Uber Research Report

Car as a Service, Uber as a Platform

Ride-hailing apps exemplify the modern “on-demand” and “peer-to-peer” economy. Uber, Lyft, Didi, Ola and others have upended the private transportation experience around the world, making intra-city, for-hire travel more accessible, flexible, safe and sometimes, cheaper. In the process they, have proven to be disruptive and controversial. Most of the influence has been additive to consumers and local economies. In the developed world particularly, ride hailing companies have added new income opportunities – albeit contractual or 1099 and part-time in many cases.  For millions in the face of declining labor participation rates and stagnant wage growth, the “on-demand” economy has been important. Uber is the dominant player in this category, leading the disruption of the traditional taxi and limousine industry and redefining the monetization of car ownership and personal travel. While there are competitive and regulatory headwinds, and inflection to profitability is still a few years out, we believe the on-demand ride-hailing business is here to stay. Uber remains at the core and in the lead, on a global basis. We are initiating coverage with a guarded but positive thesis.

METHODOLOGY

Our research process involves proprietary channel checks with users, competitors, and industry experts, as well as a synthesis of publicly available information from the company and other reliable sources.

KEY POINTS

  • Ride-Hailing Mobile Apps Redirecting the Flow of People and Income. Ride-hailing companies are disrupting the transportation fabric and redirecting the flow of people and income in urban cores around the world. Mobile apps have made automotive transport more seamless and convenient. This sub-segment of the larger Taxi and Limousine space is additive to the local economies – ongoing unsettled issues of labor law violations and opposition from the incumbent taxi and limo industry notwithstanding.
  • Car as a Service, Uber as a Platform. With roughly 1.5 million drivers, in 71 countries and 505 cities, and bookings 5-times Lyft’s, Uber is by far the largest on-demand car service in the US, and either first or second in most other countries where it operates. The company is inventing new markets and changing patterns and expectations about human logistics. By spending heavily on R&D – including investments in mapping, payment and robotics – and forging strategic alliances & partnerships with the major car and technology companies, Uber is staying ahead of the curve.
  • Growing Addressable Market. New applications of on-demand services are coming to the fore. Rides are becoming a service, delivered by man and machine. Uber is becoming a leading logistics platform in a market that is still early in a volatile and unpredictable evolution. We see a number of growth drivers ahead including under-tapped international markets, potential use cases of autonomous cars, alternatives to the existing public transportation systems, moving and delivery services, and tie-ups with automobile companies. Our estimate of Uber’s total worldwide addressable market (ex-China) is $192B in 2016 growing to $259B by 2020.
  • Regulatory Hurdles and Continued Losses Pose Major Risks. The company’s reputation for running roughshod over regulations, pushbacks from traditional industries, and the risk of being under funded in the face of continued losses pose an existential threat, if not addressed proactively and amicably.

 Enterprise Value of $45B and Market Value of $52B. Based on a 10-year DCF analysis, we peg Uber’s enterprise value at $45B and market value at $52B billion. We believe there is room for upside if the company can capture a larger than expected market share in the other international markets, following its exit from China.

 

Exhibit 1: Uber as a Platform

picture1

 

 

 

 

 

 

Source: Manhattan Venture Research

 

Exhibit 2: Uber Revenue

picture1

 

 

 

 

 

 

Source: Manhattan Venture Research

 

Investment Summary

Uber epitomizes the boom in peer-to-peer services, in its most aggressive form. It has changed the way higher income, urban consumers hire car services and move around in private cars. It is also a significant employer and destroyer of legacy cab and livery car businesses in many cities and nations. The firm was perfectly timed to rise during a long period of extremely low and often dramatically falling gas prices. Additionally, interest rates on new vehicles were very low and this allowed consumers in many geographies to purchase or upgrade vehicles. The Great Recession in 2008-2011 and the fall in income, wealth and employment, increased the population interested in earning money or extra income working under the independent contractor approach taken by Uber. The rise of the smart phone and App ecosystem was and is also positive for the company. Lastly, investors have been smitten by the brash aggressive tactics and growth of Uber and have been surprisingly forgiving of the PR miss-adventures, legal issues and costs arising from the “ask for forgiveness, not permission” model. Any and all of these factors may prove transitory and contribute to a rapid or disorderly adjustment of future market valuation. Some of the issues are directly implicated in setbacks that led to the decision to exit active competition in China.

Uber is unique in its rapid growth, rising revenue and record breaking losses. Investors have bought the story, vision, excitement and possibility. As analysts we can’t price or always agree with passion and bravado as fundamental elements of enterprise value. However, these factors do build real business empires. If you believe in Uber, you are, fundamentally, focused on story and growth. We can’t get anywhere near recent valuations but we do see the company as exciting, iconic and representative of the profound shifts in user and investor behavior.

Investment Thesis

Uber elicits passionate opinions from both sides of the investment divide. The bulls point to its global footprint, #1 or #2 market share in most markets, and ample liquidity to outspend its peers and grow market share. The bears rest their case on doubts about the business model that bleeds record cash even after 6 years in operation and a cloudy path to profitability. For them the company is just an app, with no hard assets, no defensible moat, and new competitors – particularly the car companies – making strategic investments to ultimately find synergies with their core operations. We believe the rising tide of on-demand services is irreversible, and ride-hailing services will remain at the core of this tide. That said, we believe the final contours of this market segment are still very fluid. Commercial deployment of autonomous cars, favorable outcome of the ongoing battles with regulators and municipalities, and a constructive role of the technology and automobile companies are potential catalysts if and when they come to fruition. We expect a handful of companies to succeed in the long term given the economics of the business model and the constant need for more funds. Weighing all the puts and takes of Uber’s business and the peer-to-peer sector as a whole, we are initiating coverage with a guarded but positive thesis, an enterprise value of $45 billion and a market value of $52 billion.

Key Investment Positives

  • The Rise of the App-Economy. There is a profound and established socio-economic undercurrent to the disruptive period we are living through. All this set the stage for the rise of the app-economy and on-demand services.
  • Dominant Player Powered by Network Effects and Early-Mover Advantage. Scale matters in this business. With that in mind Uber has built the largest driver base in the US, and is in first or second place in most major markets. The network effect of ubiquitous presence and satisfied customers has earned mind share and market share in a business that has a low barrier to entry.
  • Not a Zero-Sum Game. The ride-sharing market is not yet a zero-sum game, the importance of a strong balance sheet notwithstanding. While Uber is siphoning demand away from established transporters and other car-hailing competitors, it is also expanding the market with new users and new use cases, leaving room for other participants.

Secular Socio-Economic Trends Favor Uber. A number of social-economic factors favor on-demand services in general and on-demand transportation services in particular: (1) Millennials favoring renting over car ownership (2) Stagnant wages driving need for supplemental income (3) Growing urbanization worldwide. Additionally, relatively low oil prices and access to low automobile buy/lease loans have had a positive impact on the business insofar as attracting new drivers.

  • Car as a Service, Uber as a Platform = Large Addressable Market. We believe on-demand transportation services lend themselves to a number of adjacent businesses, setting them up to be a platform of services. These services include delivery services, moving services, services that substitute or complement the existing public transportation system, and private car services, among others.

Key Investment Negatives

  • Regulatory Hurdles Are Existential Threats. A recent unfavorable ruling in California, ongoing regulatory issues in Texas and other states, and the constant push backs from the Taxi and Limousines industry – particularly in Europe – are headwinds that might linger longer than expected and undermine the viability of the company.
  • Flawed Business Model? Poor Visibility into Profitability Timeline. After six years of operation Uber is losing money. According to a recent Bloomberg report – unconfirmed and unaudited – the company’s losses in the first half of 2016 totaled at least $1.27 billion, driven primarily by subsidies for its drivers. Uber’s exit from China should help to mitigate the losses to a large extent. Driver and rider promotions have become a regular feature of ride-sharing companies to build driver loyalty with drivers and riders. These promotions cut into profits for both Uber and the drivers in many cases. There have been a few reports of drivers resenting these promotions as higher volume of rides to offset the lower prices doesn’t always materialize. Additionally, the strong competitive dynamics in the international markets could demand heavy investments, offsetting any cost savings post-China and further delaying the profitability timeline.
  • New Competitors and International Markets Pose Challenges. Uber’s recent decision to merge its Chinese subsidiary with Didi’s operations and take a minority position of 17.5% is a reflection of the challenges in the international markets. Will India follow? Anti-Uber alliances such as in Southeast Asia between Didi, Ola and GrabTaxi could slow down the growth in the emerging markets in the face of Uber’s strategy to go it alone. That said, Didi’s partnership with Uber should minimize any negative impact of this alliance in the highly coveted Southeast Asia market, and in other markets where Didi has made strategic investments in Uber’s competitors.

Valuation

We constructed a 10-year DCF model to derive a fair value for Uber. The model assumes a terminal growth rate of 4%, a discount rate of 9% and a market premium of 4.3% over a risk-free rate of 1.75%. Accordingly, Uber should be valued at an enterprise value level of $45.0 billion and, after accounting for net debt and the $7.0 billion value of its 17.5% equity stake in Didi, a market value of $52.3 billion.  We believe there is room for upside if the company can capture a larger than expected market share in the international markets, if commercial deployment and uptake of driverless cars come to fruition sooner than expected, and the regulatory framework becomes more friendly and constructive.

Key Investment Positives

The Rise of the App-Economy

Few services exemplify the “on-demand” economy more than ride-hailing apps, and no company is a better representative of this economy than Uber Technologies. Ride hailing apps have not only disrupted the taxi business, but have also spawned a new economic order, providing employment to many participants, incremental tax revenue to local economies, and a de-facto ‘personal chauffeur for hire’  for all users. More broadly, on-demand service delivery has reshaped industries across countries.

