Private valuations bubble is about to burst

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At the beginning of September, ride-hailing service provider Uber raised an amazing amount of $1.2B from Baidu (NASDAQ:BIDU) to expand its penetration into the Chinese market, with the help of the local internet giant. This enormous funding round was nothing new for Uber; the company had raised a similar amount in single funding rounds last year, driving the company’s valuation, in the private market, to a whopping $51B. With the recent funds raised and the valuation boom, Uber became the second private tech company to reach a $50B valuation after Facebook (NASDAQ:FB). However, while Facebook survived the global financial crisis and succeeded in reaching $50B valuation in 7 years, Uber’s growth occurred during a six-year bull run in the public equity market, that also pumped-up the private equity markets and enabled Uber to reach a $50B valuation in only 5 years.

Earlier this year, a leaked document unveiled Uber revenues as the company expects to reach $2B in revenues in 2015, which reflects a P/S ratio of 25. Comparing these figures to other companies of similar size to Uber highlights the bubble claims:

Company Ticker Market Cap TTM Revenues P/S Ratio Salesforce CRM $52B $5.9B 8.77 Uber N/A $51B $2B 25.5 EMC EMC $49B $24.7B 2 Netflix NFLX $48B $6.4B 7.48 Paypal Holdings PYPL $44B $8.9B 5

Source: Thomson Reuters

The table above includes only four companies, but it could easily contain dozens of companies that have a lower valuation than Uber and generate more revenue. The table only includes tech firms. However, General Motors (NYSE:GM), Mizuho Financial (NYSE:MFG), Bank Of New York Mellon (NYSE:BK), Teva Pharmaceutical (NYSE:TEVA), Ford Motor (NYSE:F), MetLife (NYSE:MET) and many are valuated very close to Uber and generate significantly more revenue than Uber. Uber might have a very good growth potential. However, a $50B company could not be measured based on the same metrics as a small $1B company. A company so big should have a clear and steady revenue stream, and it should look to generate sustainable growth while trying to reach profitability. Uber is far from that.

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