Coming off a record year for initial public offerings (IPOs) in 2014, investors have been anticipating a possible Uber IPO in 2015. Now after a China-based firm invested billions into the car-sharing company, the probability of an IPO just got better.
Beijing-based Hillhouse Capital Group is leading the investment round for Uber, with estimates ranging from the hundreds of millions to an even $1.0 billion. (Source: The Wall Street Journal, June 23, 2015.)
The company’s China division is also looking for investors. Together, the funding rounds should bring in between $1.5 and $2.0 billion, pushing Uber’s stock valuation to a whopping $50.0 billion.
The only other startup to achieve a $50.0 billion mark was Facebook Inc.
That’s illustrious company for a five-year-old ride-share business out of Silicon Valley. But do Uber’s prospects warrant the prestige? And when does the company plan to go public? (Source: The Wall Street Journal, June 9, 2015.) Let’s take a look.
“Bookings” vs. Revenue
One of the key sticking points in Uber’s valuation is how it calculates revenue. Think about it this way: a customer opens their Uber app and is driven to a destination, then pays for the ride.
The payment is split between Uber and the driver. But which part should be recognized as income to the company? Uber takes home 20 to 25 cents on every dollar, leaving the rest for the driver. Should revenue encompass just Uber’s portion of the fee, or the entire sum?
If and when Uber becomes a public company, only the smaller figure would get recorded under revenue. As a clarification, Uber executives invented the term “bookings” to denote the whole payment. The company has $10.0 billion in estimated “bookings” for 2015.
Also Read: Is the Uber Valuation Too High?
Uber’s Asia Strategy
Over 500 million Chinese consumers have access to a smartphone, making it prime real estate for Uber’s business. The company estimates that it already services one million rides a day in China.
However, the Chinese market will not come easy. Two of China’s biggest taxi-hailing companies merged last year, consolidating into a new entity named Didi Kuaidi Joint Co. Didi Kuaidi is the industry’s undisputed leader, holding 80% of the market share. (Source: Forbes, June 15, 2015.)
It is also adopting Uber’s peer-to-peer method of connecting passengers and freelance drivers. The defensive strategy is meant to stop Uber’s China advance dead in its tracks.
For Uber fans, this is bad news. Didi Kuaidi is backed by the internet giants Alibaba Group Holding Limited and Tencent Holdings Limited, which means it has the financial resources to fight a price war. (Source: The Wall Street Journal, June 12, 2015.)
Not one to concede defeat, Uber CEO Travis Kalanick announced a partnership with Baidu Inc., another big Chinese internet company. He plans to fight Didi Kuaidi by diversifying Uber’s product range, adding new options for luxury vehicles or carpooling.
Public or Private?
There’s no question that an IPO is in Uber’s future, seeing as Hillhouse’s line of credit to Uber can be converted into equity. The longer Uber delays its IPO, the higher its cost of capital will rise.
Despite the constant expansion and conquering of new markets, Uber faces some serious legal challenges at home.
There’s a small but vocal movement in the U.S. to reclassify Uber drivers as full-fledged employees rather than just contractors. If Uber loses that fight, their costs will shoot through the roof.
That’s why I think the company should postpone the IPO until labor disputes are settled.
Its legal team can maneuver more easily when there are no shareholders watching, and no obligation to release settlement figures. In order to fully overthrow the taxi industry, Uber will certainly need the kind of funding that only an IPO can provide.
Also Read: How Does Uber Make Money?