Is It Still Worth Investing In Ride-Sharing Startups Like Uber?

From Uber to Gett, the ride-sharing industry has been experiencing explosive growth over the past few years. Venture capital funds that had invested in these startups have enjoyed sky-high returns, with valuations as high as $62.5 billion and $5.5 billion for Uber and Lyft respectively. Though some valuations appear extended, for example, Lyft has a valuation of 117 times its revenue for 2015. Investors are now questioning whether it is still worth investing in transportation start-ups if and when they go public.

Industry Growth Prospects and VC Sentiment

According to research data from eMarketer, 15 million US.. citizens are expected to use a ride-sharing service in 2016, marking a 20.5% increase from 2015. However, the industry growth rate is expected to decelerate from a double digit to a single digit rate after 2017. Plus, the pace of global expansion is already facing impediments by legal and regulatory hurdles.

VC funds are already treading cautiously. The chart below reveals the fall in Deal Counts since Q2 2015. It reflects how the higher valuations are repelling several investors.

The size of VC investments has been fluctuating. Capital invested in the second quarter of 2016 was exceptionally high at $5.76 billiong, but much of that was from a $3.5 billion investment by Saudi Sovereign Wealth fund in Uber. Certain analysts claim that VC interest in the sector is still strong, arguing that the lower deal count is the result of more capital being allocated to fewer highly valued start-ups.

However, if the one-off Saudi deal were excluded, the chart would show more clearly how the decline in deal count has not been met by a proportional rise in ‘Total Capital Invested’ since 2015. This confirms VC investors’ gradual declining interest in the transportation start-ups, as rising competition dampens their gross margins and growth prospects. This falling VC interest may drag down public markets’ enthusiasm as well. In fact, most of the technology Initial Public Offerings of 2015, from Fitbit Inc FIT to Square Inc SQ, are trading below their IPO price.

Nevertheless, the innovative nature of this technology-driven industry could still drive future growth. For instance, start-ups such as Lyft and Zoox are working on self-driving cars to provide taxi-hailing services, offering people a more exciting and ‘safer’ ride experience. Hence constant innovation in the sector should maintain investor interest over the long-term.

Recession- Proof?

In fact, the industry can also be considered recession-proof, as people are more likely to opt for taxi- hailing services as opposed to buying new cars during economic slumps. Higher unemployment and stagnant wages would also encourage more people to begin offering ride-sharing services to earn extra cash. According to rideshareapps.com, drivers can earn approximately $17 per hour in LA, and $30 per hour in New York. This would be enticing income for people facing financial difficulties. Therefore, the ride-sharing industry may remain stable, or potentially even expand during recessions, making the industry a worthwhile investment option.

Acquisition Targets

The resilient nature of shared transportation services has made these start-ups attractive takeover targets, as cash- rich corporations seek to diversify into more innovative and recurring revenue-generating sectors. Recent acquisitions include Daimler AG DDAIF's takeover of Ridescout, and General Motors Company GM's takeover of Cruise.

Evidently, shareholders of large corporations are pushing to diversify into ride-sharing services. For instance, Toyota Motor Corp TM's shareholders played a major role in encouraging the firm to invest $1 billion in Uber. Usually shareholders are unpleased with costly takeovers. However, given their approval of such acquisitions, companies may be more willing to takeover at higher valuations. As a result, investors will be able to sell their shares at lucrative prices.

While investing in highly valued firms like Uber may currently seem risky, it is definitely still worth investing in an industry that still holds strong interest amongst shareholders, and can prove to be resilient during recessions.

Image Credit: Andrew Brackin