Aggressive Investors Should Keep An Eye On Uber: Competitive Advantages, Strong Fundamentals

seekingalpha04-24

Uber's stock has risen 127% in the past year due to its profitability and growing free cash flow.It offers competitive advantages as a first mover in the ride-share and food delivery industry.UBER ...

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Should Keep An Eye On Uber: Competitive Advantages, Strong Fundamentals\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-24 20:19 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4685598-aggressive-investors-should-keep-an-eye-on-uber-competitive-advantages-strong-fundamentals><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Uber's stock has risen 127% in the past year due to its profitability and growing free cash flow.It offers competitive advantages as a first mover in the ride-share and food delivery industry.UBER ...</p>\n\n<a href=\"https://seekingalpha.com/article/4685598-aggressive-investors-should-keep-an-eye-on-uber-competitive-advantages-strong-fundamentals\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LYFT","symbol_name":"Lyft, 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situation at the time. The market sold the company off because there was too much risk in investing in an unprofitable company. The market only warmed up to Uber at the beginning of 2023. If I were to guess, it was around that time that investors began noticing that management got rid of its moonshot projects and began focusing on controlling costs and improving profitability. The chart below shows that the company started rapidly improving its operating margin in the middle of 2021, but operating margins only became positive in the middle of 2023. Data by YCharts The stock price has jumped around 127% since last year, as Uber's rising profitability helped improve investor sentiment around the stock. Additionally, the company has built a moat around its business to protect its profits from competitors like Lyft (LYFT). Management has also found additional ways to monetize its platform outside its core ride-sharing business, so the market is optimistic about continued revenue growth. This article will discuss the platform's competitive advantages, highlight some of its newer services, review some of the company's fundamentals from its last earnings period, discuss the potential risks and rewards in a potential self-driving taxi service, review its valuation, and explain why I think aggressive investors can buy at current prices. Uber's competitive advantages The best way to think of Uber is as a technology platform that can move people or products from here to there. Uber describes itself that way in its 2023 10-K: \"We are a technology platform that uses a massive network, leading technology, operational excellence, and product expertise to power movement from point A to point B.\" One of Uber's biggest advantages was that it was among the first companies to build an online and app-based ride-sharing network. Uber launched its first car service in San Francisco in 2010 and has a three-year lead in building its network over Lyft, its primary competitor in the U.S. In an industry where the \"winner takes all\" or \"winner takes most\" rule applies Uber's scale advantages help it generate a majority of revenue and profits. The following chart shows Uber's revenue and operating income starting to pull away from Lyft. Data by YCharts More riders using Uber's network stimulates a demand for more drivers. That demand results in a rising supply of drivers as the opportunity to gain more fares rises. As more drivers join the platform, the easier and faster riders can find transportation on Uber, and more riders start using Uber, and the cycle begins again. The following image from its Virtual Investor Update Presentation shows management's representation of the network effect. Uber Investor Update Presentation. As the driver and user sides of its network grow, Uber also gains a data advantage over competitors and potential new entrants to the ride-sharing or food delivery business. The platform uses the data it collects on the user to improve existing services and generate ideas for additional services. Uber shares all data and any improvements it makes across each platform service. That is why an Uber rider can use Uber Eats and Uber Eats will already have that person's identity, payment information, and maybe even preferences on which restaurants that person may prefer. Uber Investor Update Presentation. Chief Executive Officer (\"CEO\") Dara Khosrowshahi said on Uber's Investor Update Call about the company's data advantages: Whether you are ordering a ride or a delivery, much of the underlying tech and tech-enabled operations: identity, maps, payments, fraud detection, ordering, dispatching, pricing and more, they are all shared across Uber. In fact, around 75% of our engineering resources are focused on these shared elements. This advantage is also self-reinforcing as the lessons we learn in one business can be applied elsewhere. And, technical investments we make in one area accrue to the whole platform. One example of this self-reinforcing advantage is AI [Artificial Intelligence] where our mass datasets and our shared architecture allow us to build predictive models at a greater scale than any of our competitors. Let's look at a few additional services management has built that benefit from Uber's data collection efforts. Additional services outside the ridesharing services Uber management figured out that it could move things outside of only passengers early in its history and established the Uber Eats platform in 2014 to deliver food from restaurants. In June 2019, Uber merged the ride-sharing and food delivery platforms into one central app. Any new service or app the company establishes on the consumer side of the business also appears on one central app. In April 2020, during the pandemic, the company started a same-day package delivery service called Uber Connect to diversify its business from plummeting ridership in the days of \"shelter-in-place.