course, neither profound nor surprising, in addition to it explains why, left to their ain devices in addition to without whatever monitoring, immature companies volition claim that most or all of their expenses are for acquiring novel customers. If you lot are investing inwards a immature company, you lot volition receive got to practice your ain assessment of whether managers are misrepresenting, past times looking at expense growth over fourth dimension versus novel customers. If the release of total customers remains fixed in addition to expenses maintain rising, you lot should locomote skeptical most managerial claims (that most of the costs are for acquiring novel customers).

2. Cost Structure
One ground that investors are willing to convey losses at immature companies is because they believe that equally the companionship grows its operations, at that spot volition locomote economies of scale. In income declaration terms, this volition resultant inwards expenses growing less apace than revenues in addition to improving operating margins. That said, you lot cannot convey it on organized faith that this volition ever come about or that it volition come about at the same charge per unit of measurement for every company. To consider the impact on user value of this dimension, I adjusted the portion of Uber's expenses that are variable (and volition grow amongst revenues) in addition to those that are fixed (and grow at a lower rate) in addition to captured the value effect inwards this table:

Uber User Value in addition to Cost Structure

% of electrical flow expenses that are fixed	Value of Existing Users	Value of New Users	Uber User Value	% of Value from Existing users
0%	$14,733	$15,250	$29,983	49.14%
20%	$16,412	$20,191	$36,603	44.84%
40%	$17,834	$24,373	$42,207	42.25%
60%	$19,040	$27,924	$46,964	40.54%
80%	$20,068	$30,949	$51,017	39.34%
100%	$20,947	$33,536	$54,483	38.45%

As the proportion of expenses that are fixed rises, the value of both existing in addition to novel users goes upward but the latter goes upward at a faster rate. Put simply, the economies of scale increment equally you lot increment the charge per unit of measurement at which you lot are adding scale.
User Value Proposition 2: Influenza A virus subtype H5N1 companionship whose expenses are primarily fixed (will non grow amongst revenues) volition locomote worth to a greater extent than than an otherwise identical companionship whose expenses are variable (track revenues).

If unchallenged, immature growth companies volition ever claim that they receive got massive economies of scale but that claim has to locomote backed upward past times the numbers. Specifically, investors should pay attending to the charge per unit of measurement of alter inwards revenues in addition to expenses, since amongst large economies of scale, the one-time should alter to a greater extent than than the latter. The caveat, though, is that having to a greater extent than fixed costs tin dismiss increment risk, because it volition increment the jeopardy of failure at immature companies in addition to earnings volatility for to a greater extent than mature firms. As user growth levels off, having to a greater extent than fixed costs volition trim back value rather than increasing it.

User Economics: Growth Propositions
For immature companies, nosotros mostly persuasion growth equally goodness in addition to piece that is mostly true, non all growth is created equal. In fact, fifty-fifty amongst immature companies, at that spot are some strategies that deliver growth inwards users or revenues, piece destroying value. In a user or subscriber based model, at that spot are ii ways you lot tin dismiss grow your revenues. One is to instruct existing users to purchase to a greater extent than of your products or services in addition to the other is past times trying to instruct novel users. While both tin dismiss increment value, the one-time volition locomote create to a greater extent than value, for ii reasons. First, since it comes from existing customers, you lot don’t receive got to pay to instruct these users in addition to it is thence less costly to the firm. Second, past times increasing the value of a user, it increases the value of whatever novel users equally well, creating a secondary impact on value. Using my Uber user valuation, you lot tin dismiss consider the impact of changing the annual growth charge per unit of measurement inwards revenues for an existing user inwards the nautical chart below:

As revenue growth charge per unit of measurement increases, the value of both existing in addition to novel users increases, amongst the value of Uber hitting $90 billion at high annual growth rates. If at that spot is no growth inwards revenues, the value of Uber collapses equally novel users truly destroy value (because the toll of adding a novel user exceeds the value of that user). Now consider how Uber's value is affected, if nosotros grip existing user assumptions fixed in addition to alter the compounded annual growth charge per unit of measurement (for the side past times side 10 years) inwards the release of users:

While value increases amongst user growth rates, it increases at a lower charge per unit of measurement than it did when nosotros varied revenue growth from existing users.
User Value Proposition 3: Influenza A virus subtype H5N1 companionship that is growing revenues past times increasing revenues/user is worth to a greater extent than than an otherwise similar growth companionship that is deriving growth from increasing the release of users/customers. 

