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