When Uber, the limousine and taxi-fetching app company, was valued on Friday at $18.2 billion, a collective grunt could be heard across the Internet. It is hard to believe a four-year-old company that exists on an iPhone could be worth more than Alcoa, Tiffany or Whole Foods, some of the world’s largest and most renowned companies.
Uber’s valuation “should mark a nadir in tech insanity: not only has the last sane person in the Valley left and switched out the lights, but someone probably paid him at least a billion dollars to do it,” James Ball of The Guardian asserted.
But here’s another way to think about Uber’s whopping valuation: It is still too low. At a time when the word Internet is increasingly followed by the word “bubble,” it may be heresy to suggest that a darling of Silicon Valley could be properly valued, much less undervalued. But in the case of Uber, it may be true. Every tech startup is seemingly endless, now mirroring the .com boom of the late 90’s.
Think about the plain math for a moment. There are a lot of numbers floating around about the global revenue for taxis, but here are the basics: In the United States, the taxi business generates $11 billion annually, according to IBISWorld.
In big cities like New York and London, The Financial Times reports that the average person spends $238 a year on taxis. If you reason that Uber could one day control a quarter of the current global taxi market, the investment would turn out to be a home run. The business is currently in 128 cities in 37 countries and says it is doubling its revenue every six months. TechCrunch reported Uber’s revenue last year was $213 million on more than $1 billion of bookings; Uber takes a 20 percent cut of all driver’s receipts.
If Uber were to take just half of the taxi market in the United States it would generate more than $1 billion in revenue a year.
But perhaps what’s most interesting about Uber is that it isn’t just targeting the current taxi market; it is seeking to expand the market.
In cities where Uber is operating, the business is clearly tapping new customer. This market is fueled with people who didn’t take taxis or limousines before, or at least not nearly as frequently. The ease of pressing a button on your mobile phone and having a car magically appear can quickly become addictive.
What’s more, Uber doesn’t own the limousines or cars. So far, its biggest costs are simply providing the technology that powers the network of cars as well as marketing and support costs for drivers, which means it is a very high-margin business. Because it is still private, we don’t know the hard numbers.
It’s all anecdotal evidence, but ask an Uber driver what they did before they started driving and many will tell you they were unemployed or working part-time jobs. According to Uber, the company says “at our current rate, Uber is responsible for directly creating 20,000 new jobs per month and powering billions in economic impact in cities around the world.”
More impressive, these new jobs are not low-wage: In New York, the company says a driver for UberX, its lower-tier car service, is making more than $90,000 annually. A yellow cabdriver is estimated to make about $30,000. This doesn’t mean that all taxi drivers are persuaded of Uber’s benefits; Some are seeking a nationwide union, in part because of competition from Uber.
Mike has a strong fascination for all things business. He currently studies at the NYU Stern School of Business and is intrigued by Economics, Marketing, and Trading.