Investments and Fair Value Measurement

12 Months Ended

Dec. 31, 2019

Note 3 - Investments and Fair Value Measurement

Investments

The Company’s short-term investments and investments on the consolidated balance sheets consisted of the following as of December 31, 2018 and 2019 (in millions):



	As of December 31,
	2018		2019
Classified as short-term investments:
Marketable debt securities ⁽¹⁾:
Commercial paper	$	—	$	148
U.S. government and agency securities	—		93
Corporate bonds	—		199
Short-term investments	$	—	$	440

Classified as investments:
Non-marketable equity securities:
Didi ⁽²⁾	$	7,953	$	7,953
Other	32		204
Non-marketable debt securities:
Grab ^{(3), (4)}	2,328		2,336
Other ⁽⁵⁾	42		34
Investments	$	10,355	$	10,527

⁽¹⁾Excluding marketable debt securities classified as cash equivalents and restricted cash equivalents.

⁽²⁾On August 1, 2016, the Company completed the sale of the Company’s interest in Uber China to Didi and received approximately 52 million shares of Didi’s Series B-1 preferred stock as consideration valued at approximately $6.0 billion at time of transaction.

⁽³⁾Refer to Note 19 - Divestitures for further information on the Company’s investment in Grab Holdings, Inc. ("Grab").

⁽⁴⁾Recorded at fair value with changes in fair value recorded in other comprehensive income (loss), net of tax.

⁽⁵⁾Recorded at fair value with changes in fair value recorded in earnings due to the election of the fair value option of accounting for financial instruments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in millions):



	As of December 31, 2018								As of December 31, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Assets
Money market funds	$	1,505	$	—	$	—	$	1,505	$	5,104	$	—	$	—	$	5,104
Commercial paper	—		—		—		—		—		233		—		233
U.S. government and agency securities	—		—		—		—		—		153		—		153
Corporate bonds	—		—		—		—		—		199		—		199
Non-marketable debt securities	—		—		2,370		2,370		—		—		2,370		2,370
Non-marketable equity securities	—		—		—		—		—		—		98		98
Total financial assets	$	1,505	$	—	$	2,370	$	3,875	$	5,104	$	585	$	2,468	$	8,157
Financial Liabilities
Other	$	—	$	—	$	9	$	9	$	—	$	—	$	—	$	—
Warrants	—		—		52		52		—		—		—		—
Embedded derivatives	—		—		2,018		2,018		—		—		—		—
Total financial liabilities	$	—	$	—	$	2,079	$	2,079	$	—	$	—	$	—	$	—

The Company did not make any transfers between the levels of the fair value hierarchy during the years ended December 31, 2018 and 2019.

The following table summarizes the amortized cost and fair value of the Company’s marketable and non-marketable debt securities with a stated contractual maturity or redemption date (in millions):



	As of December 31, 2019
	Amortized Cost		Fair Value
Within one year	$	408	$	408
One year through five years	2,456		2,513
Total	$	2,864	$	2,921

The following table summarizes the amortized cost, unrealized gains and losses, and fair value of the Company’s marketable and non-marketable debt securities at fair value on a recurring basis as of December 31, 2019 (in millions):



	As of December 31, 2018								As of December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Commercial paper	—		—		—		—		233		—		—		233
U.S. government and agency securities	—		—		—		—		153		—		—		153
Corporate bonds	—		—		—		—		199		—		—		199
Non-marketable debt securities	2,305		65		—		2,370		2,309		61		—		2,370
Total	$	2,305	$	65	$	—	$	2,370	$	2,894	$	61	$	—	$	2,955

The Company measures its cash equivalents, certain investments, warrants, and derivative financial instruments at fair value. Level 1 instrument valuations are based on quoted market prices of the identical underlying security. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. Level 3 instrument valuations are valued based on unobservable inputs and other estimation techniques due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such financial instruments.

The Company’s Level 3 non-marketable debt securities as of December 31, 2018 and 2019 primarily consist of redeemable preferred stock investments in privately held companies without readily determinable fair values.

The Company uses a third-party valuation specialist to assist management in its determination of the fair value of its Level 3 debt securities. The fair value of these debt securities is based on valuation techniques appropriate for the nature of such investments and the information available about the investees’ valuation.

Depending on the investee’s financing activity in a reporting period, management’s estimate of fair value may be primarily derived from the investee’s financing transactions, such as the issuance of preferred stock to new investors. The price in these transactions generally provides the best indication of the enterprise value of the investee. Additionally, based on the timing, volume, and other characteristics of the transaction, the Company may supplement this information by using other valuation techniques, including the guideline public company approach.