\" Consumers and businesses can use Uber Connect. In July 2020, it started delivering groceries via the Uber Eats network. The company provides all of the above services mainly for consumers. The company also offers services for businesses using the same tech platform. The image below shows a few of Uber's business services. Uber Investor Update Presentation It established Uber for Business in 2014 as a platform for businesses to set up travel and meal programs for employees, customers, and clients similar to those provided by Uber to consumers through its Uber and Uber Eats apps. Uber Health provides transportation services to and from healthcare providers for non-emergencies. Uber Direct is an express product delivery service that allows local businesses to deliver packages directly to customers. Uber Direct differs from Uber Connect, as Uber Connect can involve a driver delivering different packages to different destinations, and the package delivery may take longer. A business that wants a package delivered as fast as possible would use Uber Direct. The last service I will discuss here is advertising. Uber Investor Update Presentation Uber has a massive opportunity to advertise to a captive audience through its ride-sharing app and steer users to specific restaurants in the Uber Eats app. Chief Executive Officer (\"CEO\") Dara Khosrowshahi said on Uber's Investor Update Call: The power of our advertising platform stems from what Uber users tell us every time they use our apps. Where they want to go and what they want to get. And as a result, we've got the unique ability to bring together both location based and shopping data with closed-loop attribution across our mobility and delivery channels for both performance and brand campaigns. That's how in less than four years we have reached $900 million in revenue run rate just this last quarter, now, supporting 550,000 merchants all around the world. We continue to innovate and improve our tools for advertisers. And when you combine the consumer signals with our world-class AI, we're just scratching the surface of what we believe will be a multibillion-dollar opportunity. The phrase \"closed-loop attribution across our mobility and delivery channels for both performance and brand campaigns\" means Uber can track the effectiveness of its advertising by seeing if the ads result in sales within Uber Eats, Uber ride-sharing, or other services that Uber provides. Marketers advertise where they can get the most bang for their buck. If Uber can show advertisers that ads on Uber result in enough sales to justify the expense, advertising could be one of Uber's most profitable ventures. Since advertising has high margins, it could boost Uber's consolidated gross margins if the opportunity realizes its multibillion-dollar potential. Additionally, with newer cars starting to include in-car entertainment systems, the potential for generating revenue by advertising to captive riders as they travel to their end destination is immense. Monitoring the health of Uber's network Since the company's network effect is a significant part of Uber's competitive advantage over rivals, investors should monitor the health of both sides of the platform's network. Uber management believes the key driver of the health of the platform's network is the driver (supply) side. Uber CEO Dara Khosrowshahi said on the company's fourth quarter 2023 earnings call: If I were to broaden in terms of Mobility [ride sharing], first and foremost, it's about making certain that our supply position, the number of drivers that we have on the road and engagement of those drivers continues to be healthy because that is what drives overall marketplace health. And you can never forget about the basics. The number of drivers we have on the platform was up 30% year-on-year. With engagement, average -- engagement also being up 10%. So we still drivers of the heart of the business. And as long as we've got drivers who are earning as they are, for example, in the US $33 per utilized hour and staying on the platform for longer that platform stays healthy. We have more people coming in. The following image shows a few metrics from the driver and rider (demand) side from the fourth quarter of 2021 to the fourth quarter of 2023. Over the last two years, there have been 75% more Uber drivers and 56% more vehicles on the road, which reduces transportation wait times, diversifies vehicle selection for riders, and allows the platform to expand into new geographies -- all things that increase customer satisfaction. As customer satisfaction increases, the network thrives with increased business. Investors should monitor supply and demand numbers or notice if the company avoids releasing these metrics in the future, which could signal bad news. Uber Investor Update Presentation. The new geographies section in the above image mentions \"unlocking markets delivering $3 billion in gross bookings annual revenue run rate.