Aswath Damodaran - They [Uber And The Ride Sharing Companies Collectively] Have Disrupted This Business…That’s The Good News, The Bad News Is I Don’t Think They’ve Figured Out A Business Model That Can Convert That Growth Into Profits | #155

Episode Summary

Executive Summary: Aswath Damodaran argues that Uber and similar “story stocks” have transformed transportation but remain hard to justify on fundamentals because growth has outpaced monetization. He contrasts Uber with Lyft, Amazon, and Apple to show how valuation depends on business model, cash generation, and narrative discipline, while also defending buybacks as a healthy form of cash return and outlining where global markets and disruption themes may create opportunity.

Main Topics: Uber IPO and ride-sharing valuation (Priority: 5/5): Damodaran says Uber changed consumer behavior and the car-service market, but its path to profitability is uncertain because it relies on contractors, not owned assets, and the autonomous-car thesis is capital intensive and unresolved. Story stocks vs. compact stories (Priority: 5/5): He contrasts Uber’s sprawling global logistics ambition with Lyft’s narrower U.S.-focused strategy, arguing that expansive stories can support higher valuations but create distraction and execution risk. Valuation as a flexible craft (Priority: 5/5): Damodaran explains that valuation is not a rigid DCF formula but a craft centered on asking the right questions, and that he adapted his framework to value users, riders, and subscribers rather than only revenues and earnings. Amazon and Apple as valuation case studies (Priority: 5/5): Amazon is framed as a disruptive platform that can enter many industries but is still difficult to justify at high prices; Apple is described as the greatest cash machine in history, yet still a mature iPhone-dependent business that investors should trade around rather than blindly hold. Buybacks, dividends, and capital allocation (Priority: 4/5): He defends buybacks as flexible dividends and cash returned to owners when firms lack good investments, arguing that critics confuse symptom and problem and that the backlash is emotional and political. Macro valuation and market risk premiums (Priority: 4/5): He uses implied equity risk premiums to assess whether markets are expensive, arguing that surface-level P/E complaints are insufficient and that the post-2008 market regime has structurally changed. Disruption in education, publishing, and finance (Priority: 3/5): Damodaran says universities, textbook publishing, and banking are ripe for slow-moving disruption because incumbents resist change even when customers are poorly served and technology makes legacy pricing indefensible.

Key Arguments: Uber and Lyft solved the demand side of car service but have not yet proved a durable profit model. Uber's autonomous-vehicle narrative may not accrue to Uber if the cars are owned by firms like Google or Tesla, limiting its take rate. Lyft may be the better investment than Uber because it has a narrower, more manageable U.S. story and potentially more upside in a duopoly. Valuation should adapt to modern businesses by focusing on users, riders, members, and subscribers as unit-level economics. Amazon should be viewed as a disruption platform, not merely an online retailer, but even great businesses can be overpriced. Apple is a mature cash generator; investors should recognize the difference between a great company and a great stock. Buybacks are not a sign of weakness; they are a cash-distribution choice when firms cannot invest at acceptable hurdle rates. Political attacks on buybacks often reflect nostalgia for manufacturing jobs rather than a clear understanding of capital allocation. Market-level cheapness is best assessed via implied equity risk premiums, not simple valuation multiples. Post-2008 markets are more volatile and may no longer mean-revert to the historical U.S. averages investors are used to. The most attractive opportunities often exist in crisis-hit or hated markets, such as the UK during Brexit. Education, publishing, and finance will be disrupted slowly because incumbents have too much to lose from change.

Data Points: Uber valuation (Damodaran estimate): $60 billion - His optimistic estimate for Uber based on a duopoly/side-business thesis Uber IPO valuation mentioned by host: ~$80 billion - Host references market pricing at the IPO and asks if it is reasonable Uber user base mentioned: 91 million riders - Used to illustrate scale of user-based valuation Other user-based scale mentioned: 200 million users - Referenced alongside IPO-era story stocks Amazon revenue forecast: $600 billion+ in year 10 - Damodaran’s disruption-platform valuation scenario for Amazon Amazon valuation example: $1,300 per share - Intrinsic value from his optimistic Amazon model Amazon starting stock price in example: $1,900 per share - Shows market price exceeding even his bullish valuation Apple cash returned over five years: More than $300 billion - Damodaran cites this as evidence of Apple as a cash machine Apple cash balance increase during same period: Another $100 billion - Returned huge cash amounts while still increasing cash reserves S&P 500 cash returned last year: $800 billion - Used to show scale of buybacks/dividends Share of cash returned via buybacks: 65% - Illustrates buybacks' dominant role in capital return Implied equity risk premium at end of 1999: 2% - Example of extreme overvaluation in U.S. equities Implied equity risk premium at start of month in transcript: About 5.5% - Used to argue the market was not obviously in bubble territory Equity risk premium in 2009: 6.5% - Highest since 1978 and evidence of crisis pricing Equity risk premium at start of 2008: 4.5% - Pre-crisis comparison point Buyback share of S&P 500 cash returned: 65% - Shows why buybacks are politically salient Uber riders as low-income workers: 3.9 million - Used to argue the sharing economy may be creating low-quality jobs Months to transfer IRA mentioned by host: 3-4 months - Example of banking/financial services inefficiency Blog age mentioned: 10-year blog anniversary - Damodaran’s long-running public research output Apple purchase example: $6 buy price and $600 sale price - His most memorable investment, bought as a mistaken charity-like act Time horizon for Apple example: 12 years - Held from the late 1990s to the sale U.S. stocks held by average Americans: About 80% of money - Used to illustrate home-country bias

Pivotal Quotes: "I think the value that I gave them is $60 billion. That's a pretty optimistic value from my perspective because it's built on the premise that Uber and Lyft are essentially going to become a duopoly." — Aswath Damodaran: On Uber's IPO valuation and the assumptions required to justify it "I describe valuation as a craft, and I tell people: look, you know, it's a craft where you're never quite going to master it." — Aswath Damodaran: Explaining his flexible, evolving approach to valuation "Buybacks are a way in which cash leaves companies that shouldn't be investing and goes to companies which should be investing." — Aswath Damodaran: Defending buybacks as a rational capital-allocation mechanism

Implications: Investors should separate great businesses from great stocks, focus on unit economics and cash flow, and be wary of narrative-driven IPOs. Policymakers should target job creation and labor quality, not buybacks, while contrarian investors may find value in hated or crisis-hit markets.