Wednesday, June 11, 2014

The Uber Tech Bubble

We know from the soporific testimony of former Federal Reserve Chair Alan Greenspan that even the wisest economic oracles and policy wonks can't identify a financial bubble until it has burst.  (This theme is explored in Bill Fleckenstein's "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve," 2008.)

Years after the global financial management elite are just wiping the soap off their faces from the detonation of the Uber Bubble of 2006, comes what surely seems like deja vu: the $18 billion implied valuation of Uber, the car service.

What is amazing, besides the valuation, are the leaders of the financing round: Fidelity, Wellington Management, and Black Rock. Fidelity once had a value focus, but one could argue that with the growth of Contrafund that it is a growth shop.  Wellington Management was certainly for decades a poster child for Graham and Dodd valuation optics.  I guess that this deal was too good to turn down.

The writers at the Wall Street Journal are trying to sound cautious about this story, but they then bend over backwards to suggest that the valuation might be conservative!  "Some say...." as the saying goes.

The company is already cutting prices by 20% in some markets, perhaps addressing the obvious concerns about the effects of competition.  It is also pitching the story as being one of creating markets, not providing taxis-on-demand.  Part of the pitch made Uber sound like a C.H. Robinson/Expeditors International model for transportation services.

A 20% take of gross proceeds seems pretty outlandish, and somehow the cost of taxi medallions in New York City isn't responding to the alleged inroads of Uber.  Perhaps that is an inefficient market, but it does seem odd.

A stat was quoted about drivers grossing $90,000 or more per year.  That would imply more than $112,000 in annual fares, or $56 per hour average.  Allowing for cruising and dead-heading from airports, that suggests the fares are pretty high.

But who know?  This could be the next big thing, like "Ask Jeeves."  Or, it could be the next Amazon. Why couldn't Amazon launch a service like this?  Never mind.

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