The Ride Sharing Business: Is A Bar Mitzvah Moment Approaching? by Aswath Damodaran
I did a series of three posts on the ride sharing business about a year ago, starting with a valuation of Uber, moving on to an assessment of Lyft, continuing with a global comparison of ride sharing companies and ending with a discussion of the future of the ride sharing business. In the last of those four posts, I looked at the ride sharing business model, argued that it was unsustainable as currently structured and laid our four possible ways in which it could be evolve: a winner-take-all, a losing game, collusion and a new player (from outside). While ride sharing continues its inexorable advance into new markets and new customers, the last few months has also brought a flurry of game-changing actions, culminating with Uber’s decision about a week ago to abandon China to arch-rival Didi Chuxing. It is a good time to take a look at the market again and perhaps map out where it stands now and what the future holds for it.
The Face of Disruption
While there is much to debate about the future of the ride sharing business, there are a few facts that are no longer debatable.
- Ride sharing continues on its growth path: Ride sharing has grown faster, gone to more places and is used by more people than most people thought it would be able to, even a couple of years ago. The pace of growth is also picking up. Uber took six years before it reached a billion rides in December of 2015, but it took only six months for the company to get to two billion rides. For just the US, the number of users of ride sharing services is estimated to have increased from 8.2 million in 2014 to 20.4 million in 2020.
|Year||Number of US ride sharers (in millions)||% of US adult population|
- It is globalizing fast: In the same vein, ride sharing which started as a San Francisco experiment that grew into a US business has become global in just a short period, with Asia emerging as the epicenter for future growth. Didi Chuang, the Chinese ridesharing company, completed 1.43 billion rides just in 2015 and it now claims to have 250 million users in 360 Chinese cities. Ride sharing is also acquiring deep roots in both India and Malaysia, and is making advances in Europe and Latin America, despite regulatory pushback.
- Expanding choices: The choices in ride sharing are becoming wider, to attract an even larger audience, from carpooling and private bus services to attract mass transit customers to luxury options for more upscale customers. In addition, ride sharing companies are experimenting with pre-scheduled rides and multiple stops on single trip gain to meet customer needs.
- Devastating the status quo: All of this growth has been devastating for the status quo. Even hardliners in the taxicab and old time car service businesses recognize that ride sharing is not going away and that the ways of doing business have to change. The price of a New York city medallion which was in excess of $1.5 million before the advent of ride sharing continues its plunge, dropping to less than $500,000 in March 2016. The price of a Chicago cab medallion, which peaked at $357,000 in 2013, had dropped to $60,000 by July 2016.
In short, there is no question that the car service business as we know it has been disrupted and that there is no going back to the old days. If you own a taxi cab or a car service business, the question is no longer whether you will lose business to ride sharing companies but how quickly, even with the regulatory authorities standing in as your defenders.
A Flawed Business Model
Disruption is easy but making money off disruption is difficult, and ride sharing companies would be exhibit 1 to back up the proposition. While the ride sharing option is here to stay and will continue to grow, ride sharing companies still have not figured out a way to convert ride sharing revenues in profits. In making this statement, though, I am relying on dribs and drabs of information that are coming out of the existing ride sharing companies, almost all of whom are private. Piecing together the information that we are getting from these unofficial and often selective leaked information, here is what seems clear:
- Raising capital at a hefty pace: In the last two years, the ride sharing companies have been active in raising capital, with Uber leading the way and Didi Chuxing close behding. In the graph below, I list the capital raised collectively by players in the ride sharing business over the last three years and the pricing attached to each company in its most recent capital round.
|Ride Sharing Company||Amount Raised in last 12 months (in millions)||Investor||Company Priced at (in millions)|
|Didi||$7,300.00||Apple, Alibaba, Softbank & Others||$28,000|
|Uber||$3,500.00||Saudi Arabian Sovereign Fund||$62,500|
|Ola||$500.00||Didi & Existing Investors||$5,000|
|Grabtaxi||$350.00||Didi & CIC||$1,800|
- At rich prices: As the table above indicates, the investors who are putting money in the ride sharing companies are willing to pay hefty prices for their holdings, with no signs of a significant pullback (yet). Uber, at its current pricing, is being priced higher than Ford or GM. Note that I use the word “pricing” to indicate what investors are attaching as numbers to these companies because I don’t believe that they have the interest or the stomach to actually value them. If you are confused about the contrast between “value” and “price”, please see my blog post on the topic.
- From unconventional capital providers: The capital coming into ride sharing companies is not coming less from the traditional providers to private businesses and more from public investors (Mutual funds, pension funds, wealth management arms of investment banks and sovereign funds). The reasons for the shift are simple on both sides. Public investors want to be invested in the ride sharing companies because they have visions of public offerings at much higher prices and are afraid to be left on the side lines, if that happens. The ride sharing companies are for it because some of them (Uber and Didi, in particular) are getting too big for venture capitalists to capitalize and perhaps because public investors are imposing less onerous constraints on them for providing capital.
- While burning through cash quickly: As quickly as the capital is being raised at ride sharing companies, it is being spent at astonishing rates. Uber admitted that it burned through more than a billion dollars in cash in 2015, with a significant portion of that coming from its attempts to increase market share in China. Its competitors are matching it, with Lyft estimated to be burning through about $50 million in cash each month ($600 million over a year) and Didi Chuting’s CEO, Jean Liu, openly admitting that “We wouldn’t be here today if it wasn’t for burning cash”.
The cash burn at ride sharing companies, by itself, is neither uncommon nor, by itself, troubling After all, to grow, you have to spend money, and a young start up often loses money because of infrastructure investments