Uber/Lyft Markets

Uber’s Confidential Documents Show Path to $90 Billion IPO

When Wall Street banks last fall were pitching to take Uber public, some suggested the ride-hailing giant could hit the public market with a valuation of $120 billion. But given how much valuations have fallen with the stock market slump in recent weeks, Uber is more likely to fetch a valuation of a little less than $90 billion. That still would be about $14 billion more than its most recent private valuation from the middle of 2018.

This valuation is based partly on previously undisclosed projections Uber gave creditors last March, in which the company projected it would double net revenue to $14.2 billion by 2019 from its 2017 revenue level. It also projected Uber’s loss before interest, taxes and non-cash items like depreciation and stock compensation would shrink to $500 million in 2019 from a projected $1.7 billion in 2018. Uber’s revenue in the first nine months of 2018 was better than its earlier projections, while Ebitda looks to be a little behind.

The Takeaway
• Uber projected $1.5 billion Ebitda in 2020
• Uber recently valued its foreign equity holdings at $12 billion
• Uber’s ‘big bets’ like Eats accounted for one-third of 2018 Ebitda loss

Separate documents from October 2018 provide a detailed preview of Uber’s public offering documents, including a raft of legitimate risk factors that investors should keep top of mind. (See related article here.) The company late in 2018 privately submitted to regulators preliminary offering documents, the first step towards what could be one of the biggest IPOs in U.S. history in terms of valuation. Uber is expected to raise $10 billion, said one person briefed about the matter.

It is possible that the stock market will recover, lifting Uber’s potential valuation back to higher levels. Uber is one of several big tech companies expected to go public in 2019, also including Lyft and Pinterest, making this one of the biggest years for tech IPOs in some time. If the volatile market conditions of recent weeks continue, however, offerings may be delayed. An Uber spokesman did not have comment for this article.

For public market investors, a bet on Uber would be a bet on the company’s ability to be a “platform” for services that rely on its network of drivers, said Paul Hudson, chief investment officer of Glade Brook Capital Partners, which owns private shares in Uber and Lyft, in an interview. Growth in the ride-hailing market is slowing. But “can they go after...anything you want to purchase online delivered to your door in an hour?” he said. Uber already has discussed fulfilling grocery deliveries, for instance.

Coming up with a theoretical valuation for Uber isn’t straightforward. For one thing, there is no obvious public company to compare Uber to. (Its closest competitor, Lyft, is also planning an IPO in 2019.) For another, Uber isn’t profitable and is still burning through cash. In the first nine months of last year, for instance, Uber consumed $1.4 billion in cash from its operations and on capital expenditures, its publicly released financial statements show. That figure looks in line or better than Uber’s earlier projection of $2.2 billion cash burn for the calendar year.

Another complication in valuing Uber: Growing government regulations in cities around the world, including its No. 1 U.S. market, New York City, threaten to curb the growth of its core business.

But unlike Lyft, Uber isn’t just a ride-hailing business. It runs a food-delivery service Uber Eats with somewhat different economics, though some investors expect profit margins to be the same as in Uber’s core business. Uber also has a sizable international presence, both through equity stakes in foreign ride-hailing firms like Didi Chuxing in China as well as its own operations. And it has a big self-driving car testing arm which eats cash currently and may or may not help the business long-term.

Given its lack of profits, the easiest way to value Uber might be on a multiple of sales. And the closest comparison, according to two investors, is food-delivery service Grubhub. Like Uber, Grubhub is an on-demand marketplace that keeps around 20% of gross bookings as net revenue. Its revenue growth rate in 2018 was roughly the same as Uber’s, at close to 50%, and analysts expect its growth rate to slow in 2019 to nearly the same rate as Uber’s.

Grubhub is currently trading at around five times its projected 2019 revenue. Applying the same multiple to Uber suggests it would have an enterprise value of about $71 billion. That doesn’t take into account Uber’s portfolio of investments in privately held ride-hailing leaders in China, Southeast Asia and Russia. Uber told investors three months ago those investments were worth a combined $12 billion, according to a confidential bond offering document. Within those holdings, its stake in China-based Didi Chuxing was worth $8 billion on its own, the document said.

That may be a little conservative. If, as expected, Uber’s full-year 2018 revenue is higher than the March projections, investors will likely raise their forecast for the 2019 revenue. Assuming the 2019 top line estimate goes to $15 billion, an enterprise value of $75 billion would be reasonable—lifting Uber’s market value to $87 billion.

Growth vs. Profits

In recent years, investors in companies like Netflix have been focused on growth rather than profitability. But attitudes are changing. When Uber makes its case to Wall Street, investors may be more focused on when Uber will stop losing money. Its losses have caused Uber to borrow money: Debt reached $4.8 billion as of the end of September, its financial statements show, and it sold around $1.5 billion in bonds in the past couple of months.

