Fast-growing taxi alternative service Uber made news as AllThingsD confirmed the company has raised more than $360 million at an eye-popping valuation of $3.5 billion. It's incredible for a company that didn't exist when President Obama was inaugurated for his first term, but it also raises the question of whether such a number can possibly be justified. The second wave of web companies has been a mixed bag for investors with Groupon and Zynga causing bad flashbacks to the dot-com bubble of the late 1990s while LinkedIn and comeback-kid Facebook have commanded huge valuations by building giant franchises. Where does Uber fit into this equation and why is Google putting a quarter of a billion dollars into the company at this point?
To better understand how Uber, which is allegedly on track for $125 million in revenue this year, can be valued at nearly 30 times revenue, it's worth understanding the public-market dynamics that exist now. While historically you won't find many established companies trading at more than 10 times sales, in the online sector, that group has gotten disturbingly large of late. Some are older internet firms like TripAdvisor and Financial Engines, which barely eclipse the mark. Others, like Marketo and Zillow are trading at twice that benchmark, despite relatively short histories making money. The point here isn't to call out any particular company as overvalued — that discussion can be found elsewhere — but rather to point out that we are in heady territory. The air is much thinner for companies at these levels than for the broader stock market, which many watchers are also getting nervous about.
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