The appointment of Dara Khosrowshahi as CEO of Uber was arguably the most important since Tim Cook succeeded Steve Jobs at Apple. Travis Kalanick, Uber’s outgoing CEO and founder, gave a warm and gracious introduction for Dara, who now leads the world’s highest-valued unicorn. It was a nice moment in what has been an incredibly rocky period for the company.
Earlier this year, SharesPost published its first deep-dive company research report on Uber. At the time, we felt that Uber’s near-term risk/reward was fairly balanced. However, we had a generally positive long-term bias given Uber’s disruption potential and growing market opportunity.
The past six months have been tumultuous, to say the least. While Uber’s new CEO appointment and board changes represent steps in the right direction, as we look ahead, three questions come to mind. First, what should Dara do over the next 18–36 months? Second, what can we learn from other such CEO/founder transitions in the Valley? Third, how will public institutional investors value Uber in 24–36 months for a possible IPO?
- Dara’s Growing To-Do List: There are a lot of things on Dara’s plate right now. We would prioritize internal team building and employee morale over external corporate development initiatives or media/investor relations. Over next six months, we expect the new CEO to build out an IPO-worthy top management team, including a CFO, COO, and CMO. While this task might be relatively easy to accomplish, what’s harder – in our opinion – is to increase employee morale, retention, and trust in management. One way to accomplish all of the above would be to publicly highlight the company’s progress in implementing former U.S. Attorney General Eric Holder’s recommendations. We will also be closely watching any mid-level management departures from Uber to other Silicon Valley companies. Starting in 2018, Uber will need to demonstrate clear evidence of IPO preparedness by resolving its lingering legal issues and demonstrating a pathway to profitability. We believe public investors will view positively any of the following actions by Uber: resolving the legal dispute involving Google/Waymo; divesting in India and SE Asia business, similar to Didi and Yandex deals in China and Russia, respectively; and spinning off its self-driving car division into an independent subsidiary.
- Lessons from Other CEO/Founder Transitions: Silicon Valley has had its fair share of both voluntary and involuntary CEO/founder transitions, where external, seasoned executives are parachuted in to provide adult supervision while the founders’ shadows continue to linger. Eric Schmidt’s appointment at Google turned out to be a net long-term positive for Google, but such hits have been rare. A few cases in point where CEO/founder transitions have not gone smoothly or remain debatable include: Jerry Yang at Yahoo, Jack Dorsey at Twitter, Bill Gates at Microsoft, and Steve Jobs at Apple. Significant research has been published on how to successfully manage CEO/founder transitions. Harvard Business Review says succession is often complex and always a shared responsibility. McKinsey believes a management reshuffle is the first thing new CEOs do. FTI Journal recommends that investors base their decisions on the new CEO’s reputation. Other research warns that the ex-CEO needs to be ready to embrace his or her new role on the board. All in all, we believe Dara will face challenges in his transition to Uber. He will need to build strong alliances within the Uber board and mid-level management team. He will need to distance himself from the perceived “bro culture,” while managing Travis Kalanick’s expectations and harnessing his vision. Additionally, Dara has to move quickly: He must demonstrate that he is not a puppet CEO and that he can reverse the perceived ride-sharing market share losses to Lyft.
- Public Institutional Investors’ View on an Uber IPO in 2020: If Uber goes public in the first half of 2020 as Dara recently suggested, potential public investors will likely calculate the company’s enterprise value based on a blended average of 2020 and 2021 financial estimates. The most recent Uber disclosures imply a $13 billion annual revenue run rate, based on annualizing Q1 net revenues. Assuming reasonable growth rates, we expect Uber’s net revenue to grow to between $40 billion and $50 billion in 2020–2021. Such an increase would imply a 35–40 percent four-year CAGR (compounded annual growth rate). If we apply a “mid-single-digits” EV/revenue multiple, that yields a valuation of over $150 billion. So what does that mean from a profitability standpoint? Peak EBITDA multiples for marketplaces have hovered around 50–60x one-year forward estimates. Assuming investors are reluctant to pay beyond this range, we would estimate EBITDA in the range of $2.5–3.0 billion in 2020, or overall EBITDA margins in the high single digits in 2020, rapidly approaching 10 percent in 2021. Hitting these growth rates would be difficult at any company but for the world’s most valued private company, it will be challenging to say the least.
How this transition plays out remains to be seen. What is clear is that Uber 2.0 under Dara’s leadership will be one of the most closely watched tech and business stories.
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