When Uber was valued at more than $18 billion in a recent round of fundraising it became one of the biggest VC-backed companies in history, which many analysts found hard to believe. Aswath Damodaran, professor of finance at the NYU Stern School of Business, gave a thorough explanation of why he thought Uber was overpriced that set off a refreshingly civil back and forth between himself and Uber board member Bill Gurley that rally highlights the different mindset of VC and value investors.
Uber will expand the existing market: Gurley
Gurley doesn’t argue with the meat of Damodaran’s analysis, which ends up at a rough $5.9 valuation, but focuses on his two starting assumptions: the size of the total available market (TAM) and Uber’s likely market share.
Damodaran estimates that the global taxi and limo market is worth about $100 billion per year, but according to Gurley Uber isn’t just trying to supplant the existing industry – it wants to expand that market several times over. When Uber launcher in 2010, for example, he says that the city had about 600 total black cars in operation. By 2012 Uber was already operating 600 black cars in its fleet (this is before the budget UberX class), and it has grown since then. A combination of a better service and different price points has doubled the black car taxi sector in San Francisco, and Gurley sees variations on this theme playing worldwide.
He also disputes Damodaran’s estimate that Uber will level off at a 10% market share because people will have strong incentives (faster pickup, lower prices) to use the same service. Network effects have created winner-take-all situations in other sectors (eg Facebook Inc (NASDAQ:FB)) and Gurley believes they will push Uber’s global market share toward 20% or more. Between these two differences, Gurley argues that Damadoran’s valuation could be off by as much as 25x.
The plausible doesn’t always transition to the probable: Damodaran
“I am inherently cautious, not because I don’t find his arguments to be plausible, but because I have seen how often the plausible does not make the transition to the probable and how frequently the probable fails to show up in the actuals,” writes Damodaran in his response.
This difference in perspective, more than the gritty details of either’s valuation, captures the value investing mindset as well as anything. Gurley’s thesis might work out, and if it does he’s going to make a killing, but investing in Uber right now means baking a good deal of optimism into the price. Refusing to do that, insisting instead on some margin of safety, means missing out on the disruptive technologies that really explode, but it also means avoiding all the ones that go bust.