The guideline public company approach relies on publicly available market data of comparable companies and uses comparative valuation multiples of the investee’s revenue (actual and forecasted), and therefore, unobservable data used in this valuation technique primarily consists of short-term revenue projections.

Once the fair value of the investee is estimated, an option-pricing model (“OPM”) is employed to allocate value to various classes of securities of the investee, including the class owned by the Company. The model involves making assumptions around the investees’ expected time to liquidity and volatility.

An increase or decrease in any of the unobservable inputs in isolation, such as the security price in a significant financing transaction of the investee, could result in a material increase or decrease in the Company’s estimate of fair value. Other unobservable inputs, including short-term revenue projections, time to liquidity, and volatility are less sensitive to the valuation in the respective reporting periods, as a result of the primary weighting on the investee’s financing transactions during 2018 and 2019. In the future, depending on the weight of evidence and valuation approaches used, these or other inputs may have a more significant impact on the Company’s estimate of fair value.

The following table summarizes information about the significant unobservable inputs used in the fair value measurement for the Company’s Grab investment as of December 31, 2018 and 2019:

The Company determines realized gains or losses on the sale of equity and debt securities on a specific identification method. The Company did not recognize any other-than-temporary impairment losses during years ended December 31, 2018 and 2019.

The following table presents a reconciliation of the Company’s financial assets measured and recorded at fair value on a recurring basis as of December 31, 2019, using significant unobservable inputs (Level 3) (in millions):



	Non-marketable Debt Securities			Non-marketable Equity Securities
Balance as of December 31, 2018	$	2,370		$	—
Total net gains (losses)
Included in earnings	(8		)	11
Included in other comprehensive income (loss)	4			—
Purchases ⁽¹⁾	4			56
Transfers ⁽²⁾	—			31
Balance as of December 31, 2019	$	2,370		$	98

⁽¹⁾ Purchases of non–marketable equity security include warrants to purchase shares of a private company that vest as certain performance criteria are met during the period.

⁽²⁾ Transfers include a non-marketable equity security that was previously measured at fair value on a non-recurring basis as of December 31, 2018 for which the Company elected to apply the fair value option during the year ended December 31, 2019. Management’s key inputs and assumptions used to determine an estimate of fair value for this investment is based on an option-pricing model and price of the underlying security in recent financing transactions.

The following table presents a rollforward of the Company’s financial liabilities measured at fair value as of December 31, 2018 and 2019 using significant unobservable inputs (Level 3), and the change in fair value recorded in other income (expense), net in the consolidated statements of operations (in millions):



	Warrants			Convertible Debt Embedded Derivative
Balance as of December 31, 2017	$	125		$	1,517
Vesting of share warrants	41			—
Exercise of vested share warrants	(2		)	—
forfeiture of unvested share warrants	(120		)	—
Change in fair value	8			501
Balance as of December 31, 2018	$	52		$	2,018
Vesting of share warrants	1			—
Exercise of vested share warrants	(53		)	—
Change in fair value	—			(58		)
Settlement of derivative liability	—			(1,960		)
Balance as of December 31, 2019	$	—		$	—

Convertible Debt Embedded Derivative

Convertible debt embedded derivatives originated from the issuance of the 2021 convertible notes and 2022 convertible notes (collectively the “Convertible Notes”) during 2015. Refer to Note 8 - Long-Term Debt and Revolving Credit Arrangements for further information. The fair value of the embedded derivatives was computed as the difference between the estimated value of the Convertible Notes with and without the Qualified Initial Public Offering (“QIPO”) Conversion Option (“QIPO Conversion Option”). The fair value of the Convertible Notes with and without the QIPO Conversion Option was estimated utilizing a discounted cash flow model to discount the expected payoffs at various potential QIPO dates to the valuation date. The key inputs to the valuation model included the probability of a QIPO occurring at various times, which was estimated to be 100% cumulatively by 2019 and a discount yield that was derived by the credit spread based on the average of the option-adjusted spreads of comparable instruments plus risk-free rates (average of 8.3% and 6.5% for the Convertible Notes as of December 31, 2018 and 2019, respectively). Fair value measurements are highly sensitive to changes in these inputs; significant changes in these inputs would result in a significantly higher or lower fair value. No value was attributed to other embedded features as they are triggered by events with a remote probability of occurrence. Upon closing of the IPO, holders of the 2021 Convertible Notes and the 2022 Convertible Notes elected to convert all outstanding notes into 94 million shares of common stock. Refer to Note 1 - Description of Business and Summary of Significant Accounting Policies for further information.