There is a profound and established socio-economic undercurrent to the disruptive period we are living through. Since 2008, many have struggled with global economic downturn. Real estate, in the US and beyond, was at the core of this episode. Many were real estate rich and cash poor; others were just cash poor. Add to that macro factors such a stagnant wages, low labor participation rates – particularly in unskilled jobs – and the need for supplemental income. All this set the stage for the rise of the app-economy and on-demand services.

Whether it’s personal transportation (Uber, Lyft), short term rentals (AirBnB, HomeAway), on-demand delivery services (Postmates) or skilled tasks (TaskRabbit), the app-based services have upended the status quo. These companies transact goods and services through rent rather than sale, allowing people to circulate underused assets. Equally important, people these days carry an advanced, location-aware computing system to all places and at all times. They largely trust the emerging firms building businesses that serve them and offer much needed access to incomes. Future demand drivers include new, autonomous-driven cars and trucks, alternatives to existing public transportation systems (buses, trains, subways), and collaborative partnerships and/or mergers with the major car companies to leverage each other’s strengths.

Millennials, a demographic bulge reshaping the economy and consumer tastes, initially drove the sharing or gig economy. According to the US Census Report, this group numbers 83 million in the US and is more than 25% of the nation’s population – larger as a group than baby boomers. Similarly, there are 1.75 billion millennials worldwide, according to market data from Millennial Week, further underscoring the significance of this group. We see this mobile and digital super generation well on their way to shaping their consumption habits – and all of our habits as well.

Mobile Apps – A Powerful Transformative Tool

Mobile apps are redirecting the flow of people and income in urban cores around the world. In step with this secular trend, a growing user base is moving away from the traditional modes of transportation to on-demand car services that offer seamless, safe, convenient and always accessible transportation. That said, the ride-hailing market is still in its early stages despite all its prominence. According to data from IBIS Research, just 15% of adults in the US indicated that they have ever used a ride-hailing service such as Uber or Lyft, and only half of all Americans (51%) are familiar with these services but have not actually used them, while one-third (33%) have never heard of these services before. Furthermore, for most users ride-hailing is a relatively sporadic activity: 26% of ride-hailing users indicate that they utilize these services on a monthly basis, and an additional 56% use them less often than that. However, close to one-in-five users utilize ride-hailing much more frequently: 3% indicate that they use these services on a daily or near-daily basis, while 14% indicate that they use them weekly. Put differently, 3% of all American adults use ride-hailing services on a regular (i.e. daily or weekly) basis, while 12% use these services once a month or less often. The availability of these services could be the limiting factor as they are largely in and around urban areas but that still does not negate the current low penetration rate.

For perspective, Uber’s core addressable market in the US – the taxi and limousine market – in 2016 is roughly $16 billion in terms of revenues and expected to grow at an annualized rate of 3.8%, to $23.6 billion, by 2021, according to market data from IBIS. The market is highly fragmented, with almost 25% of the revenues coming from NYC. The ride-sharing sub-segment of this market in the US is a small percentage of the total but growing at a much faster rate. Similarly, the global taxi and limousine market stands at roughly $100 billion today – according to market estimates – driven primarily by a growing middle class with increasing disposable income in many emerging markets. Most families in India and the other developing countries do not yet own a car, so economical, ubiquitous and hassle-free on-demand transportation services such as Uber, Ola, EasyTaxi and others are proving to be a strong alternative in their respective markets.

Early Mover Advantage, Network Effect and Market Dominance

Uber is a pioneer in the mobile, app-based, ride-hailing segment of the taxi and limousine industry. Founded in 2009 and launched in 2010, the company commands an 85% market share in the US, roughly 5-times the bookings of Lyft, its closest competitor. The company’s mission has evolved from disrupting the taxi industry to redefining the transportation fabric of the cities. By making cars available anytime and anywhere, the company wants to make ‘car ownership’ redundant. By providing on-demand car-pooling vans, buses and other substitutes, Uber wants to provide an alternative to existing public transportation options. Akin to IBM building the first PC in 1981 and revolutionizing personal computing, and Apple’s iPhone re-inventing mobile phones, Uber’s mission is to make “transportation as reliable as running water for everyone”.

With rides becoming a service, delivered by man or machine, Uber has evolved into a significant logistics platform. The company’s algorithm is designed to predict demand, optimize supply and maximize the efficiency of service. With dynamic pricing, mobile payment system and an effective GPS system, the rides are completed seamlessly and drivers are paid promptly. Uber is entering new markets and changing patterns and expectations about human logistics. It is driving the transformation of car services, taxis and other methods of transportation, to make private transport accessible and convenient. With significant investment in R&D focused on building its own mapping service, developing self-driven cars in its robotics facility, improving the payment systems particularly in the developing countries, and forging strategic alliances with car and technology companies, Uber is staying ahead of the curve.

Uber offers several levels of services ranging from UberX, the lowest-cost option, to Uber LUX, the top-of-the-line option with rides in premium cars such as Porsche Panameras and BMW 7 series sedans. Other services include UberT, which uses the existing taxi network, UberXL, which features larger vehicles for groups and, launched recently, Uber RUSH, an on-demand package delivery service, in New York City.

 

Figure 1: Key Uber Services

picture1

 

 

 

 

 

 

 

Source: Uber

The company processes all payments involved, charging the passenger’s credit card, taking a cut for itself (which ranges from 5% to 20%), and direct depositing the remaining money into the driver’s account. Much of the business is concentrated in a few major cities. The New York region alone accounts for nearly a third of all taxi and car service businesses, and the Northeast and California represent over 50% of the entire industry’s revenues.

Build it and They Will Come – The Network Effect

Uber has built its business on three key pillars: Maximum supply liquidity, minimum wait time, and seamless service. Right from the beginning the company focused on building a vast database of drivers in all the major cities it operates in. This liquidity, or supply-side focus, has demanded significant investments in the form of driver discounts and bonuses. But what it has created is a virtuous network effect: a large supply of drivers enables more rides to be completed, which in turn attracts more drivers and so on. Each incremental rider and driver in essence creates a network effect, making the entire platform more valuable for both sides in a virtuous circle. More importantly, a large and ubiquitous supply of drivers enables the wait time to remain below 5 minutes, which the company believes is a psychological breaking point.

 

Figure 2: Uber – Network Effect & Platform Economics

picture1

 

 

 

 

 

 

 

 

 

Source: MVR

A highly liquid supply of drivers has another key benefit: higher utilization or minimal idle time of drivers. This is a particularly critical factor for the company as drivers sign-up for more than one app to minimize idle time and maximize income. Furthermore, higher utilization gives Uber the flexibility to stay price competitive – in many cases offering rides at lower price points than taxis – without lowering the driver’s income. The traditional taxi drivers on the other hand are handicapped by a structural limitation: the supply of the traditional taxis is a function of the number of medallions in the respective cities, which are capped at a level that is deemed appropriate by the local governments. This limitation invariably results in unmet demand during peak periods and over-supply during slow periods. Conversely, this provides Uber and the other ride-hailing drivers an excellent opportunity to fill the void.

A large supply of drivers and the resulting coverage density has had one other noteworthy benefit: the outer limits of the coverage have expanded. Outer city limits and suburban towns are beginning to see more travel options at reasonable prices. Getting a ride in areas that were once beyond the reach of normal taxis is not an issue in an increasing number of suburbs.

Value Proposition

Attracting new drivers and keeping them on the platform demands a compelling value proposition. Uber’s proposition is a positive income differential compared to driving a taxi or working at other low-skilled service jobs. Drivers save on leasing fees, which most traditional taxi drivers incur. Additionally, the company essentially guarantees a sufficient volume of business to offset lower per-mile rates compared to regular taxis.

According to the company’s own data, a typical Uber driver in the key major cities in the United States can earn on average 55% more than a comparable taxi driver, depending on the city. The range varies from 100% more in New York City to 36% more in Los Angeles.

 

Figure 4: Average Hourly Wage by City – Uber vs Taxi Driver

picture1

 

 

 

 

 

 

 

 

Source: Jonathan Hall and Alan Krueger

If the results of the company’s own survey are any indication, the overall driver satisfaction rate is fairly high at 81%, and 97% are satisfied with the flexibility and 91% with the work-life balance. Additionally, the survey showed (not in the chart below) that nearly 70% drive for Uber in addition to another income stream.

 

Figure 3: Uber Driver Satisfaction Survey

picture1

 

 

 

 

 

 

Source: Uber

Price Elasticity

The price elasticity in the ride-sharing business is strong. Uber has used this factor to its benefit. As an example, Uber showed the effect of average fare reduction in Philadelphia – from $14.71 in December 2014 to $11.43 in March 2015 – on average gross earnings per hour for the drivers. The 22% price reduction in the study period resulted in a 31% jump in gross earnings – from $16.06/hour in December 2014 to $20.97/hour in March of 2015. Uber has conducted such trials in other cities to find the optimal price points that maximize total gross bookings. In a trial in New York City in early 2015, Uber saw a 6.3% rise in gross bookings even after price cuts. Overall, Uber has been fairly effective in increasing its bookings on the back of this price elasticity in its key markets.

That said, these cuts often are not well received initially by the drivers, which is understandable since the immediate effect is reduced earnings. Over time, as the examples above show, the drivers have realized that the increased demand more than compensates for the initial drop in earnings.

