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)