\" In its third quarter 10-Q, the company stated in the risk section that its growth depends on its ability to \"enter or expand operations in some of the key countries in which we are currently limited by local regulations, such as Argentina, Germany, Italy, Japan, South Korea, and Spain.\" Investors should monitor any comments or results the company shares about those countries in future communications. Uber Investor Update Presentation. The markets in the above image are ones that Uber had trouble entering or expanding into in the past, but it believes the platform can gain traction in moving forward. One example of the company's issues when attempting to grow in the above countries was Uber's problems with using unlicensed freelance drivers in Germany. Uber got away with using unlicensed drivers or skirting laws in the U.S. market, but not in Germany and a few other countries. During the company Virtual Investor Update Call, Senior Vice President (\"VP\") of Mobility and Business Operations Andrew Macdonald said (emphasis added): Five years ago, we could barely operate in these countries. Two years ago, we hit $1 billion in gross bookings. And today, there are $3 billion. Our next building block is growing engagement, more trips per rider. Among our monthly active riders, we have a healthy share of power users, but roughly half of riders take only one to two trips per month...If our once a month riders took just one more trip, that alone is $4 billion in growth. Growing engagement starts with expanding use cases. Another area to monitor is the expanding use cases for mobility in non-UberX products. UberX is the company's most affordable option, offering transportation for up to four passengers in a standard sedan. The next step-up, at a slightly higher price, is Uber Comfort, which the company describes as \"newer vehicles with proper legroom and highly rated, experienced drivers.\" Uber Black is the company's high-end luxury option. UberXL is an option for group travel and has seats for six riders. Uber Green is for people who want to ride in an environmentally friendly car, hybrid or electric. Uber WAV (wheelchair-accessible vehicles) is an option for those requiring wheelchairs. Uber Rental is an option for renting a car online for up to a month. Some of these options are only available in some markets. The U.S. market may be close to saturation, but there is still room for Uber to fill out the supply of drivers in some of these categories. Most of the above options have higher base pricing or add-on fees, making them more expensive and higher-margin products than UberX. When management states that more riders use non-UberX products, that may translate to higher margins in some cases. In other cases, more riders using non-UberX products translates to lower margin products but an increased ridership base. The first image in this section, titled \"mobility is firing on all cylinders,\" references low-cost products such as Moto + Auto and UberX Share. Moto + Auto likely refers to several rideshare products in emerging markets like Uber Auto, an auto-rickshaw available in India, and Uber Moto, which is prevalent in areas with Motorcycle taxis like Brazil. UberX Share allows riders to share an Uber and save up to 20% over the traditional UberX fare. Uber can attract more cost-conscious riders to the platform through these lower-cost products and serve as an alternative to public transportation in some areas. So, the expansion of this category of fares benefits the network effect on the platform. Uber Investor Update Presentation. The next section will discuss one of the primary reasons that investors bid the stock up in the last year; its ability to reduce costs and become profitable. Why investors bid the stock up over the last year When Uber had its initial public offering (\"IPO\") in 2019, some investors thought the company would never become profitable. During its Virtual Investor Update Call, Uber CEO Dara Khosrowshahi acknowledged that market sentiment when he said: I am proud of the incredible progress that we've made in the five years since our IPO. In Uber's early days, we were rapidly expanding all around the world while making massive investments to build our category position. Given those enormous losses, many people questioned whether Uber could ever make money. Fast-forward to today, and that question has been asked, and it's been answered. When the company delivered its 2019 annual report, it showed that its operating expenses as a percentage of revenue were around 116%, a huge hole to dig out of to achieve profitability. However, when Uber delivered its 2023 annual report, it showed that the company dropped operating expenses as a percentage of revenue down to 36.79%, helping the company achieve positive 2023 annual operating margins of 2.98% and positive fourth quarter operating margins of 6.56%. A