 

Figure 5. Uber Average Fare and Gross Hourly Wage in Philadelphia

picture1

 

 

 

 

 

 

 

 

 

Source: Uber

Scale Attracts Strategic Partners

As with most consumer-facing businesses, scale matters in the ride-sharing business. Uber has established a pole position in the US ride-sharing market by virtue of launching its service 3 years ahead of Lyft, its closest competitor. In most other markets the company is either in the first or second position in terms of market share.

  

Figure 6: Uber Profile – A Comparative Look

picture1

 

 

 

 

 

 

Source: Company reports, MVR estimates

The biggest benefit of being the best known brand in a niche market is the ability to attract strategic partners. Uber is partnering with smartphone vendors, credit card companies, car manufacturing companies, leasing companies, and insurance companies among others. A few specifics of the partnerships include the following:

  • AT&T embeds Uber on all its Android phones;
  • American Express users get 2X loyalty points on all Uber rides. Additionally, Membership Rewards users can use those points to pay for rides directly in the application. In the future these benefits could extend to drivers in the form of discounts on things like leases, gasoline and car repair;
  • Starwood Hotels and Resorts Worldwide gives extra points to preferred guests who link their accounts to Uber’s;
  • Morgan Stanley and Citigroup have adopted Uber for Business as their corporate black car service;
  • Snapdeal, a leading ecommerce site in India, allowed Uber to integrate its application interface on Snapdeal in a bid to tap into the ecommerce portal’s consumer base. Through this integration, the first completely native Uber API integration in India, Snapdeal customers will now be able to request an Uber directly through the Snapdeal app.

Not a Zero Sum Game

The ride-sharing market is very early in its life cycle with a long runway ahead and enough room for more than one player in each market. As we noted earlier in the report, just 15% of adults in the US indicated that they have ever used a ride-hailing service such as Uber or Lyft, and only half of all Americans (51%) are familiar with these services but have not actually used them, while one-third (33%) have never heard of these services before. Furthermore, for most users ride-hailing is a relatively sporadic activity: 26% of ride-hailing users indicate that they utilize these services on a monthly basis, and an additional 56% use them less often than that.

 

Figure 7: Only 15% of Adults in the US Have Used Car-Hailing Service

picture1

 

 

 

 

 

 

 

 

Source: IBIS Research

Against this backdrop, it is fair to assume the ride-hailing market is very nascent with ample room for multiple players, despite the disproportionately large market share of the leading incumbents in key markets. Uber, for instance, controls 85% of the US ride-hailing market, Didi controls 95% of the Chines rise-hailing market and Ola controls 60-65% of the India market. These numbers suggest a near-total dominance of the market by one ride-hailing player in key markets. But that is not the case. Yes, the market has rewarded the early movers, but in no way is their market dominance impenetrable given the nature of this business. Even as it relates to the traditional taxi market, it does not appear to be a zero sum game in the aggregate. At the fringes there is a modest erosion of the traditional taxi’s market share but there is no conclusive nationwide data to suggest that every incremental ride-hailing passenger is coming from the traditional taxi base.

Two key factors will continue to keep the market open to multiple players: new users and low moat. The ride-hailing companies are expanding the market by pulling in new users who would normally not take a taxi. This could be for multiple reasons: convenience, safety or instant access regardless of location and time of day. Secondly, the ride sharing business is a service, and the success of the car-hailing company is a function of price and the quality of service it offers – two factors that can be duplicated by a new player.

 

Secular Socio-Economic Trends Favor Uber’s Growth

A number of social-economic macro trends favor the “gig” economy in general and on-demand transportation services in particular: (1) Growing urbanization in the US and many parts of the world (2) Stagnant wages driving need for supplemental income (3) Growing trend toward renting over buying as the benefits of ownership are diminishing, particularly in car ownership and (4) Persistently low oil prices and interest rates favor the ride-hailing business – particularly with attracting new drivers and getting access to leasing or buying at attractive rates.

Growing Urbanization

The world has experienced unprecedented urban growth in recent decades. In 2008, for the first time, the world’s population was evenly split between urban and rural areas, according to a UN report. There were more than 400 cities over 1 million and 19 over 10 million. More developed nations were about 74% urban, while 44% of residents of less developed countries lived in urban areas. However, urbanization is occurring rapidly in many less developed countries. It is expected that 70% of the world population will be urban by 2050, and that most urban growth will occur in less developed countries. The urbanization story in China and India in particular has been rising more recently, with the uptrend expected to continue for multiple decades.

 

Figure 8: Urban Population % of Total Population

picture1

 

 

 

 

 

 

 

 

 

Source: KKR

Urbanization in the United States has been in process for some time. As the figure below shows, a number of prominent cities in the United States have seen a significant shift in the populations to the urban areas. Rapid urbanization is putting major stress on transportation systems already straining to meet vastly increased demand. These trends are expected to get more severe if the current urbanization trends hold. These strains will demand alternative options and make services such UberPool even more appealing to commuters and city administrators alike.

Figure 9: Urban population growth in US cities

picture1

 

 

 

 

 

 

 

Source: Newgeography.com

Stagnant Wages

Another key macro trend underlying the rise of the ride-hailing sub segment has been stagnant wages for middle-wage workers and declining wages for low-wage workers. According to data from the Economic Policy Institute, over the entire 34-year period between 1979 and 2013, the hourly wages of middle-wage workers (median-wage workers who earned more than half the workforce but less than the other half) were stagnant, rising just 6%—less than 0.2% per year. This wage growth, in fact, occurred only because wages grew in the late 1990s when labor markets got tight enough—unemployment, for instance, fell to 4% in 1999 and 2000—to finally deliver across-the-board hourly wage growth. The wages of middle-wage workers were totally flat or in decline over the 1980s, 1990s and 2000s, except for the late 1990s. The wages of low-wage workers fared even worse, falling 5% from 1979 to 2013. In contrast, the hourly wages of high-wage workers rose 41%.

 

Exhibit 10: Stagnant Wages

picture1

 

 

 

 

 

 

 

 

 

 

 

 

Source: Economic Policy Institute

The widespread problem of stagnant hourly wages is not a problem of insufficiently skilled or educated workers. As this figure from the Economic Policy Institute shows, a four-year college degree has been no guarantee of decent wage growth. In 2013, inflation-adjusted hourly wages of young college graduates were lower than they were in the late 1990s, a trend that held for both young male and female college graduates. Thus, wage stagnation and erosion afflict even the one-third of workers who have earned a four-year college degree.

 

Exhibit 11: Falling Wages for College Grads

picture1

 

 

 

 

 

 

 

 

 

 

 

Source: Economic Policy Institute

If we focus on jobs, the trend in the U.S. is not encouraging. The fraction of those aged 25 to 54 with a job was about 2.5% points lower in 2015 than in 2007. This shortfall is roughly the same as in the Euro area. In the U.K. and Japan, though, the prime-aged employment-to-population ratio already exceeds its 2007 level — by about one and two percentage points, respectively.

Rent versus Buy – A Growing Trend

A growing trend – particularly in the millennials slice of the population – is the preference for renting over owning. The number of millennials getting a driver’s license has dropped from a recent peak of 1.72 million in 2009 to 1.08 million in 2014, according to data from FHWA. In 2015 the number of 16-year-olds applying for a driver’s license fell to its lowest level since the 1960s, and according to Edmunds, car ownership among 18-34 year olds has fallen a full 30% in recent years.

 

Figure 12: Decline in Number of Millenials Getting Driver’s License

picture1

 

 

 

 

 

 

 

 

Source: FHWA

A number of surveys show decreased interest in car ownership among millennials as they increasingly move to urban areas. The problems of congestion, parking and pollution make the cost of owning a car unappealing. This trend is supportive of Uber and other car-hailing companies. The challenge and the opportunity for the car-hailing business segment is to make the value proposition so compelling that it is preferred over taking the traditional  taxi, bus, subway, or driving their own car. And they appear to be doing so. According to data from the San Francisco Municipal Transportation Agency, the average trips per taxi in the city from January 2012 to July 2014 declined 65% – from 1,400 per month in January 2012 to roughly 400 per month in July 2014.

 

Figure 13: Average Trips per Car in San Francisco – Jan 2012 to August 2014

picture1

 

 

 

 

 

 

 

Source: San Francisco Municipal Transportation Agency

According to AAA, the number of cars in circulation in the world is just over 1 billion, with 25% of those in the United States, and the average annual cost of owning a car is $9,000, including all maintenance costs. In one study of a typical commuter in Los Angeles, using UberX was actually cheaper than owning a car for anyone who drove under 9,000 miles per year. Thus, for a growing percentage of the population that drives less than 9,000 miles per years, Uber makes a lot of sense.

 

Figure 14: Car Ownership vs Uber in Los Angeles

picture1

 

 

 

 

 

 

Source: Medium

Declining Oil Prices and Low-Interest Rates

The transportation industry, in general, has been a major beneficiary of low gasoline prices and low-interest rates. In the last two years, the benefits have flowed down to the car-hailing segment of the industry as well. Low gasoline prices and favorable leasing/buying rates on new and leased cars attract new drivers to Uber as they have to bear the costs. The resulting savings make the economics of the business more attractive.

That said, the flip side of the argument works against the industry. As both the oil prices and interest rates rise, as they are expected to in the foreseeable future, Uber and other car-hailing companies will need an effective plan to keep the economics attractive to new and existing drivers.

