Why is Uber worth almost as much as Boeing?

Question

At $68 billion, Uber has a higher valuation than GM, Ford, and Honda.

According to Microaxis, Boeing is currently valued at around $87 billion.

Why is Uber worth so much? I would think that judging the value of companies would be similar to judging the value of employees. People often make the case that your wage/salary should reflect how easily someone else could do your job. (See this question for example on why celebrities are worth so much). Along those lines, it is hard for me to imagine how anyone could replicate the engineering and infrastructure of a behemoth like Boeing, in order to provide equivalent transportation or defense capabilities without taking many years, many talented employees, and billions of dollars to get up and running.

However, I could imagine 1 engineer fresh out of college making an app identical to Uber in only a year. Additionally, there would be no cost for the consumer to download that app, and try using it (there may not be many drivers, but there's also not a large opportunity cost to opening the app, checking for drivers, and closing the app if there are none).

So how could Uber be valued so highly? If it disappeared tomorrow, it could be easily replaced quickly without much start up time, and it could be adopted just as easily by drivers and users (the very same ones working for Uber). If Boeing disappeared tomorrow, everyone would be in trouble.

Answer 1

A big part of the answer to this question must surely be network effects.

Yes, Ford has a lot of engineering talent. But so has GM. This means that Ford has to compete with GM to sell cars, and this competition limits that amount of profit that Ford can make.

Ride sharing is a different story altogether. Suppose you write software that completely replicates the functionality of the technology used by Uber. How many drivers will want to use your software? Probably few or none because all of the people looking for a ride are using the Uber app and drivers want to be where the customers are. How many end customers will use your technology? Probably few or none because all of the drivers are using Uber and consumers want to use the platform where they can easily get a ride. As you say, people can easily open the new competing app to check it out, but if they find nobody else using it then they will just switch back to Uber. The only way to a competitor to overcome this challenge would be if many users simultaneously decided to switch at once, but such coordination is fairly rare in practice, and usually only happens if the new technology is vastly superior to the old one.

This property—that a product's value depends upon how many other people are using it—is known as a network effect, or network externality.

If you think about it, you will see that many products that have this network effect property are monopolised (or at least have relatively little competition). For example,

• a social network website is more useful if more of your friends are on there (a network effect)—and Facebook is a pseudo monopolist in this market.
• Developers write software for computer operating systems that have many users and users want to use the system with a lot of software available. These netwrok effects helped Microsoft to a position of dominance.
• Blu-Ray players are more useful if lots of shops sell blu-ray discs and shops will sell blu-ray discs if many people own a blu-ray player. The network effects here explain why the competing HD-DVD format died out and we were left with a single dominant high-definition media format.

There are many other such examples.

Since people understand that markets with network effects tend to "tip" to monopoly, and since monopolies tend to be extremely profitable, investors think that Uber is a good bet for future profitability.

Answer 2

The market capitalization of a stock is an interesting and frequently-quoted statistic. It's generated by multiplying the price of a share times the number of shares outstanding.

It is important, however, not to be misled by the difference between what the market capitalization measures and what it claims to measure.

It's true that shares are currently trading at the share price used. Only a few of the shares are transacting at that price, however; it's extrapolating from the marginal value of the shares to the average value of the shares. This would be a fatal mistake in any introductory or intermediate microeconomics class, yet it seems to be common practice in finance.

Answer 3

Uber might be just like Amazon. There was a recent Economist issue on Amazon, which, if I understood correctly, concluded that the financial market is expecting Amazon to become a dominant player in several markets in the future. These companies, by operating at the margin or even at net loss, aim to build market share, getting rid of the competition. That is very likely one aim of Uber, namely to displace standard taxis, just like Amazon has been blamed for bankrupting bookshops (e.g. in France and the UK).

A bubble in valuation is also possible, just like in the dot-com bubble. Some companies reached huge valuations. For example (taken from Wikipedia):

• inktomi reached a valuation of \$25 billion in March 2000.
• Lycos was purchased by Telefónica for \$12.5 billion in 2000.
• Commerce One reached a valuation of \$21 billion in March 9, 2000.

These valuations are, in perspective, huge. For example, in Q1 of 2000, Boeing had a valuation of \$36 billion, whereas Ford had a market capitalisation of $34 billion.

So, Uber could be not only riding passengers around, but also riding a massive bubble.

Answer 4

Boeing constantly needs subsidies from the US government to compete with AIRBUS that constantly needs subsidies from the EU. They will most probably continue to coexist for a long time for political reasons, also because of the relevance of their engineering for the military, which is seen as a public good. Development of new aircraft is VERY costly and sometimes fails. Uber is well established and the company now makes profit at very low cost out of the work of zillions of others. There are way more people using taxis every day than there are companies that buy new aircraft. Plus the uber principle has the potential to be expanded to other areas. Boeing is an old, big and kind of bureaucratic company from which most investors would not expect revolutionary new ideas that we have not seen from them in the past decades.