A little over a year ago, we presented a "Yellow" asset, which was "the best performer of the past year." It wasn't gold: it was yellow cab medallions.
As we wrote then, "the best returning asset class traded in the NY Metro area is yellow but doesn't change hands on Wall Street.... over the last 12 months New York City taxi medallions have risen 49% in price, besting the relatively humdrum returns of the S&P 500 (up 21%), the NASDAQ (22%) and the Dow (18%). Medallions – essentially the right to operate a for-hail taxi in New York City – now trade for as much as $1.3 million, an all-time record."
In retrospect it was also the perfect time to cash out on the "yellow" euphoria. According to the NYT, "the average price of an individual New York City taxi medallion fell to $872,000 in October, down 17 percent from a peak reached in the spring of 2013, according to an analysis of sales data. Previous figures published by the city’s Taxi and Limousine Commission — showing flat prices — appear to have been incorrect, and the commission removed them from its website after an inquiry from The New York Times."
Like everything else, when it comes to price discovery of a depreciating asset, it was not easy to extract that "non-seasonally adjusted" real data:
The turmoil in the medallion market has been obscured in part because publicly disclosed data about taxi medallion prices can be misleading. And the turmoil suggests that the taxi business, which has undergone little change over many decades, is now in the midst of a revolution.
The trouble in New York’s market was also partly obscured by a flaw in the average price reports that were published monthly by the city’s taxi commission until September. Those reports erroneously said average prices for individual medallions had stayed largely the same since setting a record of $1.05 million in June 2013.
In fact, individual medallions have traded below $1 million for most of the last year. But the commission excludes from its statistics any transaction at a price more than $10,000 below the previous month’s reported average.
It's not just New York:
In other big cities, medallion prices are also falling, often in conjunction with a sharp decline in sales volume. In Chicago, prices are down 17 percent. In Boston, they’re down at least 20 percent, though it’s hard to establish an exact market price because there have been only five trades since July. In Philadelphia, the taxi authority recently failed to sell any medallions at its asking price of $475,000; it will try again, at $350,000.
In Boston, the story is similar. As recently as April, Boston taxi medallions were selling for $700,000. The last sale, in October, was for $561,000.
The reason for this precipitous plunge: the arrival of such competitor services as Uber and Lyft. "A seven-mile ride from the Loop to the University of Chicago in a medallion taxi costs about $26, including tip. The same trip cost $12.29 this April with UberX, the lowest-cost service option from Uber. The crucial question for medallion owners like Mr. Ionescu is, if Uber is that much cheaper than a taxi, why would anyone take a taxi, and therefore why would any driver pay to lease a medallion? Mr. Ionescu says his revenues are down around 25 percent, and he’s having trouble leasing out his whole fleet."
Meanwhile those who are still long of Medallions in depreciating terms, are becoming just a little hysterical:
“I’m already at peace with the idea that I’m going to go bankrupt,” said Larry Ionescu, who owns 98 Chicago taxi medallions. That might be overly dramatic; after all, Mr. Ionescu also compared Chicago’s pro-Uber mayor, Rahm Emanuel, to Nicolae Ceausescu, the reviled ex-dictator of his native Romania. It’s likely Mr. Ionescu remains a very rich man. In November, Chicago medallion sale prices averaged $298,000, well below the $357,000 price that was typical this spring, but far up from the $50,000 price of a decade ago.
Naturally none of this will come as a surprise to those following Uber's ridiculous valuation ascent in recent months. As we said in July:
Because while one may or may not believe that Uber will ultimately succeed in putting NYC's cab drivers out of business, and it is very much doubtful if legacy Yellow Cabs will follow Uber in its price dumping strategy, one thing is certain: the value of a New York Yellow Cab Medallion, which about a year ago hit a record $1.3 million price, will suffer - at least in the near-term - as the conflict between Uber and Yellow Cab picks up, and as the NYC market is suddenly flooded with countless providers of cab-equivalent services.
Alas, there is no way to short the Medallion "price" which with the ongoing private status of Uber makes arbing the future of the cab industry rather difficult except for the most connected institutional investors, those which will have no choice but to keep investing in future Uber rounds at ever higher valuations until one day the Amazon strategy of beggar thy competitor either succeeds or fails.
And invest they have: when we wrote this in July Uber's valuation was $17 billion. Less than 6 months later it was more than doubled once again, and according to Bloomberg "the startup is close to raising a round of financing that would value it between $35 billion and $40 billion. T. Rowe Price Group Inc. is in discussions to be a new investor and existing investor Fidelity Investments is also set to participate in the funding, the people said."
“At this valuation, investors appear to be thinking that when Uber goes public, it might be worth $80 billion to $100 billion,” said Anand Sanwal, chief executive officer of CB Insights, a research firm in New York. “This type of mega-financing affords Uber a great deal of flexibility in terms of when they might go public.”
If Uber completes the funding, the valuation of as much as $40 billion would more than double its $17 billion value from a June financing round. That would also put Uber at about 1.5 times the capitalization of microblogging service Twitter (TWTR) and at the same size as Salesforce.com Inc., Delta Airlines Inc. and Kraft Foods Group Inc. It would dwarf car-rental company Hertz, which has a market capitalization of $11 billion.
It is unclear just what Uber plans to do with the $1 billion it is set to raise at a $40 billion valuation: the proceeds of the last equity raise round were largely used to subsidize below-cost, money-losing trips in order to accelerate the demise of traditional Yellow Cab service providers. It is very likely that the latest use of cash will be more of the same, as Uber uses investor money to essentially put competitors out of business, in hopes of subsequently raising prices once it becomes a monopoly.
That strategy is also nothing new, and has been used by Amazon for many years, with mixed success when it comes to actual monopolization of the cash flow process to go alongside its online marketplace monopoly.
In the meantime, putting things in perspective, there are 13,336 Medallions on the street in NYC, which assuming a roughly $900,000 cost each, implies that Uber is now valued at over 3 times the entire NYC taxicab industry.
In other words, the "Yellow" transportation bubble may have popped - if only with a whimper- but when it is Uber's turn to return to a not-so-Uber valuation, the bang will be heard around the world.