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    MattSam Biddle
    8/05/15 1:15pm

    I’ll admit to be wildly ignorant of the workings of high finance, but can someone explain to me the logic behind valuations and such? Cause to me, it just seems like people placing bets on the perceived fake money that a company might make at some indeterminate point in the future. And given that if a company continues for long enough, sooner or later its going to take a downturn, meaning that some sucker who put their real money into chasing after the future fake money, is going to be left holding the bag. Kind of like musical chairs or duck duck goose, except the loser loses the GDP of a mid-size country.

    How off the mark am I with this?

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      h1redgoonMatt
      8/05/15 1:23pm

      You’re actually right on the money (no pun intended). There are numerous ways to determine a company’s valuation, one of which includes present value of estimated future earnings.

      More detailed explanation can be found here: https://en.wikipedia.org/wiki/Business_…

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      useyourwordsMatt
      8/05/15 1:26pm

      The types of valuations you’re seeing are based on venture capital firms buying certain percentages of a company for a certain price. For example, if a private equity firm buys 10% of Uber for $1 billion, the valuation of 100% of UBER comes to $10 billion. That $10 billion figure has no real world implications. (this is widely simplified of course, but for the purposes of this discussion, what I’m saying is generally how it works).

      As for how analysts typically value a company, they discount all future company cash flows (based on projections, which are obviously not real) to determine a current value. Valuing a company using discounted future cash flows is a tricky game for early tech companies, because so, so many things can change over just a year or two. It’s really a fools errand to try and acertain an “accurate” value of a company like Uber - because it doesn’t really exist. It’s all based on opinions and assumptions about the future.

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    StenchofaburnerSam Biddle
    8/05/15 1:19pm

    I see the comments claiming “the taxi industry” (!!!!) paid for this post already started coming in. Now, for those that love Uber, I understand the impulse. It’s convenient and, in some areas, it addresses the problems of taxi companies that underserve (or even rip off) entire areas. However, companies like Uber and the entire concept of “the sharing economy” give rise to what Guy Standing has rightfully dubbed “the precariat”, a new class where workers become participants in a corporation’s business model with none of the inherent benefits of doing so (vacation, medical insurance, pension, etc etc). In turn, the customer is also part of this precariat because s/he is not necessarily covered by any of the liability protections afforded by traditional businesses. In this new precariat class, both workers and customers get to generate revenue for a corporation without getting any of the benefits of doing so. The only thing that is “shared” are the resources of both the worker and the customer while the corporation is a middle man getting a cut of both. There is nothing to defend in such a business model, unless one owns a piece of these middle men.

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      GregorMendelStenchofaburner
      8/05/15 1:28pm

      Like Avvo. All lawyers are listed there whether we want to be or not. Then Avvo wants us to give free legal advice in order to get higher “ratings.” The “ratings” have nothing whatsoever to do with the quality of your legal practice, but with the number of questions you answer—for free. Avvo didn’t pay for law school and doesn’t pay my bar dues. Nope, nope, nope.

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      The Noble RenardGregorMendel
      8/05/15 1:31pm

      Ugh, is that what that site is about? Glad I’m not planning on hanging my own shingle any time soon...

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    Chalupa_JackSam Biddle
    8/05/15 1:46pm

    Sam

    Please take some time to understand the terms you are criticizing before writing the article. It seriously hurts your credibility when you refer to “net revenue” as “profit.”

    And Uber reports positive “net revenues,” but also substantial losses.

    If net revenue is zero or negative, you probably don’t exist as a business.

    I say this as someone who prepares financials for a living and generally sides with you in these articles. In this case, you’re making the right points, but your detailed explanation is awful. It’s really grating to read someone railing on a company (even justifiably) and then totally butchering the explanation details.

    ****FREE POCKET GUIDE TO READING INCOME STATEMENTS BELOW****

    “Net revenue” is generally gross revenue less returns. I’m not sure what would apply to Uber as “returns,” so that could essentially just be the same as their gross revenue.

    “Cost of sales” is the first line you can refer to as any kind of “profit.” This, taken from your net revenue gives you the “gross profit” which represents the cost to make what you are selling. In Uber’s case this is probably auto expenses and the driver wages.

