Reminds me of Facebook six years back: "There's no way they're worth $33B" [1]. Now they're worth 10X, publicly traded, and printing money. Respectfully, even professional prognosticators (ie. VCs) get this shit wrong 9 times out of 10... so lamenting all the ways it could "fail to be a great business" isn't really that insightful (in the probabilistic priors sense).
TL;DR: You could be right (and frequently will be), and you could be spectacularly wrong. But we're just Monday-quarterbacking while they're trying to make the future bad-ass with magical "autonomous" cars (whether human drivers or computerized). That's cool in my book; I wish them the best of luck!
The market assumption is that they can probably grow their /user revenues quite a lot because they're not getting that many new users.
I suggest that FB is probably a very viable, very profitable company long term, but that their stock is probably over-valued.
From an investors perspective, it may have nothing to do with the reality of underlying fundamentals - but how other investors will perceive them. Ergo - FB may still make a great investment if you think they will come out with some new shiny products to keep other investors hopped up on the juice.
Purely by the books, they are about 4x overvalued right now.
10x price/earnings is the normal place for a healthy, strong, reasonably growing company.
Thanks I think your explanation makes more sense to me and I do think fundamentals are not right. I am not a finance guy so I don't understand a lot of thing but
Facebook has issued 44.22B in common stocks and Zukerberg's personal worth is 50B plus. How does that work? In a way entire common stock is contributing to his wealth.
I personally think a lot of investors will be the suckers in this game in the end.
There are shares outstanding, generally they are 'worth' the same, but with some differences maybe due to voting which affects price a little ...
Most of the companies stock are not 'floating' meaning, they are not out there on the market. So Zuck's shares are not.
The 'share price' is usually just the price of the last transaction of buy/sell on the stock.
If Zuck sold all his shares at once, he mighn't be able to get that price. But he wouldn't anyhow.
There's nothing nefarious about 'others contributing to his wealth' - people are generally buying the floating shares given what they think it's worth.
But here's a trick: if a company has a 'high profile' - often it's shares have some premium simply because there are more people looking at it. Supply and Demand.
~10 P/E is ratio for a well established, stable business - ones that maybe deliver 10% growth.
FB revenue growth is still insane - https://www.wolframalpha.com/input/?i=facebook+revenue - once that stops, honeymoon will be over.
Google has P/E ratio of 28. Facebook P/E ratio is right now only ~60% bigger, at 46 (and it already showed huge drop from >100 last year, as earnings are catching up with investors bets).
G revenue is growing at the rate of ~20%, while FB is doing >50%. If stock price for FB growth continues, it'll reach Google P/E ratio pretty soon - not 10 years. More like a year.
That 'someone said something about another company' is basically irrelevant.
The underlying issues are the facts that need to be addressed.
X years ago, what was FB's user base, how much was it growing, could it be disrupted, and how much were they spending on ops/acquisitions ... and of course, how many $ could they squeeze out of each user are the fundamental questions.
The article is not unfair.
Uber is a great business that is probably wildly over-priced at this point.
It's not irrelevant -- it's the same story every time, just with a different company.
The "underlying issues" are things Uber management (1) understands better than outsiders looking in; (2) they're actively working to address; and (3) they have vastly-superior metrics to understand their own internal growth rate. They want to stay private precisely for this reason: They don't want to answer whiny questions from people who think they know better.
"Wildly overpriced" is speculative on your part (at best). This isn't a publicly traded stock. It's preferred stock, and valuation is ~1 line item in a contract that probably spans dozens of pages. Those other T&C's matter a lot: liquidation preference, participating preferred, etc. Those newest investors are certainly getting superior liquidation preference, and likely getting guaranteed ROI.
How long is it going to last though? I expect FB to face some very hard questions about it's ad business (click farming, bots, etc) in the next 12-24 months.
Companies aren't blindly paying FB billions of dollars for ads without verifying they actually deliver a return... Clearly it's working, that's the reason so many companies pay for them.
