uber-microsoftWord has it that Microsoft (NASDAQ: MSFT) has invested about $100 million in ride-sharing startup Uber’s latest round of financing, said to be about a billion dollars worth of total funding. That brings Uber’s valuation to a whopping $50 billion.

I want to first address this valuation. Then I’ll  examine whether Microsoft has made a good move by investing in Uber, and why it may have done so.

Valuation: Stupid

A $50 billion valuation for Uber can only be described as insane. It is insane from the math perspective and from the risk perspective.

For Uber to be valued at even 1 times sales, it would have to generate $250 billion in fares in a given year, of which it keeps 20%. The average daily taxicab farebox for NYC – the largest taxi cab city in the U.S. and probably the world – is about $5 million per day, or $1.825 billion per year.

Are there the equivalent of 30 New Yorks in the world that have Uber? No way. Could it happen? Yes, but consider that, according to Bloomberg News, Uber allegedly generated $470 million of operating losses on $415 million in revenue.

So Uber is only $249.53 billion short of revenues to be fairly valued.

Yes, yes, the stock market is a discounting mechanism, but right now, Uber’s value is discounted to the end of time.

What’s Microsoft’s Angle?

So why is Microsoft getting involved? There are broader issues for Microsoft that don’t apply to the individual investor, or even to big institutions.

Some people think it has to do with Azure, Microsoft’s cloud-computing platform, which it hopes to entice Uber to use in exchange for the investment. Now, if that’s true, then the investment essentially becomes a wash for Microsoft and possibly generates significant return on investment over many years. It kind of establishes Microsoft and Uber as a partnership right from the start, so Microsoft doesn’t have to compete for the job later.

It makes sense, because other large companies like Google (NASDAQ: GOOG) and Amazon.com (NASDAQ: AMZN) have invested as well. It may simply be about establishing these strategic alliances at the earliest stage possible.

Microsoft is moving away from desktop to mobile, so there is some sense to synergizing with that, as well as Microsoft’s efforts to migrate into a more service-oriented company. Information management is also Microsoft’s new angle, and Uber will have a ton of it to manage.

Exit Strategy

For Microsoft, as opposed to individual investors, the company also has the benefit of being able to get the heck out of Dodge if need be. Once Uber releases its IPO, and the lockout period expires, chances are the stock will be worth so much that Microsoft could cash out its original investment with ease and still be playing with house money.

Because the individual investor will be last to board the train, in fact, every early stage investor can bail out and very likely make a lot of money. When Uber issues its IPO, I don’t think investors will care one red cent about valuation. I think the hype alone will send the stock soaring.

For those crazy enough to hold on, I don’t see the valuation being justified for years … or possibly ever. Heck, look at Netflix (NASDAQ: NFLX). The company makes almost no real profit and has almost no free cash flow, yet it is valued at 100 times earnings.

In this regard, it’s essentially a no-lose situation for Microsoft no matter what the reason for the investment really is.

Apple’s most closely guarded secret

Apple recently blew away expectations yet again by beating Wall Street’s earnings estimates. Without a doubt, Apple is soaring higher than ever. Yet few analysts realize is that a little-known company is destined to soar right along with it. It’s Apple’s most closely guarded secret…one they would prefer you never know. Discover it right here.

Published by Wyatt Investment Research at