What explains the valuations of aggregator companies?

Aggregator companies like Amazon, Uber, and Lyft have spectacular valuations. But all make no or disproportionately low profits, and it is likely to remain so with their current business models. I had blogged here about the problems with their valuations. So what explains their astronomical valuations?

The standard explanation is that these companies are motivated by growth so as to maximise their market share and reach a scale where their network effects are so large as to command pricing power. Then, it is argued, they can start to raise prices and quickly boost their bottom-lines. 

I am not sure this strategy will play out. This depends on two assumptions at steady state: 

1. These aggregators will continue to benefit from the same regulatory arbitrage forever, especially when they become behemoths with a large market share of the particular trade (both online and off-line). 

2. Their customers, or atleast a large proportion of them, will stay on when the company starts to increase its prices. Customers will be willing to pay the convenience fee for the services that these three categories of companies offer. 

As we discussed earlier here, the regulatory arbitrage is very unlikely to continue for much longer. On the convenience fee, I think the effects will be different for each of the three. 

In case of Amazon, if it were to raise prices, the issue is one of people's willingness to pay a price to avoid physical shopping. A share of the population at the top of the income ladder will be willing to, at least for certain types of goods. But I'm not sure whether the vast majority of population will be willing to pay a price for a service (to avoid physical shopping) for which they are currently not paying anything but only expending personal effort. This is especially a concern in developing countries.

In case of Airbnb and Uber, the model is even more tenuous. Shorn off regulatory arbitrage and at cost-recovery prices, Uber or Airbnb could be among the more efficient taxi and hotel operators. But scale with encumbrances brings its set of problems. Just see this and this on the problems with digitised efficiency maximising growth. 

There is another explanation for the exorbitant valuations. All these companies are still chasing their areas of business specialisation. They know growth gives them the run way to iterate and figure out what is the most appropriate model. 

Two things are important here. One, in the process of growth, they pick up two important ingredients - data and customers. Two, being platforms, growth can potentially create new business opportunities. It is hoped that these two factors will help them figure out an as yet unknown sustainable business model, and the business has the nous and adaptability to seize those opportunities.

In essence, investors are betting on hope!