Is the Uber Valuation Too High?

UberSince launching in 2009, Uber has gone from startup to, most recently, eyeing a $50.0 billion valuation. But can Uber justify the eye-watering valuation? And will this necessitate Uber going public sooner rather than later?

Uber Valuation: $50.0 Billion and Rising

After a banner year where 273 companies went public, 2015 was supposed to be the year for Uber. Despite the hype, it seems unlikely that the ride-sharing mobile app will go public in 2015. And why should it? It’s raking in a substantial amount of money.

That may be part of the problem.

Also Read: Uber IPO: Could It Be the Highest Valued IPO Candidate of 2015?

I last wrote on Uber back in March. At the time, Uber had a valuation of $41.0 billion, making it one of the most valuable private tech companies on the planet. A lot can change in two months. Today, Uber is on the precipice of being valued at $50.0 billion. (Source: wsj.com, May 9, 2015.)

The only other company to be worth $50.0 billion before going public was Facebook, Inc. And given that a 2015 initial public offering (IPO) is unlikely, Uber’s valuation will only continue to grow throughout 2015, eclipsing Facebook as the richest startup since the big bang.

Does the Uber Valuation Add Up?

In May 2014, Uber began a funding round hoping for a valuation of around $10.0 billion. Instead, it closed at $18.0 billion. In December, a round of funding began at $30.0 billion and closed at $41.0 billion. Word on the street is that Uber plans to raise another $1.5 to $2.0 billion in fresh capital, putting it at a $50.0 billion valuation. (Source: Uber, December 4, 2014.)

That’s pretty lofty. Can Uber keep it up? In an overvalued market where investors are afraid to miss out on the next big thing, does it even matter?

Uber makes money by taking between 20% and 25% of fares. Last year, Uber had revenue of around $400 million. At $50.0 billion, Uber is worth 125 times its trailing revenue. That’s just taking revenue into consideration. Uber isn’t profitable just yet.

Uber Must Take More to Make More

What’s the best way to make more money?  Sure, you can introduce new services. But you could also hike the commission fee to 30% or higher. Voila! You’re left with newfound money without having to do anything.

Uber has said it is increasing the commission some drivers pay to 30%. The new tiered pilot program, being tested in San Francisco, raises the commission on new Uber drivers to 30% on the first 20 rides in a week, 25% on the next 20 rides, and 20% on any rides after that.

Will the new tiered commission structure deter part-time drivers from joining Uber?  Probably not. Keeping 70% of a fare is better than nothing. The fact of the matter is, Uber needs to make money to justify its $50.0 billion valuation. And hiking commissions is the easiest place to begin. Not only that, I have a good feeling that Uber announcing its tiered commission pilot project will be a big success.

Also Read: How Does Uber Make Money?

A $100-Billion Valuation?

Uber will only go public when it wants to. And it doesn’t look like it wants to right now. But with soaring valuations and private equity investors keeping an eye on their investment, the company will need to raise serious money.

The longer Uber waits to go public, the more money it will need to raise, and the higher the valuation will be. It’s hardly a stretch to think that Uber could have a valuation of $75.0 billion to $100 billion by the time it does decide to go public.

If it goes public this year, income-starved investors dubious of an overvalued stock market will be more than happy to try their luck with Uber.