Sure, they could probably get better at managing "click farming, bots, etc", but despite these things, advertising on FB has proven incredibly valuable and there's no clear indicator that'll change soon. If anything it'll just grow more valuable across a larger user base, hence their lofty P/E ratio (implying growth).
2) Even if Uber's CAC doesn't decrease, it could have a vastly-higher CLV to justify the crazy spending to capture market share now. It's a calculated strategic decision -- and it's impossible to say if it's "wrong"; only time will tell.
2) CLV depends on customer loyalty. In the case of the ride-sharing market, this ultimately comes down to the cost of service. Plus remember that Uber has to satisfy both sides of the coin here: drivers + riders. AND they have to be profitable. Tall order here.
The difference is that Uber's network effects aren't as important. As long as a service has a minimum number of users (and there isn't any cost to maintaining accounts on multiple services) they're essentially equivalent.
Anecdotally, people in my region refer to these services as "Ubers" like "Kleenex" or "Xerox", or refer them as "cars."
Uber definitely has some advantages vis-a-vis competitors, because there is a brand and networking effect at play.
Everyone knows about Uber, nobody knows anything about that 'local startup'.
The real competitor is obviously regular cabs. There is always a cab when I need one in Montreal, I don't care about Uber really.
The bit about 'regional profitiability' is valid. I'm suspicious that Uber is running profitably in the US. That said, I'll bet the absolutely could if they wanted to ... but they spend a lot on aggressive tactics/marketing.
If they had to 'stop growth' and 'just be a US' company right now - they'd have to lay off, downround etc.. Sure - they'd have screwed over later investors, but that's the point no?
The loser in all of this is the later stage dumb money. Mostly everyone else wins.
The real question is whether Uber can ever make money without subsidizing rides with investor capital. At some point, they have to raise prices. This make them vulnerable to competition.
The good news is that if Uber goes under, it's easy to replace them. Uber and Lyft pulled out of Austin TX last May over required fingerprinting of drivers. Ten competitors sprang up to replace Uber and Lyft. They're doing fine.[1]
Curbed is ... not the best experience I've had in ride-hailing. To be honest, it's easier and more convenient for me to have the office call a cab for those relatively few times when I'm in Austin. They may have ironed out some of the quirks of their platform since then (scheduled cabs being called out immediately, an attempt to get a ride to the airport being denied because the app decided I was trying to be dropped off on the tarmac itself), but there's no killer reason yet for me to try it out again.
Having said that, it's definitely true that there are basically no meaningful barriers to entry beyond mindshare (after all, every Uber driver is also running Lyft, and likewise for the drivers -- and Lyft's better driver rates are also why I have to use Lyft when I leave for the airport at 3 AM).
Things like UberEATS may provide some stickiness, but I'm far from sold that their basic economics are going to work in the long run, let alone keep them in the market pole position.
I'm pretty sure UberEATS must be a horrible customer experience based on the random shit I see happening at registers in places that I get food from. Stuff like the driver having no idea what the customer has ordered and just taking any old order the people behind the cash register are willing to give them. Since both ends of this transaction don't qualify as the sharpest tools in the shed, it's basically the blind leading the blind.
I get that it makes sense from Uber's point of view -- increasing driver utilization and smoothing out the supply side of the relationship is probably great for their unit economics. But they actually have to execute it well if they expect people like me to use it.
Will it? Setting aside the horserace between spending VC money to subsidize around 60% of every trip vs. the legal framework and a viable self-driving car that's for sale in large numbers, there are some real costs for Uber without drivers. For one, they need to buy the cars, which the driver does now. And maintain them - what's the TCO of an autonomous car? Well, nobody knows. Then of course there's fleet management, which Uber has zero experience in. And don't forget, Tesla and Ford have publicly indicated that they're baking sharing features into their own plans for self-driving cars, which means the platform owners will have the upper hand, while Uber plays with their little app. If that's straightforward, I'd hate to see complex :)
I think you've hit on the underlying issue with the common belief that Uber will be saved by self-driving cars.
