Uber and Lyft are poised to join the ranks of Pepsi & Coke, and Boeing & Airbus, in becoming one of the most highly examined duopolies in the business world. Uber and Lyft are the two primary competitors in the ride sharing industry , nd their size dwarfs that of the next closest competitor in terms of monthly rides and annual revenue.
With Lyft’s IPO over a month in the rearview mirror, we now turn our attention to Uber, as it sets to become a public company later this week. Of course, leading up to Uber’s IPO, there have been countless comparisons to its smaller, yet formidable competitor. Discussions of how Lyft’s stock has fared since becoming publicly traded is the main topic of conversation. These comparisons will likely become more prevalent, as the wealth of information available to investors continues to increase.
From a valuation perspective, investors will keep an eye on the “multiples” of each company to compare how they are performing in relation to each other. This mindset mirrors the market approach used in the appraisals of closely held businesses. Given that both Uber and Lyft have yet to turn a profit, a valuation multiple of revenue is what will likely be examined most often by potential investors. This methodology will be explored through an example below based on Lyft’s closing price on May 3, 2019:
| Lyft 2018 Revenue | 2,200,000 |
| Lyft Market Capitalization | 18,872,000,000 |
| Lyft Revenue Multiple | 8,124 |
Based on Lyft’s revenue multiple, we can then attempt to compute Uber’s market capitalization as follows:
| Uber 2018 Revenue | 11,300,000,000 |
| Lyft Revenue Multiple | 8,124 |
| Projected Uber Market Capitalization | 91,801,200,000 |
If we use the same revenue multiple that the market is using to price Lyft of around 8.124x, we get a valuation of Uber of approximately $91.8 billion, which is slightly higher than the previously announce $80-90 billion valuation target for its IPO.
In order to justify the same revenue multiple, we have to look at risk for both companies ,and conclude that both are subject to a similar risk environment when considering industry and macroeconomic risks, among others. Given the risk profiles of both companies, their history of substantial losses, and the growth trajectory, does the same revenue multiple for both companies make sense?
This is the exact question that needs to be taken into account when valuators are looking at comparable companies and transactions in the appraisal of privately held businesses. While investors answer that question every day in the public markets with their dollars, the answer for privately held businesses can be more difficult. Valuators must assess if there is a direct competitor to the subject company that has the same risk profile that can be used to determine value? Oftentimes, this answer is reliant on the marketplace data that is available.
I will be keeping a close eye on Uber in the days following its IPO. The ride sharing duopoly is sure to hold the attention of investors well into the future as the competition between these two companies continues to accelerate.
