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Uber headed for IPO: Valuation of Uber in Comparison with Lyft

Lyft recently made its public market debut with a valuation of 24 billion $. On the following days, the shares of Lyft sank due to investors’ concern over the profitability of the company. As of April 12th, it is trading 21% below the IPO price. In our analysis of Lyft’s IPO, we predicted the overvaluation of Lyft’s market cap. Now, the recently-published prospectus of Uber is highly anticipated by investors. Uber, founded in 2009, plans to raise 10 bn $ with a valuation around 90 to 100 billion $. As Besfin Financial Analysis and Services, we compared the financials of Uber and Lyft to end the analysis with our valuation of Uber.

Lyft identifies itself as a business in transportation sector while Uber highlights the diversity of its services including transportation and logistics. Indeed, the success of Uber Eats proves Uber Technologies’ capability of operating in all means of getting one thing from one place to another. On top of that, Uber provide services all around the world with subsidiaries Grab (operating in South East Asia), Didi(operating in China) and recentlyacquired Careem(operating in Middle East) while Lyft solely focuses on North America region.

Before starting with the comparison of both firms, we should note that none of the ridesharing companies make profits as of now. This raises questions about the future of ride-sharing business. In fact, Uber goes as far as saying “ We may not achieve profitability” in its prospectus. Additionally, the autonomous car industry, which will determine the fate of ridesharing business, had not shown any signs of commercialization for the near future. However, Lyft and Uber aggressively invest in Research&Development of autonomous cars proving their belief in the industry. In 2018, Uber and Lyft spent 1.5 billion dollars, 300 million dollars for R&D respectively.

Financial Comparison of Uber and Lyft

The number of active users is a leading metric in ridesharing business. The popularity of the application attracts more drivers and riders by diminishing waiting times; hence increasing the satisfaction of users. Consequently, driver and rider acquisition costs decrease significantly meaning that ridesharing companies should achieve economies of scale. Uber, as shown below, has a remarkable advantage over Lyft in terms of active users. As of 2018 Q4, Uber has 91 million active user while Lyft only has 18,6 million active users. On the other hand, both firms increase the number of users very rapidly.

The revenue of Uber has been increasing at a diminishing rate for the last 3 years. In 2018, Uber recorded a revenue of 11.270 billion dollars while it only received 22.6% of the billings showing a decline of 0.5%. In other words, Uber’s bargaining power has decreased. The success of Lyft in North America and the increasing number of local competitors all around the world are among the reasons of this decline.

Lyft follows a similar growth trend in terms of revenues meaning that the market size of ridesharing business is increasing as a whole. Although the revenues has been increasing, the below graph depicts that both firms has not achieved profitability yet. However, there is a trend towards decreasing Loss/Revenue margins. Uber showed a higher probability of achieving profitability with a Loss/Revenue percentage of 16,4 compared to Lyft’s figure of 44%. Lyft will most likely struggle to achieve a positive EBITDA.

When we compare the prospectus of both firms, we see that Uber has raised 3.2 billions dollars from the agreement between Grab and Uber which eased the pressure of finding cash for the company. Meanwhile, Lyft didn’t have such a source of cash. If Uber raises the expected amount of 10 billion dollars with its IPO, it will have a very low probability of bankruptcy in the near future.

We should consider the side businesses of Uber technologies rather than only focusing on ridesharing business while valuing the company. Primarily, we should take the operations of Uber Eats into account. The below graph depicts the rising share of Uber Eats’ revenue in total revenue of Uber Technologies.

As of 2018, Uber Eats generated the 13% of total revenues with a significant raise compared to previous years. Therefore, Uber Eats and other side businesses of Uber will have a significant impact while valuing the company. Comparing the valuation of Lyft and Uber will not give highly accurate results. Another obstacle is that Uber operates all around the world while Lyft focuses in North America region. For instance, revenue per person in Chinese market significantly differs from revenue per person in United States.

Valuation Analysis

Endogenous&exogenous risks and investor expectations also effect the valuation of Uber Technologies significantly. Uber had a negative media coverage due to scandals involving CEO of the company in 2017. As a result of negative publicity, Uber lost some of its customer base to Lyft. In ridesharing business, there is no customer loyalty meaning that customers can switch between service providers easily. Hence, companies should be very cautious to sustain a positive brand name. It makes the valuation of Uber even harder. Similarly, the volatile stock performance of Lyft after its IPO is due to both being the first ridesharing company to be publicly traded and the intrinsic difficulty of valuing ridesharing companies.

After all, the most accurate way to value Uber is the stock performance of Lyft considering there is no other alternative to relate Uber. Conventional valuation methods also give irrelevant results due to negative EBITDA values and market’s hunger for ridesharing companies. The below table depicts the financials of Lyft with its IPO price and price as of April 12th. Moreover, we included the Uber’s 100 billion dollars valuation and its financials to make a comparison of both companies. Uber and Lyft differs in 2 significant ways. Lyft performs better in terms of turning billings into revenue. However, Uber loses half of what Lyft loses per 100 dollars of billing(11.50$). Under these conditions, Uber is more likely to achieve profitability. On the other hand, Uber is turning 22,6% of billing into revenue while Lyft’s figure is 26,8%.

To compare the valuation of Lyft and predict a value for Uber we can use the following financial metrics: “Price/Revenue”, “Price/Billing” and “Price/Active Users”. The calculations made in above table shows that the price per active users is very similar for both companies given the 100 bn $ valuation of Uber and market cap of Lyft as of April 12th. Therefore, the rumored valuation of 120 bn $ before the IPO of Lyft appears to be highly overvalued for Uber. We could reach a similar result by using the “Price/Billing” multiple which would value the company at 125 bn $. However, Uber’s “Revenue/Billing” ratio is notably smaller than Lyft. On the other hand, if we use the multiple of “Price/Revenue”, we would get a value of 100 bn $. Meanwhile, Lyft’s stock price appears to be in a downwards trend. This would impact our final valuation as 100 bn $ or smaller. In conclusion, Lyft’s market performance during April will be the lead indicator of Uber’s valuation. On top of that, investors’ valuation of Uber’s side businesses considering their growth prospects and their share in the total revenue of the company will impact the final valuation of Uber Technologies Inc.

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