    From gross profit, you have admin expenses which are things like sales/marketing/executive/etc. These are support services and costs that aren’t directly related to how they make money (i.e. the corporate office rent vs. driver salaries).

    This gets you to EBIT (earnings before interest and taxes), or what is also called “operating profit.” This is often the best way to gauge a company’s performance as a whole since it accounts for revenue, costs of revenue and your ability to reduce non-essential expenses.

    From there, you guessed it, you subtract interest and taxes to get a net income.

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      HorriyahHoo'sAPsychoChalupa_Jack
      8/05/15 2:11pm

      Sam doesn’t believe in “understanding how things work”

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      ThisismyBurnerChalupa_Jack
      8/05/15 2:24pm

      He is using the language the paperwork uses. Uber is calling it Net Revenue and then according to their paperwork subtracting their costs from that. Its in the article.

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    mitchnmuraySam Biddle
    8/05/15 1:16pm

    Ive never used Uber, but what is their comparitive advantage that any other ride sharing company couldnt copy at a cheaper price? Is there some patent on ride sharing they own that is the key to their success? Is the brand and media attention really worth 50B$?

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      cepalgmitchnmuray
      8/05/15 1:30pm

      It’s all about the brand. The thing about rideshare is that if you aren’t the biggest brand in town, you have a real fast negative feedback loop: you don’t have as much coverage, so not as many people will use you, so you’ll get less coverage, so less people will use you, etc, etc.

      If a rideshare company is going to succeed, that company is going to be Uber. As long as those pesky courts stop ruling that if you fire people for not fulfilling your demands of them in the manner you prefer it counts as employment.

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      amgarrecepalg
      8/05/15 1:50pm

      I dunno. If there were a rideshare company that could guarantee that “Our drivers won’t rape you,” I’m sure a lot of women would switch from Uber.

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    Jujymonkey3Sam Biddle
    8/05/15 1:10pm

    I assume Uber uses Donald Trump’s accountant?

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      cheerful_exgirlfriendJujymonkey3
      8/05/15 1:17pm

      They comb over every figure.

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      drokholecheerful_exgirlfriend
      8/05/15 1:25pm

      You know what they say about money - hair today, gone tomorrow.

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    Cherith CutestorySam Biddle
    8/05/15 1:18pm

    I wouldn’t expect Uber to be profitable, at this point. But its losses really seem excessive. I don’t understand what they are spending money on at that scale. I know the iPhones aren’t cheap, the tech isn’t cheap, they rent out conference centers and stuff for driver signup, there is marketing, lobbyists. Like I said, I get that, at this stage, there are a lot of costs associated with expanding. But they don’t pay their drivers a salary, no benefits for them, they don’t need much in the way of permanent office space in most of their cities, so it still seems excessive.

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      WarLordCherith Cutestory
      8/05/15 1:29pm

      Legal Fees for busting regulations and of course litigation for drivers sexual assaults

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      w_t_fCherith Cutestory
      8/05/15 1:37pm

      Uber’s tech is nothing special. They mostly shine by their ability to bend legislation and get away with it (so far). That requires a shitload of lobbying money, PR and legal fees all over the world.

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    EvanrudeJohnsonSam Biddle
    8/05/15 1:17pm

    Two things stand out that may explain the large and growing loses. The revenue for the first 6 months was about equal to the entire 2013 revenue. However, sales and marketing expenses and general and admin expenses just exploded. I would be interested in why, especially the G & A. Increased marketing may have some future benefit as far as growing revenue, but the vagueness of the G&A leave it open to wide ranging interpretations.

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      DevteslaEvanrudeJohnson
      8/05/15 1:25pm

      My guess is that turnover on drivers is huge, so they have to spend more to recruit more drivers.

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      amgarreEvanrudeJohnson
      8/05/15 1:29pm

      They are moving into smaller and smaller cities. I would imagine it takes a lot more staff cost as compared to percentage of revenue to manage far-flung Uber Peoria than say, a top 25 city. And despite what people on the coasts think, there are a LOT of people in middle America that have no idea what Uber is or how to use it. That would account for the marketing push, I’d imagine.

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    TRUMP DELENDUS EST (fka Chatham Harrison)Sam Biddle
    8/05/15 1:33pm

    Uber is a successful business because it generates so much revenue, just as this is a successful aircraft design because it generates so much lift.

