Don’t get me wrong I’m a pretty big fan of what Uber is doing. Disruption has become the new status quo and they are certainly doing it everywhere. What worries me is the size they’ve grown to and the impact their failure could have on the rest of the tech sector. Regardless of its proven existence, a large decline in Uber’s value could very well kill the “tech bubble.” Here’s how I think it will happen.
With a current valuation of roughly $40B it’s bigger than the market cap of Twitter and Hertz combined. It’s almost impossible a large company will buy Uber. Their only option is to go public. Once they go public their investors will no longer be just VCs. It will be every day people who hear the hype and invest. It’ll likely be at some high price that goes up each day before the actual IPO. Now, once you have the mom & pop investors in the game you have to worry because that’s what hurts. If a VC loses it disappears and largely affects people with a lot of wealth to start (That is unless Pension funds are getting greedy). You’re average uncle or friend who invests doesn’t have the same market savvy approach that’s recommended and will be very skittish at any sign of trouble.
What will actually cause Uber to fall off its pedestal and people to sell it? It will come down revenue. Once Uber goes public it will have to file strict accounting statements. I believe Uber will fail to hit analyst’s (or their own) revenue target which will scare investors and cause a mass sell off, drastically lowering the stock price. Due to Uber’s giant market cap, this will cause a decline in the overall tech industry and prompt investors to seriously question their other tech investments. Most will realize they have no idea what these companies do or how they actually earn money and will sell them too. While I love Taobao, I expect Alibaba to be one of the first victims in the domino effect.
I’ve come up with 3 scenarios that could each alone (or together) cause the decline of Uber.
Scenario 1 – The Government:
Uber faces a number of regulatory battles every day. Their legal right to operate is under question in almost every city they enter. On top of that, whether their drivers are employees or contractors is being decided by the courts right now. Luckily, people like them and politicians want to look cool by supporting them too. I believe this preferential treatment won’t last much longer. When tax income from the taxi industry begins to disappear and governments realize what this means for their bottom line they’ll become much more strict on Uber and its competitors. This will greatly erode not only its profit but also its ability to enter new markets. What government wants to say “Yes, come on in. We’ll change the laws so you can displace a sector that earns us $5 million so you can pay us nothing.” I’d also worry about the risk of anti-trust law kicking in.
Scenario 2 – Public Opinion:
If Uber is a fad or a trend will make all the world of a difference. Let’s not even get in to the security concerns behind the screening of drivers. On top of that its executives and corporate culture has consistently come under scrutiny. It’s my opinion that people will begin to prefer competitors or just move on from Uber all together. The projections for its revenue growth are so great that even the slightest decline in public opinion could severely impact revenue and take down this shining star.
Scenario 3 – Competition:
Uber already faces stiff competition at home from companies like Lyft. I’ve often wondered what’s the stickiness of Uber? What makes users stay with the brand over others? Abroad, it competes with local companies that have better understanding of the terrain and nationalistic support. Uber is spending quite a lot of money on international expansion which can either be a total win or a massive loss. When you think of it, Uber doesn’t have anything that can’t be replicated. In a good old free market, this leads to more players entering the market and eventually an erosion of profit. I think they’ve realized this in part and it prompted them to look into services they can provide that can’t be easily replicated (Self driving cars and mapping technology).
Let me know what you think. Comment or reply if you agree with me or thing I’m completely insane.