user and subscriber economics: a user-based...

USERANDSUBSCRIBERECONOMICS:AUSER-BASEDVALUATIONOFUBER

Allaboutusers?

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PushbackonUberValuation

¨ Inputdisagreement:MyUberDCFvaluationhashadplentyofpushback,withmanydisagreeingwithmyassumptions.ThatispartandparcelofvaluingcompaniesandIwelcomethatfeedback.

¨ Modeldebate:TherewasadebateaboutwhethertheproblemwasnotwiththeinputsbutwiththeDCFmodelitselfandtheargumentthatDCFwasdesignedforoldeconomycompaniesandnotsuitedtoneweconomyfirmsthataremorefocusedonaccumulatingusers&subscribers,makingthemstickwiththefirmandsellthemproducts&servicesoverlongperiods.

¨ DCFisflexible:IhavelongarguedthatDCFmodelsaremuchmoreflexiblethanmostpeoplegivethemcreditfor,andthattheycanbemodifiedtoreflectotherframeworks,andthatifyouhaveaproblemwithaDCFvalue,itshouldnotbewiththemodelbutwiththepersonusingthatmodel.

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DCF:AggregatedversusDisaggregatedValuation¨ DCFFirstPrinciple:Thevalueofabusinessisthepresentvalueof

theexpectedcashflowsfromthatbusiness,withthediscountrateadjustedforrisk.Thatistrueforanybusiness,manufacturingorservice,smallorlarge,oldeconomyorneweconomy.

¨ DCFPractice:Sincethatisthetruestdescriptionofadiscountedcashflowvaluation,theproblemsthatcriticsmusthavewithaDCFisnotwiththeDCF,perse,butinhowIestimatecashflowsandvalueinaDCF.

¨ AggregatedValuation:IfollowedtheaggregatedmodelfordiscountedcashflowvaluationwhereIestimatedthecashflowstoUberasacompany,startingwithitsrevenuesandworkingthroughtheconsolidatedexpensesandtotalreinvestmenteachyear.Alongtheway,IhadtomakeassumptionsaboutatotalmarketthatUberwouldgoafter,themarketsharethatIexpectthecompanytogetinthatmarketandtheoperatingmarginsinsteadystate.

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DisaggregatedValuation:Forms

¨ BusinessUnits:Inasumofthepartsvaluation(SOTP),youcanbreakamulti-businesscompanyintoitsindividualbusinessunitsandvalueeachunitseparately.Infact,IhaveapaperwhereIdescribetheprocessofdoingaSOTPvaluation,usingUnitedTechnologies,aconglomerate,asmyexample.IfthatSOTPvaluationismuchhigherthanthevaluethatthemarketattachestothecompany,youmayveryfindanactivistinvestortargetingthecompany.

¨ GeographicalGroupings:Whenvaluingamultinational,likeCocaCola,youcanbreakthecompany'soperationsdowngeographicallyandvaluegeographicalgrouping(Asia,LatinAmerica,NorthAmerica,Europe)separately,notonlyusingdifferentassumptionsaboutgrowthandriskinregionbutevendifferentcurrenciesforeachregion.

¨ Unit-basedValuation:Whenvaluinganycompany,youcantrytovalueitonaunit-basis,buildinguptoitsvaluebyvaluingeachunitseparatelyandthenaggregatingacrossunits.

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Whyaggregatedvaluation?

¨ Lawoflargenumbers:Totheextentthatyourestimationerrorsonaunitbasisareuncorrelatedorlightlycorrelated,yourestimatesonanaggregatedlevelwillbemoreprecisethantheunit-basedestimates.

¨ InformationVacuums:Informationonadisaggregatedbasisisdifficulttogetforindividualbusinesses,geographies,productsorusers,ifyouareaninvestorlookingatacompanyfromtheoutside.Ifyouaredoingyourvaluationfrominsidethecompany(asanownerorventurecapitalist),youmaybeabletogetthisinformation,butasyouwillseewithmyUberuservaluation,eveninsiderswillfacelimits.

¨ MissingValuePieces:Whenvaluingacompanyonadisaggregatedbusiness,itiseasytooverlooksomeitemsthatareconsequentialforvalue.Insumofthepartsvaluation,forinstance,analystsaresocaughtupinestimatingthevaluesofindividualbusinessesthattheyforgettovalue"corporatecosts",whichcanbeamulti-billiondragonvalue.

