Uber and Lyft Are At Least 7x to 10x Overvalued

I am watching Bloomberg and CNBC this morning as Uber prepares to come public. The discussion among analysts is on whether Uber and Lyft should be trading at 4 times sales or 6 times sales. Lyft is a pure play US taxi service. Uber is more international, and plays in a whole series of other industries, including transport and food delivery. Lyft’s top line is growing much faster. Hence, presumably one merits a premium over the other.

The discussion strikes me as patently absurd.

To be clear, the last time that analysts suddenly switched from trying to rationalize equity pricing at multiples of sales was, umm, March 2000. The argument was made that internet stocks could create such efficiencies that a top line multiple could be applied. But, those companies had wide margins at the time. Uber and Lyft today are operating at margins of around 20% that are continuing to compress.

These types of valuations that are being applied to Lyft and Uber are predicated on robotaxis replacing cars that require a driver in the immediate future and on automation leading to wider margins.

Now, I am a big believer in the future of automated driving, but I don’t see that necessarily expanding the margins of either Uber or Lyft operating fleets of driverless cars in 2020. Even Uber CEO, Dara Khosrawshahi, says it will be “quite a few years” beyond 2020.

When the industry becomes completely automated (whether that happens in 3 years, 5 years or 10 years) and Uber and Lyft are operating fleets of driverless cars, their margins will not be expanding at the rate that would justify a sales multiple of four or six times sales today. Rather, the margins will continue to compress as the market for robotaxis will be perfectly competitive (as will the market in every other industry in which Uber participates).

So, I believe that even under the most realistic and optimistic circumstances, a fair valuation for companies operating in this industry would target a PE of about 10x in 5 years or a price to sales of about 0.4x to 0.6x. That would make both of these companies overvalued by 7 to 10x. And, I intend to invest in both of these companies when they trade at those valuations.