Exhibit 15: Oil Prices: 2010 to 2016

picture1

 

 

 

 

 

 

 

Source: InfoMine.com

 

Exhibit 16: Interest Rates on Consumer Credit

picture1

 

 

 

 

 

 

 

Source: Federal Reserve     

Car as a Service, Uber as a Platform = Large Addressable Market

The on-demand transportation services lend themselves to a number of adjacent businesses, including delivery services, moving services, public transportation, private car service, trucking services, and a few others. All these services are ripe for innovation and a number of disruptive companies have already rolled out their offerings. While Uber has the financial resources and a highly liquid supply of drivers, it is not a given that the company will capture a significant share of these related opportunities.

 

Exhibit 17: Uber as a Platform

picture1

 

 

 

 

 

 

 

 

 

 

Source: Google Images, MVR

 

Key Adjacent Market Opportunities:

  • Use in Less Urban Areas. Because of its highly proficient proprietary ordering system and the ability to efficiently organize a distributed set of drivers, Uber can operate effectively in markets where it simply doesn’t make sense to have a dense supply of taxis. If you live in a suburban community, there is little chance you could walk out your door and hail a cab. Today, Uber already operates well in many suburban areas with pick up times in less than 10 minutes. This creates new use cases versus a historical model.
  • Rental Car Alternative. Uber is already popular amongst business travelers, an important part of the car rentals market. According to Certify data, the second most popular expense management software in the US, ride-hailing share of ground transportation expense has grown from less than 10% in 1Q14 to 45% in 1Q16, while car rentals have fallen from 55% to 40%.
  • Supplement for Mass Transit. If someone primarily uses mass transit, he or she is more likely to consider UberX, which is a low-cost offering, in circumstances such as running late, missed a train, emergencies or off hours. Lower price points than a taxi and more reliability make this appealing.
  • Delivery Services. Uber launched a food delivery service, UberEats and UberRush, last fall. Both businesses are in their infancy and need time before they find traction. The main difference between Uber Rush and its competitors like Amazon Prime Now, Postmates and Kozmo bike and car delivery is that unlike the other delivery services, Uber Rush does not actually involve any purchase of products or transactions on the end of the consumer. It merely involves the delivery of already owned and purchased products that are very similar to the traditional messenger service.
  • UberEats. launched in the fall of 2015 to deliver lunch and dinner items from popular restaurants to Uber users in parts of New York City, Chicago, Los Angeles, Toronto and Barcelona;
  • UberRUSH. a partnership with local businesses owners to improve delivery. Blockheads, Indie Fresh, Sam & Lex, and hundreds of other local businesses are already using UberRUSH to make faster, cheaper, and more reliable deliveries. With help from Uber’s business platform partners Shopify, Clover, ChowNow, Bigcommerce and BloomNet as well as local on-demand ordering platforms like delivery.com, millions of owners can integrate on-demand delivery into their businesses. Here’s what UberRUSH helps them do: (1) Order and track deliveries instantly: Thousands of lunch and dinner orders from kitchen to customer every day can be tracked until the delivery is completed (2) Expand delivery zones: Restaurants can deliver nutritious, chef-prepared meals on demand and maintain product quality while serving all of Manhattan, for instance, from one brick and mortar location (3) Integrate with existing tools and platforms: Sam & Lex, a boutique, uses Shopify to process online orders and UberRUSH to deliver them.
  • Bike and Car Messenger Courier Delivery Service. The service is only applicable in New York City, Chicago and San Francisco. First launched in 2014, the Uber Rush trial version lets the user hail a courier by using the app. You use the app like the normal Uber app and track the bike messenger on the screen of your phone when they approach your home. So now, instead of specially hailing an Uber to go and pick up the jacket that you left across town, you can just arrange for one of the fleet of Uber Rush’s bike messengers or regular Uber drivers to retrieve it for you in less than one hour.
  • Trucking Service – A Natural Extension of Core Business. The trucking service is a compelling growth opportunity for the app-based transportation market segment. In the U.S., over 70% of all freight movement is hauled by trucks of various types and sizes. Needless to say, any improvements in freight efficiencies will have a cascading positive impact on all corners of the world’s largest and most dynamic economy. The last time the U.S. transportation and logistics industry experienced revolutionary changes was in the 1990s, when information technology drove remarkable efficiency gains. We are now at the cusp of a similar revolutionary transition in the trucking industry with Uber for truck-type apps entering the market, but this time the competition will be high and the solutions a lot more fragmented.

A typical use case could be the following: a bearings maker in San Francisco needs to urgently ship 20 boxes of bearings to an elevator manufacturer in Seattle. An “Uber”-type app for freight transportation can now connect the shipper to a truck that is scheduled to leave the shipper’s area for Seattle. The driver is happy, as she/he can now get more payload to carry (which otherwise could not have been located on an on-the-fly, ad-hoc basis), generate more revenue, and reduce empty miles. The shipper is happy because he/she can ship freight on an ad-hoc, on-demand basis. The app provider is happy as it has created a new business opportunity in the market helping efficiently connect demand to supply, and finally other motorists and the environment are both happy as we reduced empty miles (hence congestion) and also emissions. Moreover, shippers are billed immediately and carriers are paid immediately, and the transaction is executed in a swift and seamless manner with the app provider benefiting from each transaction. Each year, on average, 20 billion empty miles are incurred by trucks, which cost the economy billions of dollars in fuel, congestion, environmental damage, and lost man hours.

A recent study by Frost & Sullivan forecasts that by 2025, $26.4 billion of all truck freight movement revenues will be enabled by mobile freight brokering. Smartphone/mobile device-based freight brokers are attempting to rise above traditional brokerage firms by offering higher asset utilization and expedited revenue allocation to carriers; peer-reviewed and rated carriers; and an expedited on-demand, ad-hoc demand response service to shippers. Start-ups such as Cargomatic and Transfix from California and New York, respectively, are targeting carrier types such as for-hire and private fleets in a host of market sectors such as long-haul, regional, and local trucking. The growth potential of this industry is promising, and that has attracted an array of investors, ranging from truck makers (e.g., Volvo) to logistics behemoths (e.g., UPS).

According to data from the trucking industry, the North American trucking industry is facing an acute driver shortage of roughly 400,000 drivers. An even more disturbing trend is the record-low levels of young drivers (21-25-year-olds) in the overall driver population mix. This trend has negative connotations for economic growth if not addressed.  Smartphone-based freight brokering, among many other innovations, can help reduce the severity of this shortage. When coupled with autonomous driving, truck connectivity and infotainment, cabin comfort, and other convenience-focused enhancements brought by truck makers can also attract younger drivers.

Thanks to several innovative technologies that are being developed today, a truck will soon be driven autonomously for extended periods of time, offering a safe driving environment on highways and enabling the driver to use his/her smartphone/mobile device to get connected to the world outside and vice versa. This will also help the driver locate nearby freight and carry it to its destination if the truck is headed there. These productivity gains and freight efficiency gains will benefit both the driver and the fleet he/she represents. This will also reduce empty miles, congestion, and emission footprint of commercial vehicles. At the heart of this change will be mobile devices like smartphones that will enable people to connect freight to trucks, with spare freight-carrying capacity on an on-demand, ad-hoc, and networked manner. There will be concerns around the track record of the fleet, driver, equipment that represents carrier capabilities, and type/nature of freight, etc., that will present initial hurdles and psychological inertia, but with extensive vetting, reviewing and checking mechanisms, companies offering mobile freight brokering services can present trucks that can deliver the highest uptime, fleets that present the highest trust and confidence ratings, drivers that drive safely and reliably, and a service that is safe and efficient.

  • Autonomous Cars – A Boon for the Industry? Autonomous cars could prove to be the much-needed solution to the company’s biggest overhead – drivers. Uber gives 75-80% of its bookings to drivers. It is not surprising that the company is at the forefront of developing this technology. A more likely scenario would be Uber paying a percentage to an owner of a self-driving fleet (such as Hertz or GM) at a lower cost than a human driver. Uber already has partnerships with Enterprise and Hertz, although Lyft’s direct partnership with car-maker GM might be a better model. Self-driving cars offer several financial advantages:
  • Lower cost, shorter timeline to profitability. Columbia University published a 2013 study that an electric self-driving car would cost approximately $0.50 per mile to operate. Fortune estimates that a personal car costs about $1.60 per mile. The lower overhead could drop to the bottom line much faster.
  • Additional market size. Self-driving cars could service very low-density areas, taking Uber’s market from dense urban areas to the entire country—anywhere with a road. Cars currently have an average utilization rate of 5-10% of the day—Uber would only have to exceed this to offer a cheaper alternative than ownership.

Against this backdrop, Uber is doubling down on its investments in self-driving cars. In addition to launching self-driving rides in Pittsburgh with the help of Volvo, the company recently acquired Otto and its all-star team.

Otto has been focusing on self-driving technology kits that could be fitted into trucks that are already on the road now, as opposed to developing its own self-driving vehicles. The company makes its own radar sensors. This aligns well with Uber’s own strategy to become a major supplier of its proprietary self-driving kits to automobile manufacturers such as Volvo. The acquisition brings with it a strong stable of talent, including Anthony Levandowski, a renowned expert in the self-driving space having led the effort at Google, and Lior Ron who was head of product at Google Maps. Combining Otto’s technology with Uber’s strong push to develop its own mapping service on the back of user data should help put the company in a strong competitive position in a market that is expected to be hyper-competitive.

