Uber's revolutionary software may be a double-edged sword

Uber's revolutionary software may be a double-edged sword
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Henry Ford famously said: “If you think you can do a thing or think you can't do a thing, you're right.”

There was no shortage of naysayers in 1908 when the Ford Motor Company’s first Model T, priced at a whopping $825.00, rolled off the assembly line. More than 10,000 Model T’s were sold the first year, and today, the annual revenues of the world’s 17 largest automakers exceed $1 trillion. 

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Ford’s words — and vision — are relevant today as the “can-dos” and “can’t dos” debate whether Uber, the innovative ride-sharing company, should command a $120 billion valuation in an initial public offering (IPO).

For perspective, a $120 billion valuation for Uber would be nearly five-times larger than the current largest IPO valuation — The Alibaba Group’s $25 billion valuation in 2014.

Ford, of course, was ahead of his time. He saw that through assembly-line production of his Model Ts, it would be economically feasible to achieve his vision of a car in every driveway. It is a testament to Ford that the automotive industry he created hasn’t changed dramatically for more than a century. 

Then came Uber, and software became the core value of a car.

Uber’s ride-sharing software has disrupted the entire auto industry. Just as Ford envisioned a car in every driveway, Uber’s creators envisioned delivering a ride to anywhere at any time, enabled by a powerful software application on a phone. 

Uber’s service has become wildly popular since its inception in 2009. Consider these astounding statistics:

  • 10 billion rides delivered as of this year;
  • 48 million U.S. adults expected to use Uber this year;
  • 15 million rides a day;
  • 300 million drivers;
  • availability in 600 cities; and
  • annual revenues of nearly $7 billion.

So why are so many people skeptical over Uber’s IPO valuation? 

Yes, it is a lot of money, especially for a company that has not yet turned a profit. That said, investors want in on what they see as a long-term driving revolution. They are eager to embrace a new approach and put the dog- tired version of Ford’s original vision in the rearview mirror. 

The days of automakers building cars for their dealer network, using financing incentives to drive new car purchases and getting people to buy more and more cars are over.

Uber’s impressive rider-number trend is a clear indication that ride-sharing is a force to be reckoned with and not a fad. So could Uber be worth $120 billion? Yes, particularly in this hot IPO market. 

But smart investors will also carefully consider what Uber has relied upon to drive its explosive growth — the innovative software that enables a terrific experience for both riders and their drivers.

Indeed, innovative software development may be the double-edged sword that makes $120 billion too steep a valuation for Uber. Why? Autonomous cars. 

The rapid, agile software development that Uber leverages to tell the drivers where to get you and makes the user experience so positive is also being leveraged by automobile manufacturers who are investing heavily in development of autonomous vehicles.  

While it is the case that Uber is also investing heavily in the autonomous driving market, it is not certain they will be the winner there. It’s hard for one company to own multiple markets.  

Still, I’m very optimistic about Uber’s long-term success. However, at a $120 valuation, as an investor, I would want to see a realistic path to profitability before buying the IPO. If it can get to profitability and continue to dominate the ride-sharing business, they can use their profits to fund autonomous vehicles. 

Make no mistake: What Uber has done with ride sharing is as revolutionary as Ford’s mass production of automobiles.

Autonomous driving at scale represents a significant threat to Uber’s ride-sharing model and needs to be factored in when considering investing in an Uber IPO. 

Lou Shipley is a lecturer at the MIT Sloan School of Management. He is CEO of Black Duck Software and has over 25 years of experience as an enterprise software executive.