Uber Is Transportation, But It Prefers to Look Like Tech

(Bloomberg Gadfly) -- Uber is a technology company. It is also a transportation company.

That may seem like a trivial distinction, but a lot is riding on it. And not just for Uber, but for every disrupter that fancies itself a technology company.    

Europe's highest court -- the European Court of Justice -- will decide later this year whether Uber is more transportation than technology and should be regulated accordingly. Such a ruling would mean stricter rules, licensing requirements and higher compliance and regulatory costs.

Needless to say, Uber couldn't afford those regulatory burdens. It lost $2.8 billion last year, excluding its China business, and $708 million in the first quarter. But regulations would be the least of Uber's concerns. The bigger problem is that Uber is worth far less as a transportation company than as a technology company.  

The technology sector is famous for its extravagant valuations, and Uber is no exception. Like many technology companies, Uber has no earnings, so forget about a price-to-earnings ratio. It also has few assets other than its hard-to-value software, so forget about a price-to-book ratio.

Based on one valuation measure that can be calculated, however -- its price-to-sales ratio -- Uber is richly priced. Uber's valuation of $69 billion and net revenue of $6.5 billion last year gives it a P/S ratio of 10.6, compared with 4.2 for the S&P 500 Information Technology Index. Which is saying something because the tech sector's P/S ratio is by far the highest among S&P 500 sectors.

Uber would be nowhere near as expensive if it were valued like a transportation company. The P/S ratio of the S&P 500 Transportation Index is a lowly 1.5. To put that in perspective, Uber's value would have to tumble 86 percent to align with the average transportation company.

It's no wonder that Uber is desperately fighting to keep its technology tag.

Uber is hardly alone. It seems as if every would-be travel or retail or food or financial disrupter is calling itself a technology company. It's likely not a coincidence that tech stocks look frothy. As my Gadfly colleague Shira Ovide pointed out on Thursday, there's a raging debate about whether tech valuations are approaching worrying levels not seen since the 1990s-era dot-com bubble. In every conceivable valuation category, the tech sector is the first, second or third most expensive among S&P 500 sectors.

If you have any doubt that disrupters are trying to ride the wave of lofty tech valuations, consider so-called fintech, or financial technology. Most fintech companies charge their customers for what can safely be described as a financial service, which is why they're already regulated as financial firms.

Unlike Uber, fintech companies have no regulatory bogeyman to dodge. But you're picking a fight if you refer to fintech firms as financial companies. And here's why: The P/E ratio of the S&P 500 Information Technology Index is 24.4, while the P/E ratio for the S&P 500 Financials Index is 15.1. No one wants to see their company's value drop by 38 percent.

Still, this insistence that everything is a technology play won't last forever. Since 1990 -- the earliest year that numbers are available -- the Information Technology Index's P/E ratio, excluding negative earnings, has been the richest among S&P 500 sectors just 39 percent of the time.

When tech valuations come back to earth, I suspect that Uber and all the other disrupters -- er, technology companies -- will care less about labels. In the meantime, they better hope the market doesn't tag them with a less indulgent sector.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nir Kaissar is a Bloomberg Gadfly columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

To contact the author of this story: Nir Kaissar in Washington at nkaissar1@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.