  • Russian search giant Yandex announced self-driving car partnership. Yandex, the leading search engine in Russia and Google’s chief competitor in that market, announced a partnership with Kamaz, a Russian truck manufacturer, to develop self-driving vehicles. The companies will work with Daimler and the Russian government-funded research organization NAMI to develop an autonomous minibus shuttle that could be part of a shared mobility infrastructure. This partnership could put a vehicle on the road for testing by next year. This effort will bring together Yandex’s computer vision and recognition technology with NAMI’s testing facilities and Kamaz’s manufacturing capabilities. The vehicle is expected to be able to seat 12 and have a range of around 125 miles, double that of Local Motors’ Olli minibus, which was announced in June and is currently undergoing testing in Washington, DC, according to TechCrunch.
  • nuTonomy Ahead of Uber. While a number of companies have been racing to unveil self-driving cars for taxi services and consumer use, nuTonomy’s self-driving taxi service beat them to the road and began testing in Singapore.
  • International Markets – Ripe for Penetration despite Challenges. The international markets, particularly the major cities in emerging growth companies present compelling growth opportunities. Most of these countries suffer from an over-crowded public transportation system and lack better options. Another opportunity is to tap into the two and three wheeler markets, both popular modes of transportation. As incomes increase, as we are seeing in many countries, users want to upgrade to a car not only for safety reasons but also for convenience. Additional demand drivers include continued urbanization with limited road and parking capacity and growing mobile internet penetration, especially in lower tier cities.

A key challenge for Uber is to “localize” its service to the individual markets to compete aggressively with the incumbent car-hailing companies. And the company is doing just that. In Hyderabad, India for instance – a southern city with a population of nearly eight million – in May 2015, the company broke from its tradition of only accepting payment via card, removing a major hurdle to international growth. The company began a pilot that allowed users in Hyderabad, to pay for their rides using cash. Strong incumbent rivals in India (Ola) and Southeast Asia (Grab) have long accepted cash.

One of Uber’s biggest selling points is its seamless and convenient payment system. By linking a card to the rider’s account, the fare, including tips, is debited as the rider exits the car. Additionally, the system gives the ability to split fares with co-riders, making it affordable for many riders. All this takes away the hassle of carrying credit cards in the wallet and opens up the service to a wider base of riders. Yet, despite all that, cash is becoming an important facet of Uber’s service in parts of the world where credit cards are not used or ownership is not in many emerging market countries is less than 10% of the population. The initial cash payment trial has been expanded to a range of new markets in 10 countries across three continents, including India, all of Southeast Asia (minus Singapore and Malaysia), Kenya and Nigeria in Africa, parts of the Middle East, and Peru in Latin America. And that’s just the start. The cash payment option is all set to expand further to reach Uber customers in many more countries in these regions, while at the same time the company works on innovations on the backend to make cash payments as seamless, transparent and convenient as credit card payments.

Key Investment Concerns

Regulatory and Operational Hurdles Pose Existential Threat

Regulatory hurdles pose a significant existential threat to Uber and other phone or app-based car-hailing companies.  The recent unfavorable ruling in California, issues in Texas, and the constant push backs from the Taxi and Limousines industry – particularly in Europe – are examples that underscore the nature of the regulatory battles ahead.

 

Figure 18: Anti-Uber Demonstration in the U.K.

picture1

 

 

 

 

 

 

 

 

Source: The Telegraph

Uber has faced regulatory hurdles since the beginning of its operations and continues to face legal hurdles – the service is currently banned in a handful of jurisdictions including Brussels and parts of India, and is receiving intense scrutiny in many other parts of the world. Several court cases are underway in the US regarding the company’s compliance with regulatory procedures. The core issue is whether it subverts taxi regulations, as most major cities are controlled through medallion or license-based systems for street-hail based taxis. Uber vehicles qualify as For-Hire Vehicles (FHV), which means they can only be ordered via phone or the app, but this still requires a commercial license in most cities.

The company has defended itself aggressively and proactively. Uber points to the example of New York City, where 1.95 million private cars share the road—inefficiently, often with only one rider. The company estimates it would take only 365,000 UberPools to fulfill the same rides as these private cars. With fewer cars on the road, traffic congestion would decrease and rides would go that much faster, in turn allowing drivers to complete even more fares per hour and further boosting Uber’s bottom line.

Key Regulatory & Operational Challenges:

  • 1099 Contractors. Uber’s biggest difficulty is its classification of drivers as independent contractors. A number of lawsuits have been filed arguing that the “driver-partners” are actually employees, but that classifying them as independent allows Uber to avoid paying certain benefits such as health insurance, paid holidays and depreciation on cars. Uber has settled most lawsuits based on the 1099 distinction out of court, including a $100 million settlement for drivers in Massachusetts and California. In both cases drivers will continue to be classified as contractors instead of formal employees. Uber’s strategy for dealing with the 1099 issue is to negotiate with drivers by providing them more services, such as an appeals process for suspended drivers and allowing the creation of “driver’s associations”, as opposed to full-fledged unions. Uber’s defense is that it does not tell drivers when to work or which fares to accept, meaning the company does not explicitly direct driver’s activities, which is the threshold for qualifying as an employee.  Although presented as a “sink or swim” issue for Uber, the continuing transition to gig work will likely pressure regulators and courts into accepting some form of independent contractor status. Many cities created a new category of “transportation network companies” so Uber would not fall under taxi company regulations, and similarly a new type of employee category could be created that balances the independence for drivers and lower overhead for Uber and other such companies.
  • Antitrust. Although not currently a major issue, Uber has faced antitrust litigation in a few places. In one case, surge pricing is cited as a system of price fixing, as Uber’s many “independent” drivers are colluding to raise prices collectively. US vs Apple has been cited as a possible precedent in this case, in which Apple acted as a platform for e-books publisher. In that case, Apple was considered a supplier, but acted as part of the e-books pricing scheme by accommodating publishers’ plans to raise prices. Uber may similarly be considered a supplier, easing antitrust concerns for normal pricing situations, but potentially creating problems for its surge pricing model.
  • Background Screening. Uber has been accused of having lax background checks on its drivers, and a few high-profile incidents of assault by drivers led to criticism. The company has strengthened its verification process in many countries, but with breakneck growth and many new markets, it will likely be near impossible for some bad operators to not slip through.

Protests Tarnish Image. In some cities, taxi drivers have staged violent protests against Uber. Riots in Paris are the most prominent example. Protestors blocked streets and burned tires to complain against what they saw as “unfair” competition by the company. Paris in particular has a highly regulated taxi and for-hire industry, giving Uber significant advantages by avoiding some of these requirements. Although protests do not strictly indicate regulatory problems for Uber, they tarnish the company’s image to the public and as importantly, to experienced drivers that Uber itself is trying to recruit. At the same time, Uber drivers are often the first to protest in support of the company, and are often successful in reversing bans and rules.

Excellent Service, Bad Business?

One sign of excellence for any company is when its name becomes a verb! Uber, to its credit, has achieved this distinction just as Google and Xerox did in the past. It has become a staple of the transportation fabric in most major cities and increasingly in the outer suburbs. However, after six years of operation the company is losing money. According to the latest leaked data from the company (as reported in Bloomberg), Uber’s losses in the first half of 2016 totaled at least $1.27 billion, driven primarily by subsidies for Uber’s drivers. The company’s exit from China is expected to mitigate the magnitude of losses but losses are likely to persist for a few more years, given the competitive dynamics of the industry. While it is not unusual for an emerging private company to lose money for market share, the level of losses in the case of Uber has been unusually high and bound to have consequences if it is not controlled. We have already seen one casualty of high losses. Sidecar, an app that competed with Uber and Lyft, shut down last December, citing a “significant capital disadvantage” compared with others in the market.

Subsidies and Bonuses – A Double-Edged Sword

Uber’s prime asset and its biggest expense are its vast pool of drivers. Incentivizing them to stay in the system in the face of competing offers is essential but expensive, as Uber and the other car-hailing companies have realized. Below we constructed Uber’s economics for a typical ride, based on management comments and publicly available data from competing firms.

 

Figure 19: Average Economics of a Typical Ride

picture1

 

 

 

 

 

 

 

 

 

Source: Manhattan Venture Research estimates.

Uber takes roughly 20% to 25% of each ride. The effective take rate shrinks after driver and passenger incentives and bonuses are factored in. For instance, to build loyalty and keep them on the platform, both Uber and Lyft run promotions where they waive the commissions, which means the drivers keep the fares and the companies earn no revenues. And in some cases, both companies provide additional cash incentives to the drivers simply to get out on the road, which raises the cost base.

 

Figure 20: Uber Driver Incentives

screen-shot-2016-10-25-at-12-48-33-pm

 

 

 

 

 

 

 

Source: Uber

Drivers often complain that their “independent contractor” classification status comes with added costs such as insurance, depreciation and gas that cannot be passed down. Additionally, Uber does not cap the number of drivers on the road, like the taxi industry does. The resulting oversupply keeps the average wait time low for riders, but hurts the drivers because of higher idle time, which the company does not compensate. Complicating this issue is the fact that drivers are not contractually bound to work for one car-hailing company. In fact, a 2014 survey of car-share drivers by SherpaShare, two-thirds of rideshare drivers reported working on two or more platforms in the same week. So far, this has not hurt Uber or the other companies, but it does confuse the picture on how many drivers are actually working on the app.

Offsetting the take rate, there are a number of variable expenses for each ride, albeit consistent percentages of the total fare. These variable costs amount to about 15.0% out of the 27.3% take rate (including roughly 18% commission rate and 9% booking fee) in our hypothetical model above. Net, net Uber generates about $1.98 in contribution margin on a typical $16.00 fare, assuming an effective take rate of 17.9%. Accordingly, a challenge for these companies is to figure out an optimal commission and expense structure that will keep drivers happy, attract passengers and put the company on a sustained path to profitability.

