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> lack of viable business models To be fair this still remains to be seen for most? public tech companies. It’s easy to be unprofitable and just say you’re fol

> lack of viable business models To be fair this still remains to be seen for most? public tech companies. It’s easy to be unprofitable and just say you’re following the Amazon model. But can Uber or AirBnb actually run a business that increases their net profit YoY sustainably? I think that remains to be seen. The super easy money in both private and public markets for over a decade has kicked up this fog so that it’s hard to make out what is going on. It could be that many are just as sustainable in a tight market as they would’ve been in 1999

kragen 5y ago
Of course no company can increase their net profit YoY sustainably, unless you mean increasing it at the rate of overall economic growth, because otherwise after a few decades the economy consists of only that company and its growth must then fall to the rate of overall economic growth. So let's consider the more reasonable interpretation of "viable business models" as whether Uber or AirBnB can be sustainably profitable at a level that justifies their current market cap (and thus stock price.) Uber Cab is US$73B, AirBnB is US$100B, and justifying those at a P/E of 20 would require respectively US$3.5B and US$5.0B per year of profits, which are US$0.50 and US$0.75 per person per year, at the current population. They're both effectively marketplaces making a living by skimming a commission off the earnings of actual service providers, who are providing respectively transportation and lodging. Such commissions are usually in the 0.5%-50% range depending on the market power of the marketplace and the kinds of risks involved. (Consulting agencies commonly suck off 50%, for example, in part because they don't get paid at all if the client is sufficiently unhappy.) Suppose they're 0.5%. Then to justify Uber's market cap, the annual transportation budget per person needs to be at least US$100, and the annual lodging budget per person needs to be at least US$150. These seem like very plausible numbers to me, even a bit low. For example, right now Uber's commission is 20%, 40 times higher than the 0.5% I'm using above, and pre-covid the US hotel/motel industry was about US$220 billion for a country of only 330 million people, which is US$666 per person, a beastly number that is four times higher than the US$150 I computed above. So I think the market is pricing in a fairly large risk that Uber or AirBnB will just blow up and be worth $0 in a few years. But I guess you see it very differently. What's your analysis? What am I missing?
- dannyw 5y ago
  Commissions are revenue, but it's earnings (profit) that you should really care about. The mentality of "Revenue Growth At Any Cost" (spend $1.2 in CaC to buy $1 of revenue) is coming into an end, and my view is that only profitable businesses will survive. Airbnb only reported positive earnings in the last quarter (which is great, hope they continue the trend), but I reckon a lot of "never made money" tech companies are going to continue to see their valuations sinking.
  - kragen 5y ago
    Absolutely true, and I should not have conflated revenue with profits in my comment. Plausibly AirBnB and Uber won't have a significant cost of sales in the long run, but plausibly they will. I doubt they'll have retail-like 5% profit margins though, so the difference might be a factor of 2 or 3.
    - timdiam 5y ago
      Isn’t this line of reasoning assuming Uber / AirBnB capture 100% of the market? I don’t think that’s a realistic assumption.
      - kragen 5y ago
        Yes, more or less. AirBnB does have pretty close to 100% of some overnight lodging markets and are likely to take more, but they're a long way from having 100% of the market now; their revenues are only about US$5 billion a year. But I think the major threat to their business is not competition from the old guard with their trillion-dollar yearly revenues; they'll eat those guys' lunch, no problem. The real risk is that they'll be banned, like they are in New York, or soft-banned to favor local startups, like they are in China.
- AnthonyMouse 5y ago
  > Then to justify Uber's market cap, the annual transportation budget per person needs to be at least US$100, and the annual lodging budget per person needs to be at least US$150. This is also ignoring potential for expansion into other markets. For example, Uber's model might be useful for trucking services. You bought some used furniture, you want a truck to come and bring it to your house. You're a plumber, you need a water heater transported from the warehouse right away for an emergency job. Open the app. Uber has a large number of drivers connected to them, why not go into competition with UPS and FedEx? Maybe things like that succeed, maybe they don't. But if they do they make a lot more money, and the possibility that they do makes the company more valuable.

kragen 5y ago

Of course no company can increase their net profit YoY sustainably, unless you mean increasing it at the rate of overall economic growth, because otherwise after a few decades the economy consists of only that company and its growth must then fall to the rate of overall economic growth. So let's consider the more reasonable interpretation of "viable business models" as whether Uber or AirBnB can be sustainably profitable at a level that justifies their current market cap (and thus stock price.) Uber Cab is US$73B, AirBnB is US$100B, and justifying those at a P/E of 20 would require respectively US$3.5B and US$5.0B per year of profits, which are US$0.50 and US$0.75 per person per year, at the current population. They're both effectively marketplaces making a living by skimming a commission off the earnings of actual service providers, who are providing respectively transportation and lodging. Such commissions are usually in the 0.5%-50% range depending on the market power of the marketplace and the kinds of risks involved. (Consulting agencies commonly suck off 50%, for example, in part because they don't get paid at all if the client is sufficiently unhappy.) Suppose they're 0.5%. Then to justify Uber's market cap, the annual transportation budget per person needs to be at least US$100, and the annual lodging budget per person needs to be at least US$150. These seem like very plausible numbers to me, even a bit low. For example, right now Uber's commission is 20%, 40 times higher than the 0.5% I'm using above, and pre-covid the US hotel/motel industry was about US$220 billion for a country of only 330 million people, which is US$666 per person, a beastly number that is four times higher than the US$150 I computed above. So I think the market is pricing in a fairly large risk that Uber or AirBnB will just blow up and be worth $0 in a few years. But I guess you see it very differently. What's your analysis? What am I missing?

dannyw 5y ago
Commissions are revenue, but it's earnings (profit) that you should really care about. The mentality of "Revenue Growth At Any Cost" (spend $1.2 in CaC to buy $1 of revenue) is coming into an end, and my view is that only profitable businesses will survive. Airbnb only reported positive earnings in the last quarter (which is great, hope they continue the trend), but I reckon a lot of "never made money" tech companies are going to continue to see their valuations sinking.
- kragen 5y ago
  Absolutely true, and I should not have conflated revenue with profits in my comment. Plausibly AirBnB and Uber won't have a significant cost of sales in the long run, but plausibly they will. I doubt they'll have retail-like 5% profit margins though, so the difference might be a factor of 2 or 3.
  - timdiam 5y ago
    Isn’t this line of reasoning assuming Uber / AirBnB capture 100% of the market? I don’t think that’s a realistic assumption.
    - kragen 5y ago
      Yes, more or less. AirBnB does have pretty close to 100% of some overnight lodging markets and are likely to take more, but they're a long way from having 100% of the market now; their revenues are only about US$5 billion a year. But I think the major threat to their business is not competition from the old guard with their trillion-dollar yearly revenues; they'll eat those guys' lunch, no problem. The real risk is that they'll be banned, like they are in New York, or soft-banned to favor local startups, like they are in China.
AnthonyMouse 5y ago
> Then to justify Uber's market cap, the annual transportation budget per person needs to be at least US$100, and the annual lodging budget per person needs to be at least US$150. This is also ignoring potential for expansion into other markets. For example, Uber's model might be useful for trucking services. You bought some used furniture, you want a truck to come and bring it to your house. You're a plumber, you need a water heater transported from the warehouse right away for an emergency job. Open the app. Uber has a large number of drivers connected to them, why not go into competition with UPS and FedEx? Maybe things like that succeed, maybe they don't. But if they do they make a lot more money, and the possibility that they do makes the company more valuable.