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      notsomethingstructuralTRUMP DELENDUS EST (fka Chatham Harrison)
      8/05/15 2:30pm

      Nah... everyone overestimates the potential of lyft.

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      HoldenCashnotsomethingstructural
      8/15/15 5:20am

      best comment

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    Chris ThompsonSam Biddle
    8/05/15 1:39pm

    Yo Sam, re: Uber deducting driver pay and then subtracting expenses from net revenue (and, speaking as the dipshit owner of a couple of dipshit small businesses), that’s kind of the stupid way a lot of accounting software figures costs of goods versus expenses. Costs of goods sold are deducted from income, then expenses are deducted from “net revenue.”

    This kind of makes sense: revenue is what is used to pay expenses, profit is the left over, the cream, the sweet, sweet product of my imagination probably because surely it will never exist in this lifetime fuck fuck fuck

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      Color-CommentaryChris Thompson
      8/05/15 3:14pm

      It’s straightforward GAAP accounting. Uber takes in $x in cash from the customer. They have to book that. It shows up as cash in their accounts and has to be reconciled. That’s “gross revenue.” They are obligated to pay 70-80% of that out to the drivers. It’s not Uber’s money at any point; they’re just collecting for the drivers. That drives the choice to call that a deduction from gross revenue rather than booking it as “cost of services.” The rest, Uber’s cut, is “net revenue.”

      I’d imagine the “$2B in revenue” figure that people bandy about is the *gross* revenue, which is certainly relevant if you think the future is that the drivers’ cut gets squeezed down. It’s also relevant in the sense that this is the measure of what people are willing to pay for Uber’s services.

      The article is just technically incorrect that “net revenue” = profit. “Net income” is profit.

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      fdsafdsaffewaaewChris Thompson
      8/05/15 3:30pm

      Noooooooope. In a normal, small-business environment, you’d be right about people interchanging operating income (Sales minus COGS) and net revenue, but you are WAY wrong on this one. Net revenue is a very specific accounting measure used to highlight the difference between all revenue paid for a company’s product and the revenue attributed to the company itself.

      The big example they gave us in grad school was a phone sex line. (OK, it was a psychic hotline, but my example is more compelling.) You may call your 1-900 number and pay 2.95 a minute or whatever, but the 1-900 number itself has to pay the phone operator 1.75 per minute. As such, their financial statements would show a net revenue line with that 1.75 charge pulled out, earning only 1.20 per minute. The phone sex line effectively never sees that 1.75, so it would be wrong to record it as revenue at all.

      Uber is presenting their revenue net of driver fees because their revenue works much in the same way- each fare comes with its instantly determinable driver fee that has to be remitted to them no matter what. They’ve clearly been pressured to present this way- it’s far and away the most conservative method of presentation. What it fails to capture, though, is the fact that Uber can (and eventually will) slash the percentage of each fare that goes to the driver. Based on the graphs shown, I think the driver fee is something like 75% of the gross fare. What if they cut that to 60%? Or 50%? Their net revenue is going to shoot up and wipe out their current losses.

      Source: CPA, not familiar with Uber's financials beyond what's presented in this article

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    nopunin10didSam Biddle
    8/05/15 1:19pm

    Sounds to me like they’re using an adaptation of the Amazon model. They keep prices artificially low to get themselves into enough markets. That builds a large customer base that not only uses their service but relies on it.

    If they succeed, they can potentially keep prices low based on economies of scale, but still have some margin of profit.

    What’s different? Along the way, they fight tooth-and-nail with governments to dodge taxi regulations (or have them dropped). I don’t remember Amazon being as visible with their lobbying, except maybe in regard to the online model for charging state sales tax.

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      WillyWonka12nopunin10did
      8/05/15 1:30pm

      I think you just described Wal Mart’s original business market. Move into an area, operate at a loss for 2 years and drive everyone else in the area out of business, leave the locals no other choice but Wal Mart.

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      Hingle McCringleberrynopunin10did
      8/05/15 1:42pm

      Amazon didn’t have as many local fights, as taxi laws are much more locally based, and thus more immediately visible. Amazon also pulls the same bullshit ‘these guys working for us are independent contractors, not employees” stuff that i was to see killed off with a federal law.

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