The stock market told ride-hailing companies to take a hike when they went public earlier this year. The share prices of Uber Technologies Inc. and Lyft Inc. plummeted as investors focused on the long history of massive losses in the freelance-taxi industry.
But now? It’s time for a rethink.
Uber and Lyft still face big challenges, but may appeal to aggressive investors. At their current beaten-down stock prices, the twin giants of ride-sharing could actually be cheap.
At least, that is the conclusion of Aswath Damodaran, a professor of finance at New York University and widely followed authority on stock valuation. He recently updated his calculations for a number of companies that have gone public over the past few months. By his reckoning, fair value for Uber is US$35.42 a share. For Lyft, it is US$54.38 a share.
Both companies were trading below those prices on Friday – Uber at US$32.71 and Lyft at US$44.54. In a blog post, Prof. Damodaran writes that “Uber and Lyft have moved from being over to undervalued.” He recently bought Uber shares at US$30 apiece.
You may disagree with his numbers, of course. But the broader point here is that valuation matters.
Investors should keep this in mind before dismissing this year’s crop of initial public offerings. Many of the most high-profile IPOs in recent months – Uber and Lyft, as well as Levi Strauss & Co. and Peloton Interactive Inc. – have disappointed people who bought them at the price at which they opened trading. On top of that, the attempted IPO of We Co., parent of WeWork, turned into a comedy of giant egos and had to be postponed.
Lots of folks have been eager to blame the disappointing results on inflated expectations and unrealistic hopes. But, if so, investors appear to have done a fine job of adjusting prices to bring them back into line with reality.
By Prof. Damodaran’s calculations, Beyond Meat Inc. is the only recent high-profile IPO to remain radically overvalued. He figures the veggie-burger maker is worth only about US$47.41 a share, compared with its current share price of US$100.81. In contrast, Peloton, the maker of high-tech exercise bikes, looks only mildly overpriced, while other recent IPOs, including Uber, Lyft and Levi Strauss, could be bargains at today’s prices.
As a long-time skeptic of the ride-hailing business, I was surprised by his conclusions. Uber and Lyft have never generated profits. They face legal questions about whether they will be able to go on classifying drivers as independent contractors rather than employees. They could find future growth to be tough if new companies enter the market. Or, for that matter, if a strong jobs market makes it more difficult to attract people who are willing to drive for a relative pittance.
But it is also possible to see Uber and Lyft in a more positive light. Prof. Damodaran’s spreadsheets (available on his Musings on Market blog) demonstrate that both companies may be reasonable investments if they can continue growing at rates that seem well within the bounds of possibility.
In the case of Uber, Prof. Damodaran assumes the overall market for short-haul car rides will expand at about 10 per cent a year. He also assumes Uber’s share of that market will rise over the next decade, from about 14 per cent today to 30 per cent in 2029, as the company’s advantages in capital and technology allow it to grab a bigger piece of the overall pie.
If so, the professor figures Uber should start generating free cash flow about six years from now. He builds in a 5-per-cent chance that Uber will simply go bust for whatever reason. But even with that possibility of failure, he still arrives at a fair value of US$35.42 a share.
To be sure, none of his projections are guaranteed. A reasonable observer can disagree with his premises. But what is striking is the degree to which you can justify Uber’s current valuation without having to resort to outlandish assumptions. The same holds true in the case of Lyft and Levi Strauss.
Investors may want to take note. It has been easy over the past few months to make glib statements about the frothiness in today’s markets. But the numbers suggest that people may now be undervaluing, not overvaluing, several recent IPOs.