¨ CorporateStructure:Therearesomeitemsthatareeasiertodealwithattheaggregatelevel,becausethatiswheretheyaffectthebusiness.Thus,youcanmodelwhentaxescomedueandtheeffectoflosseseasierwhenyouarevaluinganaggregatedbusinessthanwhenyouarevaluingitonadisaggregatedlevel.Similarly,ifyouareconcernedaboutlegalpenaltiesorcorporategovernance,thesearebetteraddressedattheaggregatedlevel.

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Whydisaggregatedvaluation?

¨ Incorporatekeydifferences:Inaggregatedvaluation,youmisskeydifferencesacrossdisaggregatedunits(business,geographies,products,users)aswellasthemissingofcompetitiveadvantagesthatapplyonlytosomeunitsofthebusinessandnottoothers. Withdisaggregatedvaluation,youcanbringthesein.

¨ Connectstoriestovalue:Ifthestorybeingtoldbyabusinesspersonorentrepreneurisaunit-basedstory(users,subscribers),buildingavaluationthatisrelatedtothoseunitsisbetter.

¨ Connecttobetterbusinessdecisions:Totheextentthatinsiderscanobtaintheinformationtovalueabusinessonadisaggregatedbasis,youcanusethatinformationtoimprovethewaythecompanyisrunandtoincreaseitsvalue.

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UserBasedValuation

¨ Tovalueacompany,basedonitsusers,youhavetovalueanindividualuserfirstandthenestimatethecostofacquiringnewusers.

Valueofuser-basedcompany’soperations=Valueofexistingusers+Valueaddedbynewusers- Valuedragfromcorporateexpenses

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ValuingExistingUsers

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ImplicationsforValue

¨ Thevalueofauser increaseswithuserstickinessandloyalty (capturedintheexpectedlifetimeofauserandtheannualrenewalrate).

¨ Thevalueofauseris directlyproportionaltotheprofitabilityofservingthatuser (capturedasthedifferencebetweentherevenuesfromthatuserandthecostofservicingthatuser)

¨ Thevalueofauseris directlyproportionaltothegrowththatyoucangenerateinprofits overtime,byeithergettingtheusertousemoreofyourproductorserviceorcomingupwithotherproductsorservicesthatyoucansellthatuser.

¨ Thevalueofauser decreasesasyoubecomeuncertainaboutyourfuturecashflows fromthatuser,withthatuncertaintybeingafunctionof:¤ RevenueModel:SubscriptionversusTransaction-basedversusadvertising¤ DiscretionaryversusNon-discretionarynatureofproductorservice

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ValuingNewUsers

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ImplicationsforValue

¨ Thevalueaddedbyanewuser increaseswiththevalueofauser,estimatedinthelastsection.Youmaybecomeamorevaluablefirmwithastrategyofgoingfor fewerandmoreintenseusers thanonewithmoreandlessengagedusers.

¨ Thevalueaddedbyanewuser decreasesasthecostofaddingusersincreases.Thatcostwillbeafunctionofthecompetitivenessofthebusiness(increasingascompetitionincreases)butalsoofnetworkingeffects.Infact,ifyouhavestrongnetworkingeffects,thecostofaddingnewuserswilldecreaseasyouaccumulatenewusers.

¨ Thevalueaddedbyanewuserdecreasesasyoubecomemoreuncertainaboutusergrowth.Thatuncertaintywillbeafunctionofcompetitionandwhetherthetechnologythatyouhavebuiltyourproductorserviceonissustainable

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ValuingCorporateExpenses

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Uber:DeconstructingtheFinancials

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Uber’sExistingUserValue

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ExistingUserValue:Whatif?

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Uber’sNewUserValue

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NewUserValue:Whatif?

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UberCorporateExpenseValue(Drag)

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UberValuation

UserValue Assetvalue CompanyValue EquityValue

ExistingUsers $16,412.49

NewUsers $20,190.70

UserValue $36,603.19 $36,603.19

- CorporateExpenseDrag $(10,369.28)

UberOperatingAssets $26,233.91 $26,233.91

+Cash $5,000.00

+Didi CrossHolding $6,000.00

UberFirmValue $37,233.91 $37,233.91

- Debt $-

ValueofEquity $37,233.91

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BottomLine

¨ Allvaluationsrequireassumptions,whetheryouvalueabusinessonanaggregatedbasisoronadisaggregatedone.Infact,youusuallyrequiremoreassumptionswiththelatterthantheformer.

¨ Valuingabusinessonadisaggregatedbasisrequiresinformationthatisusuallynotavailabletoinvestorswhoareoutsidethecompanybutonlytoinsiders.

¨ ThelifetimevalueofauserorsubscriberisaDCFvalue.