New Competitors and International Markets Pose Challenges

Uber has competition in most major cities that it operates in. The landscape is getting crowded with the addition of technology and automobile companies in the mix. Additionally, the traditional taxi and limousine industry is rolling out apps, and the local incumbents in the international markets are forging preemptive alliances and raising money to compete with Uber.

Automobile and Technology Companies Stake a Claim 

Automobile and technology companies have staked their claim on the future of this business – a future that is expected to be tech-heavy and transformational, with electric cars and autonomous cars at the core. Google, Apple, General Motors, Ford, Volvo and others have forged partnerships with the either Uber or Lyft. General Motors, for instance, invested $500 million in Lyft in 2015, on the heels of its acquisition of Cruise for $1 billion. Additionally it acquired Sidecar’s assets to launch Maven, its own ride-hailing brand. Volkswagen followed suit with a $300 million investment in Gett, Uber’s biggest competitor in Europe, and Daimler AG acquired RideScout and Mytaxi in 2014. Ford Motor Co is working on its own ride-sharing service.

Traditional Taxi Industry Fighting Back 

The taxi industry launched its own ride-hailing app, Arro, to compete against Uber and others. The app is very similar to other ride-hailing apps. The industry’s earlier attempts to introduce apps have not proven successful, and early reviews of Arro are lukewarm at best. This is not because the apps are not good. It is because of two issues germane to the taxi industry that puts it at a disadvantage to Uber and the other car-hailing companies.

  • Cap on Total Taxis Increases Wait Time. Uber and Lyft have raised user expectations when it comes to wait time for rides. Uber for instance has staked its reputation on pick-up times of 5 minutes or less. And it has been proven that the longer Uber and Lyft operate in the city, the less likely a user is willing to wait for a ride. These companies can set and meet the threshold because of a highly liquid supply of drivers. The Taxi industry on the other hand, by design, limits the number of cars on the road to maintain a stable income for drivers. The flip side of this ends up being longer wait times for riders. One study in 2014 found that 92% of ride-hailing cars arrived in under 10 minutes, while only 16% of taxis did. This structural handicap puts the legacy taxi industry at a competitive disadvantage against the new competitors that have lowered the acceptable threshold of wait time for riders.
  • Uber and Lyft Can Innovate Quickly. Uber and Lyft are technology companies that employ highly talented engineers. As a result, the pace of innovation is fast and the quality of service is always improving. Dynamic pricing and service features closely capture the demands of drivers and riders. Taxis on the other hand have a metered pricing system that is overseen by various bureaucratic agencies. They just aren’t equipped to rapidly innovate and keep up with the new innovative tech companies. Moreover, taxis seem to have difficulty getting their innovations to work, even when they finally can roll one out, largely because drivers have insufficient technical training to operate the new apps.

International Markets Are Compelling But Come With Challenges

The company faces well-funded and entrenched competitors with key knowledge of the local market. Uber has the advantage of an international brand, and market growth in many new markets should be enough to support multiple competitors. That said, Uber will have to offer upfront incentives and bonuses to attract drivers and passengers even as the incumbent leaders fight back aggressively with their own promotions to maintain their competitive lead.

Pre-emptive alliances and investments present another hurdle. As Uber ramps up its business globally, major competitors including Lyft in the U.S., Didi in China, Ola in India and GrabTaxi in South East Asia have entered into a strategic partnership to work together on technology and services. The terms of the agreement allow customers of each company to use their local apps to order transportation when they travel to the other markets in the network. The companies say that each country will handle “mapping, routing and payments through a secure API.” The four companies all say the plan is to keep their independence as regionally-focused companies and to keep growing in that way, rather than a precursor to a merger or more growth for any individual company. Nevertheless, a service and technology tie-up between the four companies is understandable given that they share common VC backers, notably, Softbank, Alibaba and Tencent. Collectively, the group has raised $7 billion in funding. The other connection between the four partners is that Didi has invested in Lyft ($100 million), GrabTaxi (led a $350 million round) and Ola (part of $500 million round). Uber has taken a different competitive approach. The company prefers to compete on its own – as it did in China before merging its operations into Didi’s and is doing in India and other markets – instead of partnering with other companies.

 

Figure 21: Cross Ownerships in Ride-Hailing Companies

picture1

 

 

 

 

 

Source: Pitchbook, Company reports

The following section highlights Uber’s key competitors in the major markets in the US, India, Latin America and Africa:

A Duopoly in the United States

In the US, Uber’s largest market, the main competitor is Lyft in many cities, with additional competition in the large cities like NYC and Chicago from niche players such as Gett and Via, respectively. To the typical US consumer, Uber and Lyft are essentially indistinguishable in terms of service in markets where they compete together. Uber has an edge overall in that it is more ubiquitous because of its larger pool of drivers and its broader geographic footprint. Both services offer the same types of rides and compete largely on price. Some comparative features, which keep changing periodically, include the following:

  • Uber has surge pricing, Lyft has Prime Time; Uber has Pool, Lyft has Line. Uber drivers incur a $10 weekly cost to use their pre-supplied iPhones, which disable downloading of any other app;
  • Both companies offer huge incentives for drivers who have previously worked for each other. Both companies have a $500 signup bonus. Uber offers it via two-way referrals which gets credited after 25 rides are completed within 30 days of activation. The norm was 20 rides last year. Uber also has a $600 incentive for anyone who has been a driver for Lyft or Sidecar previously, in select markets like San Francisco. Lyft updated its sign up bonus to $500, and to $750 for the Silicon Valley area. Lyft typically starts with a much higher sign up bonus before gradually reducing it over time. For example, it had a $1000 sign up bonus for Boston for a week, followed by $750 for the next week, before bringing it down to $500. There’s a caveat though. The number of rides required within the 30 day period since activation is 50, that’s significantly more than Uber’s 30. Uber’s sign up amounts are still relatively steady at $500. Lyft, by contrast, has brought down the sign up bonus amounts to $300-$400 in several markets since October;
  • To maintain an active account, the drivers must accept at least one trip in a month. The driver app for Uber does cost $10 per week, so it gives Lyft an edge. Lyft markets itself as up to $40/hour job and Uber at $35/hour job. A comparison of how much the drivers from both services make (source: Sherpashare.com) makes for an interesting read. While Lyft drivers do marginally better in quite a few major centers like Washington D.C., Austin, Los Angeles, Orange County and Nashville – Uber drivers make a lot more (up to $2 to $3 more per hour) in other centers like Salt Lake City, Phoenix, Baltimore, Miami and Seattle. The overall stats tilt slightly in favor of Uber;
  • On user engagement, Uber edges out Lyft. Average trip costs for both Uber and Lyft are roughly similar. The average cost of a rideshare ride is $2/mile – trips starting at $1, costing roughly $1/mile and $0.25 per minute. However, Uber has a clear notification for ‘surge pricing’, and you can roughly estimate the trip cost ahead of time using the surge calculator, even though the surge prices may go up to seven to eight times the regular price. Lyft has smaller prime-time zones, and the prices typically never go beyond 200% of the original price. But their app isn’t very clear about the information, and trip prices can’t be calculated ahead of time, often leaving the users nonplussed.

Will Lyft Remain an Independent Company?

That is the 64,000 dollar question in the face of mounting losses, and limited scale and funding compared to Uber. General Motors is already a major partner, having invested $500 in Lyft in 2015, and recent news reports suggest that its offer to acquire the company outright was rejected by Lyft’s management. Apple is supposedly also interested in making a strategic investment in Lyft, although we cannot confirm this news. As Uber focuses on global growth, diversification of product, and ubiquity of service, Lyft appears to be more proactive in going beyond its core domestic car-hailing service to the potential opportunities with self-driving cars, if and when they come to fruition. This strategy fits very well with GM and Apple’s strategies. Both these companies have made early investments in the development of autonomous cars and want to be at the forefront when the technology is ready for commercial deployment.

India – The Next Focus Market

Uber has brought the same hypercompetitive approach to India. India market is largely unorganized – run by local operators without the use of technology – with just 10% of the $15 billion being the share of the organized players such as Uber, Ola, EasyCabs, Meru and others. Ola and Uber, two of the leading car-hailing companies, get 80-90% of the business from the top-10 cities. With roughly $7 billion worth of business expected to move to apps by 2020, Ola and Uber are jockeying to maximize their respective market share. Cab ride rates via apps are cheaper than those from traditional providers by 15-25% and new services such as auto rickshaws (3-wheelrs), bikes, bus shuttles and e-rickshaws are highly popular.

Key comparative features of Ola and Uber:

  • Ola does more rides per day than all competitors being first to market (2011 vs Uber in 2013) and having a sound knowledge of the domestic market. Ola offers service in 102 cities and has 450,000 drivers. Uber is present in 26 Indian cities with 250,000 drivers using the platform and commands a 25% market share.
  • Uber has taken a flexible approach to India, adjusting its services to the unique taxi market in the country. Uber offers new products such as UberMoto, a bike-sharing product priced at 3 rupees per kilometer ($.046) and UberAuto, which allows for hailing an auto-rickshaw. These lower-priced offerings are meant to compete and take share from transportation alternatives already in the country, as well as reduce traffic in India’s congested cities.
  • To get drivers on board Ola runs special programs like Ola Pragati, where a driver can get a loan from State Bank of India, buy a car and drive for Ola. It also gets drivers via referrals. High performing drivers called OlaStars get additional benefits like cash back, fuel subsidies and scholarships for their kids. Uber runs a similar referral program called ‘Uber Dost’ and loan meals (fairs) to rope in new drivers. High performers join Uber Club with benefits on health, free insurance, education subsidies for kids and so on.
  • Both have almost identical offerings. They have cars of different sizes with tiered fares. For example, the cheapest rides on OlaMini and UberGo (hatchbacks) cost Rs 5 to Rs 8 per km. Both retain a 20% commission and the rest goes to the driver. OK Play, a relatively new entrant in the market, offers e-rickshaws, launched on April 4, and bus shuttles. The fares undercut conventional taxis, which offer a flat rate of Rs 23 per km for a sedan and S 16 per km for a hatchback (in Delhi) – but increase when demand for rides is high. On March 3, 2016, Uber started a new category of services under bike taxis and Ola announced the same within 24 hours. They have also taken their battle to cab pooling and auto rickshaws.
  • Uber uses Paytm wallet and Airtel wallet, cash and cards – debit and credit. Ola has its own Ola Money and it also accepts cards and cash.