Young companies human face upward the interrogation of whether to allocate resources to instruct novel users or essay to sell to a greater extent than to existing users is i of those. At to the lowest degree inwards the illustration of Uber, the numbers seem to dot that the wages is greater inwards getting existing users to usage the service to a greater extent than than inwards looking for novel users.

User Economics: Business Propositions
At the jeopardy of stretching the user value model also far, it tin dismiss locomote used to hash out concern models inwards the space, from the networking benefits that so many companies inwards this infinite claim to possess to how the revenue model you lot select (subscription, transaction or advertising) plays out inwards user values.

1. Competitive Dynamics in addition to Networking Benefits

Is it improve to operate inwards a concern where the toll of acquiring a novel user is depression or high? Holding all else constant, the response is obvious. Influenza A virus subtype H5N1 trouble solid volition maximize its value if tin dismiss generate both high value per user in addition to receive got a depression toll of acquiring novel users. That said, if everyone inwards the concern shares these characteristics, i or some other of these variables has to change. If the toll of acquiring novel users is depression for everyone, contest volition drive downwardly the value per novel user, in addition to if the value per user remains high, contest volition drive upward the toll of acquiring novel users. The merchandise off is captured inwards the motion painting below:

User Value Proposition 4:  The particular trouble solid volition locomote the i that is able to detect a pathway to high value per user in addition to a depression toll to adding a novel user inwards a market, where its competitors struggle amongst either depression value per user or high costs of acquiring users.
So how practice the particular companies describe off this seeming impossible combination of high value per user in addition to depression toll per novel user? I may locomote stretching, but it is at the pump of ii damage that nosotros consider increasingly used inwards business, network benefits in addition to big data.

• Network Benefits: If network benefits exist, the toll of acquiring novel users volition decrease equally a company's presence inwards a marketplace increases, reaching a tipping dot where the biggest instrumentalist volition human face upward much lower costs inwards acquiring novel users than the competition, allowing it to capture the marketplace in addition to perchance usage its marketplace potency to increment the value of each user. In the illustration of Uber in addition to ride sharing business, the declaration for networking benefits is strong on a localized basis, since at that spot are clearly advantages for both drivers in addition to customers to shift to the dominant ride sharing companionship inwards whatever locality, the one-time because they volition generate to a greater extent than income in addition to the latter because they volition instruct improve service. The declaration is much weaker on a global basis, though ride sharing companies are trying to create networking benefits past times allying amongst airlines in addition to credit assist companies, in addition to how this endeavour plays out may good determine Uber's ultimate value.
• Big Data: While I stay a skeptic on the "big data" claims that every companionship seems to locomote making today, it is inarguable that at that spot are companies that usage large information to augment value. These companies collect information on their existing users/subscribers/customers in addition to usage that information to (a) customize existing products/services to consider user preferences, (b) create novel products or services that consider perceived user needs and/or (c) for differential pricing. All of these increment user value past times altering i or to a greater extent than of the inputs into the equation, amongst customization increasing user life in addition to novel products & differential the growth inwards revenues/user. In my view, the best users of large information (Netflix, Amazon, Google in addition to Facebook) receive got used the information to increment their existing user value. Uber is withal inwards the nascent stages, but its attempts at using information receive got expanded from surge pricing to differential pricing.

2. Revenue Models
In my version of user valuation, I expression at revenues per user, drawing no distinction on how those revenues are derived. Broadly speaking, at that spot are iii revenue models that a user/subscriber based companionship tin dismiss use, a subscription-based model where users or subscribers pay a subscription fee to maintain to usage the service or product, a transaction-based model where users or subscribers pay only when they usage the service of production in addition to an advertising-based model where users or subscribers instruct to usage the production or service for free, but are targeted inwards advertising. Netflix operates on a subscription-based model, Uber is a transaction-based trouble solid in addition to Facebook generates its revenues from advertising. Some companies similar LinkedIn receive got hybrid models, generating revenues from subscriptions (from premium members), transactions (from recruitments) in addition to advertising.  There are other inputs into the valuation that volition locomote affected past times a company's revenue model in addition to I receive got tried to capture them inwards the tabular array below:

