Can Uber go public at $120 billion? Why not?

On Tuesday, a story in the Wall Street Journal suggested that Uber was talking to bankers about an initial public offering (IPO) in early 2019 at a valuation of as much as $120 billion.

The article went on to state Uber’s potential valuation as being greater than the combined current valuation of the big three U.S. automakers (General Motors, Ford and Chrysler). With “game changing” technology companies like Uber, that is not a relevant comparison.

{mosads}Similar to comparing a company like Netflix to traditional media companies (which has exceeded the valuation of all major media companies, including Disney, Comcast, CBS and Viacom, despite producing a fraction of the profits of those companies), it isn’t the right metric.

What metrics growth equity investors are more likely focused on is how big the company’s opportunity is and how big a company’s “moat” (barriers to entry/competitive advantage) is.

If Goldman Sachs and Morgan Stanley (the rumored banks in the WSJ article that prepared IPO valuation) believe that Uber can go public at $120 billion, it is likely based on what they expect Uber’s revenue to be in the next few years and their ability to grow and defend their competitive position.

While I believe $120 billion may be the largest valuation of any U.S. company that has gone public, it is not the largest valuation of any company that went public overall. Alibaba, the Chinese e-commerce platform that went public in 2014, did so at a valuation north of $160 billion.

It also would be smaller than a rumored $150 billion valuation achieved earlier this year by a $14 billion round completed by private Ant Financial, the fintech affiliate of Alibaba that started as Alipay.

This investment included leading private-equity investors like Carlyle, SilverLake, Warburg Pincus and sovereign wealth funds of Singapore and Malaysia.

When leading investors decide to invest in companies at this kind of valuation, they often look to how big they believe the company can be valued. Can it be worth $300 billion? $400 billion? $500 billion?

As an example, those investors that invested in Alibaba’s IPO back in 2014 were rewarded earlier this year when Alibaba peaked at almost a $550 billion valuation before the Chinese trade tensions increased.

So, while this seems possible for a company like Uber, what are the biggest issues that investors will probably grapple with when Uber goes public? Besides the more volatile market conditions that we have seen in the last year, a few things:

1. Who gets out first, Uber or Lyft? On the same day news broke of the Uber valuation, news broke that Lyft had also picked underwriters for its potential IPO in early 2019. While Lyft’s valuation is rumored to be a fraction of Uber’s, given their relative size, it will likely be a race to see which firm can get out first.

Ideally, a company like Uber, which is the largest in a yet “undefined” sector in the public markets, would like to go public first and define the space versus having a competitor define it for them (and potentially impact their valuation differently).

2. With the stepping down of founder Travis Kalanick and others in the last year, are Uber’s management issues behind it? While Uber has hired a well-respected, experienced public technology CEO who has been in place just over a year, some of the other recent hires, including the new CFO, have joined more recently.

While investors will be excited about having a seasoned management team in place, the question will be: Has the team worked long enough together to “gel” and lead Uber? 

3. Are regulatory issues going to continue to be a factor? While regulatory skirmishes in major markets like London and Paris seem to be solved (for now), regulatory issues will likely continue to be a hurdle for Uber as they continue to expand.

The issues haven’t been just international in nature; issues in markets like Austin and New York City have also presented challenges for Uber in recent years.

4. How will investors “value” Uber’s opportunity in international markets (especially in key large and growing markets like China and Southeast Asia)? Usually, investors look for potential upside in a company’s long-term growth prospects by assessing the potential in large adjacent (or in this case, international markets).

In the case of both China and Southeast Asia, Uber sold its position in those markets to its biggest competitors — Didi in China and Grab in Southeast Asia. In exchange, they received significant equity stakes in both dominant players in these markets.

So, investors may look to the “half-full” argument: Instead of Uber “bleeding money” in these markets to grow market share against a formidable competitor, they are now equity participants in the growth of Didi and Grab.

Conversely, investors may look to the “half-empty” argument: Uber’s total addressable market is significantly less in big markets where they are not in the “driver’s seat.” Similarly, there is also a story currently circulating that Uber may decide to sell minority shares in its autonomous driving business.

Whatever the valuation Uber decides to go public, investors will likely be thinking longer-term, can Uber be a “U” added to “FAANG” (Facebook, Amazon, Apple, Netflix and Google — now Alphabet) stocks? 

David Erickson is a senior fellow in finance at The Wharton School, University of Pennsylvania. Before retiring from Wall Street in 2013, Erickson was head of global equity capital markets at Barclays. He was also previously an operating partner at Bessemer Venture Partners.