The Uber-Didi Merger Could Hurt Ola and Benefit Uber

Didi’s acquisition of Uber’s China business reshapes the landscape in Asia’s growing ride-hailing sector, and leaves India’s Ola more vulnerable to attack by Uber in its $15 billion home market. Ola might face funding issues with Didi’s conflicted position and Softbank facing a liquidity crunch because of its high-profile acquisitions in telecom and chip sectors. After the Didi deal, Uber is even more focused on India, which it has previously called its No. 2 priority overseas market, doubling down on resources, staffing and technology deployed there. Uber is localizing its service in India, as it did in China with privately-owned cars in big cities, where car ownership has historically been low. Uber is redeploying 150 engineers from its China operations to other key markets such as Southeast Asia after agreeing to sell its business in the world’s most populous nation. Uber will develop new features such as mapping as it boosts services for the region that includes Singapore, Thailand and Indonesia. The China deal will allow Uber to free up capital to double down on putting resources into other markets and hire more engineers locally in India. Uber could refocus its energies on other international markets—Europe, South America, Southeast Asia—but it could just as easily go after an easy and decisive win on its home turf.

Didi’s acquisition of Uber’s China business reshapes the landscape in Asia’s growing ride-hailing sector, and leaves India’s Ola more vulnerable to attack by Uber in its $15 billion home market. Ola might face funding issues with Didi’s conflicted position and Softbank facing a liquidity crunch because of its high-profile acquisitions in telecom and chip sectors. After the Didi deal, Uber is even more focused on India, which it has previously called its No. 2 priority overseas market, doubling down on resources, staffing and technology deployed there. Uber is localizing its service in India, as it did in China with privately-owned cars in big cities, where car ownership has historically been low. Uber is redeploying 150 engineers from its China operations to other key markets such as Southeast Asia after agreeing to sell its business in the world’s most populous nation. Uber will develop new features such as mapping as it boosts services for the region that includes Singapore, Thailand and Indonesia. The China deal will allow Uber to free up capital to double down on putting resources into other markets and hire more engineers locally in India. Uber could refocus its energies on other international markets—Europe, South America, Southeast Asia—but it could just as easily go after an easy and decisive win on its home turf.

Latin America – Another Growth Market

Uber also faces competition from Latin America’s own crop of ride-hailing companies. Mexico City was Uber’s first foray into Latin America, where it began operating in July 2013 and Mexico is the company’s largest Latin American market. In Latin America as a whole, Uber operates in 45 cities in 10 countries, and claims to have more than 2 million users every week. Tappsi is a competitor in Columbia, and Easy Taxi operates in 10 countries, including Argentina, Venezuela, Chile and Mexico. Those companies are estimated to have about half a million drivers as of Jun 1, 2016.

When Uber pushes into new markets, it’s often met with various forms of resistance. Uber’s entrance into Latin America faced similar opposition from taxi drivers and governments alike. In Colombia, Uber received a $140,000 fine for its “unauthorized taxi services” earlier this year. In Mexico, taxi drivers in Guadalajara protested against the start-up. The protest eventually turned violent, leading to a street riot. Last year in Guadalajara, several Uber drivers were abducted at gunpoint. One day in April, after Uber started operations in Buenos Aires, Argentina, a local court told authorities to shut down Uber’s services.

Despite all of this hostility, Uber is still growing in the region according to management comments. The company has managed the upheaval against them and seen “driver and passenger sign-ups” increase. In the first four months of 2016, for instance, it tripled the number of rides taken on its app in Latin America, putting the growth rate in the region on its highest run rate.

Uber in Africa

Uber currently operates in 11 cities, including Egypt, Kenya, Nigeria, Morocco and South Africa, and is planning to launch in Ghanaian capital Accra soon. Uber’s ride in Africa has not been a smooth one. Like elsewhere around the world, Uber’s disruption of the local metered cab industry has been met with resistance and regulation disputes. In Egypt, South Africa and Kenya, Uber’s presence has sometimes led to violent protests by rival local taxi drivers. In Nairobi at least two Uber cars have been attacked and set alight, one with the driver still inside. Uber drivers have also been attacked in Johannesburg, with one such incident last month leading to Uber temporarily suspending its service in the Sandton neighborhood. Uber drivers have not only feared for their own safety but also protested Uber cutting driver tariffs in order to lower fares for customers.

Tapping into dissatisfaction with Uber seems to be the unofficial expansion strategy of the app’s competitors in Africa. More and more ride-hailing services are identifying chinks in Uber’s armor and using that to their advantage to expand into the African market. Taxify, the Estonian ride service, for instance, identified an opportunity among disgruntled drivers in South Africa. Last April, when Uber South Africa announced a nearly 20% cut in its tariffs, drivers went on strike, marching to the company’s local headquarters. The labor laws in South Africa are employee-friendly, so the drivers’ working conditions have come under scrutiny.

The Saudi Arabia-based cab service, Mondo Ride, has targeted Kenya and Tanzania as favorable locations for their first expansion outside of the Middle East. In adjusting to the local market, Mondo Ride also makes use of boda-bodas, local motorcycle taxis. They’ve also promised to avoid surge pricing.

Local developers are also making a go of it. Kenya’s Maramoja launched a year ago with the promise of a deeper understanding of the country they operate in. Claiming an intimate knowledge of Nairobi’s grinding traffic, Maramoja charges according to zones. The app also tries to tap into users existing networks, recommending drivers through social media favorites via friends or followers.

The scramble for Africa’s passengers has been a bruising race for some. The South American Easy Taxi has reportedly had to bow out of the African market, unable to compete with Uber. Funded by Africa Internet Group (AIG), Easy Taxi operated in Nigeria and Kenya, where it was the most downloaded app at one point. But with the arrival of Uber in those markets, Easy Taxi appeared unable to compete.

While Uber has inspired a series of new players in the market, none of them have made much of a dent in Uber’s expansion in Africa. It remains the most ubiquitous hailing app and has both Kenyan and South African government officials on its side in clashes with metered cabs. Ultimately, Uber’s adaptation to regional markets, like the introduction of cash payments, gives it local flexibility with global clout. For both investors and drivers, Uber is the most reliable ride-hailing app in Africa, for now.

Financials & Valuation

We took a top-down approach to constructing our financial model and ran a 10-year discounted cash flow analysis to derive our valuation.

 Financials

Our financial model is based on inputs from multiple sources including publicly available company data, industry data from market research firms, and our own channel checks and assumptions.

Key Assumptions

  • Uber’s addressable market in 2015 (our base year) was $285 billion, classified into four segments: (1) Taxi and Limousine (~$100 billion worldwide opportunity, including $16 billion in the US)) (2) Rental car market, primarily business travelers (~$50 billion) (3) Logistics, which includes delivery services (~$35 billion) and moving services (~$20 billion), both of which are still early and mainly in the US (4) Mobility services, which includes the mass transit market in the US (~$60 billion) and the car sharing market primarily in Europe (~$ 20 billion);
  • We have modeled the addressable market to grow to $338.3 billion in the next 10 years (2025), based on industry assumptions, management comments and our own assumptions. Uber’s market share of its addressable market share is 9.5% in 2016 and expected to increase to 23.3% in 5 years and 44.3% by 2025;
  • The majority of Uber’s revenue today comes from its core taxi market. The rental car market is ripe for deeper penetration as business travelers find on-demand car service as seamless and efficient as car rentals from the traditional companies. The other businesses are in the early stages and need more time to gain traction;
  • We are removing China-based revenues and losses from Uber’s projections post 2016, following the company’s decision to merge the operations with Didi’s, and take a 17.5% partnership position in the consolidated company. We believe Uber’s focus will shift to India, its second largest market opportunity. Our assumptions for India are for continued growth, with daily rides ramping from 1 million per day (versus 3 million for Ola) to around 12-15 million rides per day in India, raising its share to 50% by end of 2017 from 30% today. Losses overall should moderate considerably following its exit from China;
  • Growth in the US has been on a somewhat more predictable track requiring fewer assumptions. US ride growth is believed to have crossed a million per day somewhere in the latter half of 2015, and the company has continued to expand the number of cities and drivers at a rapid pace, the latter at about 25-30% quarterly. Recent data from the New York City Taxi & Limo Commission on the ride-hailing sub-segment suggests that New York City—Uber’s largest city by revenue—grew by over 120% from summer 2015 to summer 2016, providing some conviction to our forecast growth rates of 100% for 2016 and 40% for 2017;
  • Gross Revenues are expected to rise from $18.3 billion in 2016 to $59 billion in 2020 (5 years) and $136.6 billion in 2025 (10 years). Average take rate drops gradually from 22% in 2016 to 20% in 5 years and 17.5% in 10 years.