Going public could force Uber’s management to be more conservative in how aggressively they pursue growth, some investors say. Glade Brook’s Mr. Hudson said he hopes Uber’s and Lyft’s respective 2019 IPOs are a “catalyst for more rational behavior when it comes to pricing [for riders] and subsidies [for drivers],” allowing both to accelerate their push to profitable status. He declined to comment about Uber’s financial projections.

On that score, in a presentation distributed in March 2018, Uber said it had “clear levers” it could pull in order to turn on the cash spigots if it wanted to, by reducing its marketing spending both in the U.S. and developing markets and by finding partners to help finance its self-driving car development, documents show. Pulling those levers would slow revenue growth by a third—from a 33% growth in net revenue to 22% growth in net revenue in 2019.

Uber said it had “clear levers” it could pull in order to turn on the cash spigots if it wanted to, by reducing its marketing spending both in the U.S. and developing markets.

But it would save Uber $2 billion annually, the company said. And that would mean Uber could generate earnings before interest, taxes, depreciation and amortization of $1 billion this year. That’s compared to an Ebitda loss of $500 million that management otherwise expected in what it calls its “base case scenario”—assuming it continues to focus more on growth.

Under that same likely “base case” scenario, Uber management believed it could turn profitable by 2020, when it would make $1.5 billion in Ebitda. This assumes a lot: Net revenue would more than double between 2017 and 2020 to $18 billion (from $7 billion), while annual personnel costs would remain roughly level. Research and development costs would double and marketing costs would increase about 50%. It also assumes operations and customer support would nearly double to $2.4 billion. In other words, Uber is banking on net revenue growth more than making up from the rise in expenses.

Uber management did not offer projections beyond 2020. But even if it did, it is debatable how much weight investors in the IPO will put on its earnings projections, particularly given how old they are.

But Uber’s performance in the first nine months suggests the projections were conservative. In the March investor presentation, it projected net revenue would rise 48% in 2018 from the year before, to $10.7 billion. For the first nine months, revenue was on track to beat that projection handily and should hit at least $11.3 billion, if not $11.5 billion. Profit looked to be a little behind: Uber has reported a loss before various charges of $1.25 billion for the first nine months, compared with the $1.7 billion projection for the full year.

In its October 2018 bond offering documents, Uber said it has reduced its losses over the past year by reducing subsidies for drivers, saying it did a better job of targeting subsidies to specific drivers and not to others. It also said it eliminated "inefficient" forms of online advertising that attracts both riders and drivers. And lastly, Uber said it was "beginning to see scale-driven fixed-cost leverage" as its business growth outstrips its need to hire people to manage affairs on a local level around the world.

Added Wrinkles

Investors have to take into account some other wrinkles that could affect its valuation. On the plus side, Uber’s value could receive a multibillion-dollar boost based on expected future tax benefits. Uber’s accountants have likely been declaring a “net operating loss” from its current cash burn, which would mean it will be able to significantly reduce its tax bill when it eventually generates cash.

Another complication is that Uber’s food delivery service Uber Eats is growing much faster than the ride-hailing operation—100% annually compared to about 30%. Uber Eats already makes up more than 15% of gross revenue and likely more than 7% of net revenue. But it is also more of a loss-maker. Eats will lose at least $320 million in Ebitda in 2018, if its second half 2018 performance resembles that of the first half. Some investors might want to apply a higher multiple to Eats than to the rest of ride-hailing.

In all likelihood, Eats lost more money than that, as Uber tried to keep gaining market share versus rivals like Grubhub, Deliveroo, DoorDash and Postmates. That’s a change from March, when Uber was planning to make Eats’s adjusted Ebitda positive in the second half of 2018. The company’s continued investment in Eats may worsen its Ebitda in the near term, but investors say that doing so is justified and will help margins later on.

Uber also is losing money from its nascent marketplace that helps companies ship freight via trucks and from autonomous vehicle research, the latter of which cost around $500 million to run in 2018 and does not generate revenue. That means Uber’s big bets likely accounted for at least a third and possibly close to half of Uber’s adjusted Ebitda loss in 2018. (Uber had projected the overall 2018 Ebitda loss would be $1.7 billion.) Uber in March 2018 said its big bets would likely make up the majority of the company’s $500 million Ebitda loss in 2019, while its core business would run at an Ebitda loss of $125 million that year.

Lastly, Uber said last month that in 2019 it would spend more than $1 billion on buying and renting electric devices to customers—namely, scooters and bikes. It is unclear how the company is accounting for that budget and whether it will impact earlier plans for improving margins. In other words, it also is unclear how the March 2018 projections may have changed in the past nine months.

Amir Efrati is executive editor at The Information, which he helped to launch in 2013. Previously he spent nine years as a reporter at the Wall Street Journal, reporting on white-collar crime and later about technology. He can be reached at [email protected] and is on Twitter @amir