Warrant Liabilities

In February 2016, the Company issued two warrants to an investor advisor to purchase up to 205,034 shares and 820,138 shares of the Company’s Series G redeemable convertible preferred stock at an exercise price of $0.01 per share in exchange for advisory services. The warrants were liability-classified due to the contingent redemption features in the underlying preferred stock and were subject to fair value remeasurement each reporting period. The vested warrants were exercised during the first quarter of 2019, and the Company reclassified $45 million, which represents the fair value of the exercised warrants on the exercise date, to Series G redeemable convertible preferred stock. Upon closing of the IPO, the Series G redeemable convertible preferred stock were automatically converted to shares of common stock.

In connection with the sale of Uber China to Didi in August 2016, the Company committed to issue to Didi a warrant for 4 million shares of Series G redeemable convertible preferred stock at an exercise price of $0.00001 per share (the "contingent warrant"), subject to the closing of Didi’s investment. The contingent warrant was subsequently issued to Didi in February 2017 upon the closing of Didi's investment. The vesting of the contingent warrant was subject to certain restrictions on Didi, including a restriction on certain investments outside of Asia in an aggregate amount in excess of certain U.S dollar threshold (the "Significant Investment Amount") for a period of six years (a four-year initial term plus two automatic one year extensions). The warrant was to vest on a monthly basis over a four-year period from the issuance date, provided Didi has not exceeded the Significant Investment Amount. Didi exercised all its vested warrants in 2017 and the fair value of the exercised and vested shares of $37 million was included in preferred stock as of December 31, 2017. On February 5, 2018, the Company was notified by Didi that Didi closed on an investment outside of Asia in an aggregate amount in excess of the Significant Investment Amount on January 26, 2018. Accordingly, the unvested shares related to the contingent warrant were forfeited in January 2018, and the vested and exercised shares were repurchased in May 2018 for an immaterial amount. As a result of the forfeitures and repurchases, the Company recognized a gain totaling $152 million in other income (expense), net in the consolidated statements of operations during the year ended December 31, 2018.

Assets Measured at Fair Value on a Non-Recurring Basis

The Company’s non-financial assets, such as goodwill, intangible assets and property and equipment are adjusted to fair value when an impairment charge is recognized. Such fair value measurements are based predominately on Level 3 inputs.

Non-Marketable Equity Securities

The Company’s non-marketable equity securities are investments in privately held companies without readily determinable fair values and primarily relate to its investments in Didi and an initial $50 million investment made in October 2019 in Cornershop. Refer to Note 1 - Description of Business and Summary of Significant Accounting Policies for further information on the Company’s investment in Cornershop. On January 1, 2018, the Company adopted ASU 2016-01, in which the carrying value of its non-marketable equity securities are adjusted based on price changes from observable transactions of identical or similar securities of the same issuer or for impairment (referred to as the measurement alternative). Any changes in carrying value is recorded within other income (expense), net in the consolidated statements of operations. Non-marketable equity securities are classified within Level 3 in the fair value hierarchy because the Company estimates the fair value of these securities based on valuation methods, including the common stock equivalent method, using the transaction price of similar securities issued by the investee adjusted for contractual rights and obligations of the securities it holds.

The following is a summary of unrealized gains and losses from remeasurement (referred to as upward or downward adjustments) recorded in other income (expense), net in the consolidated statements of operations, and included as adjustments to the carrying value of non-marketable equity securities held as of December 31, 2018 and 2019 based on the observable price in an orderly transaction for the same or similar security of the same issuers (in millions):



	Year Ended December 31,
	2018		2019
Upward adjustments	$	1,984	$	—
Downward adjustments (including impairment)	—		—
Total unrealized gain for non-marketable equity securities	$	1,984	$	—

There was a remeasurement event for Didi security during 2019; however, based on the selling price of newly issued shares of similar preferred stock to new investors using the common stock equivalent valuation method and adjusted for any applicable differences in conversion rights, management concluded that no adjustment was warranted.

The Company did not record any realized gains or losses for the Company’s non-marketable equity securities measured at fair value on a non-recurring basis as of December 31, 2018 and 2019.

The following table summarizes the total carrying value of the Company’s non-marketable equity securities measured at fair value on a non-recurring basis held as of December 31, 2018 and 2019 including cumulative unrealized upward and downward adjustments made to the initial cost basis of the securities (in millions):



	As of December 31,
	2018		2019
Initial cost basis	$	6,001	$	6,075
Upward adjustments	1,984		1,984
Downward adjustments (including impairment)	—		—
Total carrying value at the end of the period	$	7,985	$	8,059

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

Fair value method

Relative weighting

Key unobservable input

Financing transactions

Transaction price per share

Volatility

Estimated time to liquidity

1.0 - 2.5 years