 

Figure 22: Uber Gross Bookings ($B)

picture1

 

 

 

 

 

 

 

Source: Company reports, MVR Estimates

Net Revenue rises from $4.0 billion in 2016 to $11.8 billion in 2020 (5 years) and $23.9 billion in 2025;

 

Figure 23: Uber Net Revenue ($B)

picture1

 

 

 

 

 

 

 

Source: Company reports, MVR Estimates

  • EBIT goes from loss of $1.81 billion in 2016 to loss of $1.1 billion in 2020 and gain of $5.5 billion in 2025 on margins that improve from -45% in 2016 to -9.5% in 2020 and +23% in 2025;
  • We expect FCF breakeven in 2022 at the earliest based on current run rates; operating income should turn positive in 2021;
  • Additional data points and management comments that influenced our model inputs:
  • CEO Kalanick’s commented that Uber was generating $1 billion in EBIT in its top 30 cities;
  • In Q1 2015, the company realized a 40.4% gross margin, based on around 45% of its business being based in the US. This margin quickly deteriorated with its worldwide push to 0%, with marketing and acquisition costs ballooning to drive a net income loss of over $600M in that quarter alone;
  • Uber said in 2015 it was profitable in half of its cities—200+ of 450+, with more cities going EBIT-positive with time. The company has noted that it is profitable in aggregate in the US, and still has major growth ahead, implying that a large part of the $2 billion loss in 2015 was due to incentives and bonuses to acquire drivers and passengers. Given the importance of scale and market share to successfully create a profitable business, these investments appear justified if such a competitive position can be maintained. So far, most major markets have two to three competitors, so margin expansion is likely as competitors drop out.

 

Figure 24: Uber Financial Model ($Mil)

picture1Source: MVR estimates and market data

Valuation

We constructed a 10-year DCF model to derive a fair value for Uber. The model assumes a terminal growth rate of 4%, a discount rate of 9% and a market premium of 4.3% over a risk-free rate of 1.75%. Accordingly Uber should be valued at an enterprise value level of $45.0 billion and, after accounting for debt, cash and the $7.0 billion value of its 17.5% equity stake in Didi, market value of $52.3 billion. We believe there is room for upside if the company can capture a larger than expected market share in the international markets, if commercial deployment and uptake of driverless cars comes to fruition sooner than expected, and the regulatory framework becomes more friendly and constructive.

 

Figure 25: Uber Discounted Cash Flow Model

picture1Source: MVR Estimates

Funding

Uber has been a juggernaut when it comes to raising money. The company has raised $14.7 billion to date, primarily through equity rounds and partially through two debt rounds. The most recent funding round – on August 1, 2016 for $1.0 billion – was led solely by Didi, and valued the company at $68 billion. The last equity round, Series G, in May 2016 raised $5.6 billion at a post-money valuation of $66 billion and $48.77 per share. This was followed closely by a debt round of $1.15 billion in July 2016 with a 5% yield and led by Barclays, Citigroup, Morgan Stanley and Goldman Sachs.

 

Figure 26: Funding Rounds – By Year ($Mil)

picture1 picture3

 

 

 

 

 

 

 

 

 

 

picture2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Pitchbook

 

Management

Uber management has taken a take-no-prisoners approach. Kalanick as CEO is thought to be intensely competitive, with an approach employees describe as “shoot first and ask questions later.” Given the size of the opportunity before Uber and the breakneck speed of change, this approach might be considered an asset. Employees note this persona is meant to also imbibe the company with an entrepreneurial spirit, in contrast to some other tech giants (Google, Microsoft) that are often more “academic” in their approach to new products.

Uber’s go-to-market strategy is to create successful “playbooks” in each market by using both qualitative and quantitative results from previous cities to turn expansion into a repeatable process. This iterative approach is a major key to its ability to rapidly scale. Kalanick focused most of his attention over the last two years in China, which means he is likely to begin working on new initiatives following the Didi merger.

Travis Kalanick, Co-founder and the CEO. Prior to Uber, Travis founded Red Swoosh, an enterprise content delivery company that he sold to Akamai Technologies in 2007. Prior companies include Scour, the world’s first peer-to-peer search engine where Kalanick also attained the dubious distinction of having been sued for $250 billion. In addition, Kalanick has been an active angel investor. Travis graduated from the University of California, Los Angeles with a degree in computer engineering.

Ryan Graves, Head of Global Operations. Ryan Graves helped build the company from 1 to 200+ employees by driving operations, strategy, expansion, and recruiting. Ryan’s business and technology experience range from organization scaling, business development, and product management to large ERP implementations & corporate restructuring.

Jeff Holden, Chief Product Officer.  Jeff Holden was the Senior Vice President of Product Management of Groupon since April 2011. Prior to joining Groupon, Jeff was the CEO and co-founder of Pelago, whose flagship product, Whrrl, was designed to help people get out of a social rut and discover new things in their cities. Previous to this, Jeff was at Amazon.com, where he was Senior Vice President of Consumer Websites, Worldwide. He was responsible for the worldwide consumer website experience, including personalization, ordering/Amazon Prime, community, search, automated merchandising and online traffic. Prior to Amazon, he worked at D. E. Shaw & Co., L.P. in New York from 1992 to 1997. He has been an Independent Director at Become, Inc., since September 2010.

Prominent Board Members

Cheng Wei, Co-Founder & CEO, Didi Chuxing

Board Member (since 2016)

Bill Gurley, General Partner, Benchmark

Member of Board of Directors (since 2011)

Yasir Al Rumayyan, Managing Director @ Saudi Arabia’s Public Investment Fund

Board Member (since 2016)

Reema Bint Bandar Al-Saud, Public Policy Advisory

Board Member (since 2016)

About Manhattan Venture Partners

Our Research Methodology

Manhattan Venture Partners provides clients with accurate, timely and innovative research into the companies and sectors we cover. To that end we have established an experienced team of analysts, researchers, economists and industry veterans that focus exclusively on private companies with a proven track record of success. Producing quality research on a private company is uniquely challenging. Our analysts communicate with employees, ex-employees, early investors, VCs, competitors, suppliers and others to gather valuable information about the company under coverage. This information enables us to create unique financial models that value the underlying company and provide insight to our clients and industry experts, leveraging years of experience working for bulge bracket firms.

Manhattan Venture Partners reports include business and financial aspects of late-stage companies. These reports include but are not limited to industry overviews, competitor analyses, SWOT analysis, products (existing and in development), management and key directors, risks and concerns, other propriety channels, historical financials, revenue projections, valuations (using various matrices and valuation recommendation), waterfall analysis, and a capitalization table.

About the Analysts

Santosh Rao

Santosh Rao has over 18 years of experience in equity research, primarily within the technology and telecommunications space. He started his equity research career as an Associate at Prudential Securities and later moved to Broadpoint Capital (Formerly First Albany Capital), where he was the Senior Equity Analyst, and later to Evercore Partners, where he worked with the Telecom and Data Services Group. Prior to joining Manhattan Venture Partners, he was the Managing Director and Head of Research at Greencrest Capital, focusing on private market TMT research. Mr. Rao started his career as a Financial Analyst in the Operations Groups at PaineWebber (UBS) and Prudential Securities. Santosh has an undergraduate degree in Accounting and Economics, and an MBA in Finance from Rutgers Graduate Business School.

Max Wolff

Max Wolff is an economist specializing in international finance and macroeconomics. Before joining Manhattan Venture Partners, he was Chief Economist at Greencrest Capital, and prior to that spent four years as the senior hedge fund analyst at the Beryl Consulting Group LLC. Mr. Wolff teaches finance and statistical research methods in the New School University’s Graduate Program in International Affairs. Max’s financial markets and Macro-Economics work appears regularly in Seeking Alpha, The WSJ, Reuters, Bloomberg, The BBC, Russia Today TV, and Al Jazeera English.

Disclaimer

I, Santosh Rao, certify that the views expressed in this report accurately reflect my personal views about the subject, securities, instruments, or issuers and that no part of my compensation was, is, or will be directly or indirectly related to the specific views or recommendations contained herein.

I, Max Wolff, certify that the views expressed in this report accurately reflect my personal views about the subject, securities, instruments, or issuers and that no part of my compensation was, is, or will be directly or indirectly related to the specific views or recommendations contained herein.

Manhattan Venture Partners LLC (Hereafter “Manhattan Venture Partners”), the parent company of Manhattan Venture Research, does and seeks to do business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This document does not contain all the information needed to make an investment decision, including but not limited to, the risks and costs.

Additional information is available upon request. Information has been obtained from sources believed to be reliable but Manhattan Venture Partners or its affiliates and/or subsidiaries do not warrant its completeness or accuracy. All pricing information for the securities discussed is derived from public information, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. Manhattan Venture Partners does not engage in any proprietary trading.  The user is responsible for verifying the accuracy of the data received.  This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Manhattan Venture Partners does not have ownership of the subject company’s securities. Manhattan Venture Partners does not have any market making activities in the subject company’s securities. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information.

Copyright 2016 Manhattan Venture Research LLC. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed, in whole or in part, without the written consent of Manhattan Venture Research.

Information Access Level Classification System (IALCS)

Manhattan Venture Research uses an Information Access Level Classification System (IALCS) to make clear the degree of access offered by the company(s) covered in all research reports.

Each research report is classified into one of three categories depending on its classification. The categories are:

I++: The company covered by the research report provided substantial disclosures to Manhattan Venture Partners.

I+: The report was prepared following partial disclosure by the company, including publicly available financial statements, and/or is based on conversations with past or present company employees.

I: All reports are prepared using a mosaic research approach. Not all companies are willing and able to provide substantive access to management and information. In I reports no direct access was granted.

Research Reports

Stripe
Palantir Technologies
Alibaba Group