If I can produce as many self-driving cars as I want (i.e. I'm Ford), what is my incentive to sell them to you?
I can make more money by owning them myself. Remember also, my cost to make is less than your cost to buy. Then I just tell them to drive off the assembly line and start picking up fares.
If self-driving cars are really a panacea, then the car manufacturers will be the ones who profit. It will also lead to extreme consolidation amongst low end manufacturers, since those with the best self-driving systems will make a lot more money per car from self-ownership than regular cars sold to customers can earn over their lifetimes.
You have to park them somewhere, you have to fuel or charge them, you have to clean them, and you have to maintain them. That means infrastructure. Expensive infrastructure.
Self-driving cars as a service have all the problems of personal rapid transit except track cost. Personal rapid transit has never been very successful. There are at least four startups selling driverless PRT shuttles right now, and nobody has more than one demo installation. Still, shuttle buses ought to be driverless very soon.
(Olli, from Local Motors, is very cute.[1] It talks to its riders, and using IBM Watson, can advise on restaurants and points of interest.)
Well, you don't actually ever have to park them. They could run near constantly, or any schedule that makes the most return on investment. Self-driving cars, if taken to their logical extreme, result in total gridlock.
I do think that between Ford and Uber, Ford is much better equipped to handle maintenance of a giant fleet of cars. Uber has zero experience in this area, whereas Ford has a giant, distributed network of dealers. If cars are predominantly owned by the company rather than being sold to consumers, these dealers might be in a position to pivot towards fleet management rather than sales and service.
However, I don't think any of this will happen for the simple fact that self-driving cars are not as close as people currently think. Maybe trucks and buses, but even then I remain skeptical.
It's funny Uber has been out of Austin for a while and things function pretty well and there are decent alternatives (considering their size)
Unless they somehow magically get the jump on driverless cars and even then once that technology develops won't easier to compete with them? they seem pretty worthless long term.
1. Same interface in any city. I don't need to figure out what the taxi phone number is (or what they are in case of multiple companies).
2. I can get a car somewhere other than downtown.
3. I can pay with credit, without fear that a driver will (best case) lie that the credit card machine is not working, until I say I don't have cash, or (worst case) kidnap me and take me to an ATM.
4. No silly medallion limits, so I never need to wait for long, even at closing time.
They really don't need to do the Ponzi scheme thing, hemorrhaging money and leaving the VC with the bill. Plenty of people will gladly pay more than a cab for the above benefits. In that sense, taxis are not really a competitor.
Right now, Uber's business model is throw so much VC money at everything that everybody else goes out of business, and hope the taxis die before you run out of VC money.
So Uber's short/mid term plan is to put all taxis out of business by lowering prices using VC money and their long term plan is to use autopilot cars to leave all drivers jobless.
And the other day there was an engineer from Uber commenting how ethical the company was.
I'm sure their engineering team is very ethical and responsible. But their business model and plan is actually very questionable. It's like they are hiding the highly questionable business ethics behind the good engineering ethics.
Yes the comparison is ridiculous, but so is your complete dismissal of taxi regulations. If you can't see that, then I agree that there is no further basis for discussion.
Plus acknowledging that regulations do provide some benefit is reasonable. Regulations ensure that:
* Taxis are regularly maintained
* Pricing is standardized, transparent, with rules to prevent gouging during "surge" periods
* Background checks for drivers
* Drivers are qualified (have to pass various tests to get licensed)
On a more philosophical level, I think taxis serve a public utility function, similar to busses and subways. In this sense, some government oversight makes sense.
I think most of the criticism of uber are valid... but the status quo they're working against (taxis and drunk driving) have enough downsides that I don't think the ethical calculus around their business practices is simple.
I don't think anyone is disputing that Uber is a great service — it's been a game changer for the consumer.
What's continually being debated, however, is what Uber is as a business enterprise, which is what the article is about.