	Subscription	Transaction	Advertising
User Stickiness (User life & Renewal Probability)	High (High life & renewal probability)	Intermediate (Intermediate life & renewal probability)	Low (Low life & renewal probability)
Revenue per User Predictability (Discount rate)	High (Low Discount Rate)	Low Predictability (High Discount Rate)	Intermediate (Average Discount Rate)
Revenue per User Growth (Annual Growth Rate)	Low (Low growth charge per unit of measurement inwards revenues/user)	Low (High growth charge per unit of measurement inwards revenues/user)	Intermediate (Intermediate growth charge per unit of measurement inwards revenues/user)
Growth charge per unit of measurement inwards users (CAGR inwards # Users)	Low (Low CAGR inwards # users)	Intermediate (Intermediate CAGR inwards # users)	High (High CAGR inwards # users)
Cost of adding novel users (Cost/New User)	High (High Cost/New User)	Intermediate (Middling Cost/New User)	Low (Low Cost/New User)

There is no i dominant revenue model, since each has its pluses in addition to minuses. An advertising-based model volition allow for much to a greater extent than rapid growth inwards a firm's early on years, a subscription-based model volition generate to a greater extent than sustainable growth in addition to a transaction-based model has the greatest potential for revenue growth from existing users.
User Value Proposition 5:  The "optimal" revenue model may vary for a trouble solid depending upon where it is inwards the life wheel in addition to across firms depending on their production or service offerings in addition to across investors, depending on whether they are focused on user growth, revenue growth or revenue sustainability.

3. Real Options
When valuing a companionship based upon its expected cash flows, at that spot is a run a jeopardy that you lot volition nether value the company, if it has command of a resources that could locomote used for other purposes inwards the future, even if that usage makes no economical feel today. That is why a applied scientific discipline or natural resources reserve that is non feasible today tin dismiss withal receive got value, in addition to this is the soil for the existent alternative premium. In the context of a user-based business, optionality tin dismiss instruct a element of value, to the extent that companies may locomote able to exploit their user bases to sell other products in addition to services inwards the future. While the intuition of existent options is simple, valuing existent options is notoriously hard in addition to afterwards much paw waving, most of us (including me) give up, but the user-based valuation model provides a framework to at to the lowest degree eke out some full general propositions most optionality in addition to value.

There should locomote no surprises inwards this picture, amongst the value of a existent alternative inwards a user base of operations tied to the inputs into an alternative pricing model.
User Value Proposition 6: The value of optionality from a user base of operations volition locomote greatest at firms amongst lots of sticky, intense users inwards businesses where the future is unpredictable because of changes inwards product/service applied scientific discipline in addition to client tastes. 

The Bottom Line
The most straight applications of a user or subscriber based model is inwards the valuation of companies similar Uber, Facebook in addition to Netflix. That said, to a greater extent than in addition to to a greater extent than companies are seeing benefits inwards shifting from their traditional concern models to user-based ones. Apple is a cash machine built precisely about a smartphone but it is also accumulating information on to a greater extent than than a billion users of these phones, to whom it may locomote able to offering other products in addition to services. Amazon started life equally an online retail companionship but at that spot is no denying the powerfulness of its 70 1000000 Prime members inwards generating revenues for the company. I receive got used Microsoft in addition to Adobe products for equally long equally they receive got been around, but amongst both companies, but my human relationship amongst both companies has changed. I am right away a subscriber (Office 365 in addition to  Creative Cloud member) who pays annual fees, rather than a client who buys in addition to upgrades software on a discretionary basis. Understanding user economic science in addition to value is fundamental to non only investors inwards these companies, when valuing in addition to pricing them, but to managers of these companies, inwards their day-to-day concern decisions. I volition admit, without shame, that my cognition of user-based companies is rudimentary in addition to that my user-based model may locomote amateurish, inwards what it misses or mangles. That said, if you lot are an skilful on user-based businesses, I promise that you lot tin dismiss construct on the model to brand it to a greater extent than realistic in addition to useful.

YouTube Video

Links

1. Crystal Ball (Simulation Add On for Excel)
2. My newspaper on dealing amongst doubt inwards valuation

Attachments

1. Uber User Valuation Spreadsheet
2. Uber User Value: Simulation Output

Blog Posts

1. Uber's Bad Week: Doomsday Scenario or Business Reset (June 2017)
2. User/Subscriber Economics: An Alternative View of Uber's Value