Is it this easy to become a billionaire?
The 5-year old ride-sharing company Uber just received funding that valued the firm at $17 billion. Really? How can a taxi-company that didn’t exist when current kindergartners were born be worth more than Avis and Hertz combined?
Anyone who’s ever rented a car knows how annoying it is. The lines, the prices, the endless special fees. And standing on a street corner with your arm raised trying to hail a cab and seeing endless off-duty signs feels like a scene from Kafka.
Transportation is an inefficient market. Uber uses smart-phones to link riders and drivers together. It’s reported that the company makes over $17 million a month, and that sales double every six months. With a 20% margin, that valuation would be 13 times projected 2018 earnings.
But that’s the rub. A lot can go wrong between now and 2018. Competitors like Lyft can force down margins. Cities could restrict the service. Taxicab and rental car companies will try to tie them up in litigation. But unlike web companies like Facebook or Twitter, Uber is offering a real service, not just some online experience.
This is what progress feels like. It’s messy and disruptive. If Uber is successful, a lot of cab drivers will have to find other work, just like folks who used to build typewriters. One thing is sure: in 2018 you’ll have more ways to get to the airport.
Douglas R. Tengdin, CFA
Chief Investment Officer