Uber is interesting in that they're a facilitator of a commodity in which they're not all that crucial to the equation. They're the eBay or Google Search equivalent of transportation, where they give users and workers access to a common marketplace (not quite a market, since the workers are not able to set prices; I'm sure there's a proper economic term for what it really is) and the real work is done by the drivers. But they're not a monopoly, and that marketplace exists at the whim of the customer, who might not have the brand loyalty to stick around.
I mean this only makes sense if it's affordable for the rider, driver, and Uber. There's simply no evidence this is even likely: only the rider benefits. Which is enough to destroy existing taxi companies.
What would have been great would have been a universal ride hailing app hooking into the local companies.
Uber and Lyft left Austin at the beginning of the year over fingerprinting rules. Since then, there has been an explosion of smaller ride sharing companies: Fare, Fasten, GetMe, and, most interestingly, RideAustin, which is a local non profit started by Austin tech luminaries. The apps were certainly much buggier than Uber or Lyft when they started, but I recently took a Ride Austin, and the app is so similar to Uber (as was the experience), that I wonder if Ride Austin will eventually branch out into other cities, at least by licensing their tech.
The Texas lege will likely override Austin's local regulations next year, so it will be interesting to see what happens when the fingerprinting requirements go away and Uber and Lyft come back.
The BBC ran an interesting article the other day asking if Uber were getting too big to fail, pointing to the way state-subsidised Uber is replacing public transport in some areas and worrying about what their lack of profitability means for this: http://www.bbc.co.uk/news/technology-38252405
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[ 3.1 ms ] story [ 116 ms ] threadTL;DR: You could be right (and frequently will be), and you could be spectacularly wrong. But we're just Monday-quarterbacking while they're trying to make the future bad-ass with magical "autonomous" cars (whether human drivers or computerized). That's cool in my book; I wish them the best of luck!
[1] https://signalvnoise.com/posts/2585-facebook-is-not-worth-33...
Yes Facebook is earning money but will it be a great business to justify 300B+ valuation in long term?
The market assumption is that they can probably grow their /user revenues quite a lot because they're not getting that many new users.
I suggest that FB is probably a very viable, very profitable company long term, but that their stock is probably over-valued.
From an investors perspective, it may have nothing to do with the reality of underlying fundamentals - but how other investors will perceive them. Ergo - FB may still make a great investment if you think they will come out with some new shiny products to keep other investors hopped up on the juice.
Purely by the books, they are about 4x overvalued right now.
10x price/earnings is the normal place for a healthy, strong, reasonably growing company.
Facebook has issued 44.22B in common stocks and Zukerberg's personal worth is 50B plus. How does that work? In a way entire common stock is contributing to his wealth.
I personally think a lot of investors will be the suckers in this game in the end.
There are shares outstanding, generally they are 'worth' the same, but with some differences maybe due to voting which affects price a little ...
Most of the companies stock are not 'floating' meaning, they are not out there on the market. So Zuck's shares are not.
The 'share price' is usually just the price of the last transaction of buy/sell on the stock.
If Zuck sold all his shares at once, he mighn't be able to get that price. But he wouldn't anyhow.
There's nothing nefarious about 'others contributing to his wealth' - people are generally buying the floating shares given what they think it's worth.
But here's a trick: if a company has a 'high profile' - often it's shares have some premium simply because there are more people looking at it. Supply and Demand.
But FB is stabilizing - https://www.wolframalpha.com/input/?i=facebook+p%2Fe+ratio+c... - P/E is dropping even as stock is going up. Market is betting that in a couple of years revenue growth should stabilize.
Agreed, but in order to justify the massive P/E they would have to be growing quite a lot for the next 10 years.
I don't seem them delivering this kind of growth over that time.
Maybe.
Google was able to do it for a long while.
G revenue is growing at the rate of ~20%, while FB is doing >50%. If stock price for FB growth continues, it'll reach Google P/E ratio pretty soon - not 10 years. More like a year.
The underlying issues are the facts that need to be addressed.
