Investing in Uber vs investing in Careem
Careem has three categories of rides available: Careem GO, Careem GO+, and Careem Business. Uber mainly operates on two fronts, namely Uber GO and Uber X¹.
A potential investor can make an investment in any one, two or all of these categories. In this section, we quantitatively compare Uber and Careem’s services and conclude which of these two services offer higher returns to the investors.
We have made the following assumptions in our analysis:
To make a fruitful comparison between Uber and Careem, we need to compare the services offered by both firms in the two segments they operate. Uber and Careem GO basically target the middle-class customers, who are looking for a cheaper mode to commute. Therefore, their rates are quite low and older cars are accepted by both firms.
The graph below shows the yearly revenues of both services to the investors:
Careem charges a higher rate on a per km basis which allows the investor to earn higher revenues (around 400,000rps more than Uber). Uber’s primary strategy is to offer low rates to the customers, and this in turn hurts investors. Keeping every other factor constant, an investor can make higher revenue on an annual basis with Careem GO.
Similar to the revenue analysis, Careem GO has a higher net profit on an annual basis. This is primarily down to two crucial factors:
- Higher rates on a per km basis charged by Careem
- A higher percentage per ride charged by Uber – Uber charges its drivers 25% of the entire fee per ride as compared to Careem, which charges around 20%. The difference of 5% actually adds up to a large figure if taken on an annual basis. In addition, a lower revenue per ride, results in a lower net profit when compared with Careem
Some other financial measures also paint a similar picture. Careem GO has a higher ROI, NPV and a lower payback period. These results are down to the above mentioned factors of a lower per km charge and a higher percentage charged by Uber on a per ride basis.
Table above shows few of the other measures that can be used to evaluate the two investment options. Return on investment measures the net profit as a percentage of the capital invested. As the table shows, Careem GO generates a higher return as a percentage of the total investment for the investor.
An interesting financial measure called the payback period determines how long it will take for the investor to recoup his/her investment. The table shows it will take the investors approximately 1 year to recoup their investments in Careem GO and less than 2 years to get their capital back with Uber Go.
Note – even though most of the figures used are accurate to the best of our knowledge, figures such as ROI must be handled with care.
Note about NPV
Net present value (NPV) is a financial measure used for valuing a particular investment in today’s terms. Its valuation is based on three components:
- Cashflow – in simple terms, the amount of cash that is available to the firm at the end of the year. It is often calculated as adding back depreciation or any non cash expense to the net income figure.
- Discount rate – The interest rate or the rate of return that is offered by investments of a similar risk class. In other words, an investor should ask his/herself the following question: will I receive a better return investing in an asset that offers lower risk than taxi services? In this case, the discount rate becomes a subjective matter. Meaning, it is dependent upon the return that is “expected “by an investor and this ultimately depends on the risk adverse nature of the investor.
- Number of years the project lasts for – in our analysis, the project lasts for five years. Each cashflow is discounted, and the value of the cashflow in today’s terms is dependent on the year in which it is incurred. That is, the cashflow occurring a year from now is more valuable than the one incurring in the fifth year.
As the table shows, Careem’s GO service at a 5% discount rate has a higher NPV than Uber GO. This means, Careem’s GO service is much more valuable in present value terms and an investor will be better off registering with this particular service. Note that Careem GO derives a higher NPV solely as a result of higher net cashflows.
Uber X vs Careem Business
Both of these services cater to the needs of the upper class segment. With better and newer cars, both of these firms charge a higher rate on the basis of per km travelled, base rate and per minute charge. We show a graph of the projected revenues next:
An investor willing to invest in Careem Business will earn around 90,000rps per year more than an investor willing to go for Uber X. Similar to the middle-class segment, Uber X charges a higher percentage per ride (25%) and a lower fee per kilometer. The difference in fee per kilometer is around 8rps between Careem Business and Uber X. Combining these two factors result in higher revenues and lower costs for Careem Business and eventually a higher net profit.
The chart above confirms our finding. The investor should earn around 90,000rps more from Careem Business than Uber X on an annual basis.
A few other measures paint a similar picture to the ones presented earlier. Careem’s Business service has a higher ROI, NPV and an identical payback period. One point worth considering is the fact that Uber X allows vehicles of 2006 and above to be registered in this service. On the other hand, Careem Business only permits cars of 2016 and later models. If an investor goes for a cheaper and an older model, NPV, payback period and ROI might be more attractive for Uber X.
A note about Careem GO+
Careem GO+ also offers an attractive revenue stream, ROI and a reasonable net profit. It has a high NPV which makes it an attractive case when it comes to investing in ride share services. Careem, with a bit of research, has expertly built a service that offers more comfortable cars at affordable rates. The rates are deemed affordable as they are just above Careem GO but below Careem Business, two of the market segments considered.
The thinking revolves around the fact that customers will be willing to pay a bit more for better rides or in the event that they cannot find cheaper GO cars. Another interesting fact is that, drivers with newer cars can also take up GO rides in case they cannot find GO+ customers. However, an investor should be wary of the fact that GO+ rides maybe hard to find and they may or may not be able to complete 6 rides per day as mentioned in our analysis.
- Uber has a Uber Mini as well, but due to a lack of accessibility we have not considered it in this book
- Insurance cost is considered to remain constant for the 5 year period considered. In reality this might not be the case and premiums may go up or down depending on the number of accidents, firm policy, etc.
- Price of Fuel is 85rps/L. Mileage of Daihatsu 2004 varies between 12km/l and 25km/l. We take a median of these two values. We expect fuel efficiency to improve for the newer models.
- Per minute cost for Uber is provided in their bill receipt. This cost is estimated for Careem and
varies according to the speed of the car. 264rps per hour is billed on a per minute basis and
applies when the car moves at below 16km/hr. To get an approximate of this cost, we calculated
the cost of a quick 15 minute ride, with minimum delays. This cost may or may not depict reality.
To get the cost for GO+ we performed the following calculations:
365/264 = 1.38*1.65 = 2.28
Similar methodology is used to calculate Business’s figure.