X years ago, what was FB's user base, how much was it growing, could it be disrupted, and how much were they spending on ops/acquisitions ... and of course, how many $ could they squeeze out of each user are the fundamental questions.
The article is not unfair.
Uber is a great business that is probably wildly over-priced at this point.
The "underlying issues" are things Uber management (1) understands better than outsiders looking in; (2) they're actively working to address; and (3) they have vastly-superior metrics to understand their own internal growth rate. They want to stay private precisely for this reason: They don't want to answer whiny questions from people who think they know better.
"Wildly overpriced" is speculative on your part (at best). This isn't a publicly traded stock. It's preferred stock, and valuation is ~1 line item in a contract that probably spans dozens of pages. Those other T&C's matter a lot: liquidation preference, participating preferred, etc. Those newest investors are certainly getting superior liquidation preference, and likely getting guaranteed ROI.
No - it's definitely not the 'same story' :)
The same was said about Google and FB, and Amazon - and they are doing very well.
It was said about Twitter and they are failing.
These companies are all quite different.
Companies aren't blindly paying FB billions of dollars for ads without verifying they actually deliver a return... Clearly it's working, that's the reason so many companies pay for them.
Sure, they could probably get better at managing "click farming, bots, etc", but despite these things, advertising on FB has proven incredibly valuable and there's no clear indicator that'll change soon. If anything it'll just grow more valuable across a larger user base, hence their lofty P/E ratio (implying growth).
1) Moat - barriers for entry in the ride-"sharing" space are low. See Austin for example.
2) Economies of scale - the costs for FB to add each incremental user got increasingly cheaper due to cost savings at scale. Not so much for Uber.
2) Even if Uber's CAC doesn't decrease, it could have a vastly-higher CLV to justify the crazy spending to capture market share now. It's a calculated strategic decision -- and it's impossible to say if it's "wrong"; only time will tell.
Anecdotally, people in my region refer to these services as "Ubers" like "Kleenex" or "Xerox", or refer them as "cars."
Everyone knows about Uber, nobody knows anything about that 'local startup'.
The real competitor is obviously regular cabs. There is always a cab when I need one in Montreal, I don't care about Uber really.
The bit about 'regional profitiability' is valid. I'm suspicious that Uber is running profitably in the US. That said, I'll bet the absolutely could if they wanted to ... but they spend a lot on aggressive tactics/marketing.
If they had to 'stop growth' and 'just be a US' company right now - they'd have to lay off, downround etc.. Sure - they'd have screwed over later investors, but that's the point no?
The loser in all of this is the later stage dumb money. Mostly everyone else wins.
The good news is that if Uber goes under, it's easy to replace them. Uber and Lyft pulled out of Austin TX last May over required fingerprinting of drivers. Ten competitors sprang up to replace Uber and Lyft. They're doing fine.[1]
[1] http://www.curbed.com/2016/12/7/13828514/uber-lyft-ride-aust...
Having said that, it's definitely true that there are basically no meaningful barriers to entry beyond mindshare (after all, every Uber driver is also running Lyft, and likewise for the drivers -- and Lyft's better driver rates are also why I have to use Lyft when I leave for the airport at 3 AM).
Things like UberEATS may provide some stickiness, but I'm far from sold that their basic economics are going to work in the long run, let alone keep them in the market pole position.
I get that it makes sense from Uber's point of view -- increasing driver utilization and smoothing out the supply side of the relationship is probably great for their unit economics. But they actually have to execute it well if they expect people like me to use it.
They don't have to raise prices, they have to cut costs. This will be quite straightforward once there's no driver to pay.
If I can produce as many self-driving cars as I want (i.e. I'm Ford), what is my incentive to sell them to you?
I can make more money by owning them myself. Remember also, my cost to make is less than your cost to buy. Then I just tell them to drive off the assembly line and start picking up fares.
If self-driving cars are really a panacea, then the car manufacturers will be the ones who profit. It will also lead to extreme consolidation amongst low end manufacturers, since those with the best self-driving systems will make a lot more money per car from self-ownership than regular cars sold to customers can earn over their lifetimes.
Self-driving cars as a service have all the problems of personal rapid transit except track cost. Personal rapid transit has never been very successful. There are at least four startups selling driverless PRT shuttles right now, and nobody has more than one demo installation. Still, shuttle buses ought to be driverless very soon.
(Olli, from Local Motors, is very cute.[1] It talks to its riders, and using IBM Watson, can advise on restaurants and points of interest.)
[1] https://www.youtube.com/watch?v=9joEsWiYFEI
I do think that between Ford and Uber, Ford is much better equipped to handle maintenance of a giant fleet of cars. Uber has zero experience in this area, whereas Ford has a giant, distributed network of dealers. If cars are predominantly owned by the company rather than being sold to consumers, these dealers might be in a position to pivot towards fleet management rather than sales and service.
However, I don't think any of this will happen for the simple fact that self-driving cars are not as close as people currently think. Maybe trucks and buses, but even then I remain skeptical.
Unless they somehow magically get the jump on driverless cars and even then once that technology develops won't easier to compete with them? they seem pretty worthless long term.
1. Same interface in any city. I don't need to figure out what the taxi phone number is (or what they are in case of multiple companies).
2. I can get a car somewhere other than downtown.
3. I can pay with credit, without fear that a driver will (best case) lie that the credit card machine is not working, until I say I don't have cash, or (worst case) kidnap me and take me to an ATM.
4. No silly medallion limits, so I never need to wait for long, even at closing time.
They really don't need to do the Ponzi scheme thing, hemorrhaging money and leaving the VC with the bill. Plenty of people will gladly pay more than a cab for the above benefits. In that sense, taxis are not really a competitor.
And the other day there was an engineer from Uber commenting how ethical the company was.
I'm sure their engineering team is very ethical and responsible. But their business model and plan is actually very questionable. It's like they are hiding the highly questionable business ethics behind the good engineering ethics.
Or is there a point I'm missing?
Ethics goes out of the window in the pursuit of profit.
Don't want people to play a crooked game? Don't set one up.
Regulations exist for many reasons, not all are designed to act as a barrier for new entrants. Consumer safety springs to mind...
Plus acknowledging that regulations do provide some benefit is reasonable. Regulations ensure that: * Taxis are regularly maintained * Pricing is standardized, transparent, with rules to prevent gouging during "surge" periods * Background checks for drivers * Drivers are qualified (have to pass various tests to get licensed)
On a more philosophical level, I think taxis serve a public utility function, similar to busses and subways. In this sense, some government oversight makes sense.
This is a question worth considering, given that rides are currently subsidized with VC $$$.
What's continually being debated, however, is what Uber is as a business enterprise, which is what the article is about.
Uber is interesting in that they're a facilitator of a commodity in which they're not all that crucial to the equation. They're the eBay or Google Search equivalent of transportation, where they give users and workers access to a common marketplace (not quite a market, since the workers are not able to set prices; I'm sure there's a proper economic term for what it really is) and the real work is done by the drivers. But they're not a monopoly, and that marketplace exists at the whim of the customer, who might not have the brand loyalty to stick around.
What would have been great would have been a universal ride hailing app hooking into the local companies.
The Texas lege will likely override Austin's local regulations next year, so it will be interesting to see what happens when the fingerprinting requirements go away and Uber and Lyft come back.
It's not rocket science, easily copied, little customer loyalty and consumers will switch quickly to whoever offers the better and cheaper service.
The end game here is autonomous vehicles and I'm not sure they are even in the game.
[1] https://techcrunch.com/2016/09/14/1386711/ [2] https://www.uber.com/info/atc/
I guess it depends on what they include in COGS.
Over 75% of my Uber rides are heavily subsidized in some way:
- pools where no one else is picked up.
- 25% off coupon for 10 rides (I almost always have one of these)
- 50% off coupon for 5 rides (I get like once a month, and have one currently)