large part of Uber's rising stock price in 2023 is likely investors acknowledging the company's ability to cut costs and expand profitability. Data by YCharts Next, let's discuss gross bookings, something management often emphasizes rather than revenue growth in company presentations. Gross bookings, which is the total value of all trips booked on the platform, make tracking the platform's growing market share easier. For instance, Uber grew annual gross bookings by 20% year-over-year to $138 billion in 2023. In contrast, Lyft only grew annual gross bookings by 14% year-over-year to $13.8 billion during the same year, which indicates that Uber could be grabbing market share from Lyft. Additionally, gross bookings measure the strength of Uber's network effect; Gross bookings of 20% suggest the company's ride-sharing and food delivery service is attractive to users, and investors may be willing to award the stock a higher valuation when the company grows this metric at rates in the solid double digits against significant competition in the ride-sharing and food delivery business. Uber Investor Update Presentation. The company has grown its gross bookings at a compound annual growth rate of 33.50% since the end of 2020 while at the same time achieving Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) profitability in the third quarter of 2021, followed up by free cash flow (\"FCF\") turning positive in the second quarter of 2022. A year later, in the second quarter of 2023, Uber achieved GAAP (generally accepted accounting principles) operating and earnings-per-share (\"EPS\") profitability -- a feat few thought possible within a five-year time frame in 2019. The following image shows management's three-year outlook for profits and FCF growth. If the company hits the following numbers, trailing 12-month FCF should grow from $3,362 million at the end of 2023 to between $8,012 and $10,007 million at the end of 2026. Uber Investor Update Presentation. The acronym MAPCs on the above chart stands for monthly active platform consumers, which the company defines in its earnings release \"as the number of unique consumers who completed a Mobility or New Mobility ride or received a Delivery order on our platform at least once in a given month, averaged over each month in the quarter.\" Trips per MAPCs measure the average usage of Uber's platform by monthly active platform consumers. When Trips per MAPCs increase, it's a sign of the company's network effect increasing and that consumers find the platform increasingly valuable. The company's financial condition Uber has $5.407 billion in cash and short-term investments against $9.459 billion in long-term debt. Its net debt-to-EBITDA ratio is 2.1. Generally, when a company's net debt-to-EBITDA ratio falls below 3.0, it can pay down its debt over time. Uber has interest coverage of 7.44, which means that its operating income can comfortably cover the interest on its debt. Uber has a $1,433 million refinanced term loan due in 2025 and a $1,150 million 2025 convertible note due on December 15, 2025. Considering it has over $5 billion in cash and short-term investments and over $3 billion in FCF in 2023 that management expects to grow at around a 30% to 40% CAGR over the next three years, it's unlikely that the upcoming debt maturities in 2025 will cause undue stress on Uber's balance sheet. Suppose Uber maintains its ability to turn revenue into EBITDA and EBITDA into FCF at the current rate. In that case, the company should have minimal problems paying down its debt in the foreseeable future. Data by YCharts Uber has a quick ratio of 1.19, meaning the company has enough short-term assets to liquidate to cover short-term debt. Reward and risk in autonomous vehicles In this section of the article, I will briefly discuss what could be a massive reward for Uber and its highest risk: self-driving vehicles. At one point, Uber tried to develop self-driving cars independently, and developing self-driving technology was a huge cash drain. The company only started moving toward profitability after management sold the company's self-driving car unit to Aurora Innovation (AUR) in December 2020. Another division that Uber sold during the same period that I may talk about in future articles, as it still represents a future opportunity for Uber to partner with or buy other companies: its flying taxi unit, Elevate, which Joby Aviation (JOBY) acquired. Uber shifted its strategy on autonomous vehicles (\"AV\") towards partnering with companies developing self-driving car technology. The following image shows Aurora as one partner and several other companies, including Alphabet's (GOOGL) (GOOG) Waymo. Uber has a massive network that has value. By partnering with Uber, the companies below can avoid building a network of customers from scratch. Uber benefits from not spending time developing or maintaining self-driving car technology. Uber Investor Update Presentation. VP Andrew Macdonald said the following about the company's AV strategy on the Virtual Investor Update (emphasis added): In addition to safety and quality benefits, AVs will bring down the cost per mile, increasing the shared mobility TAM. A lot has happened in the autonomous landscape over the past two years, but one thing remains clear. Autonomous vehicles will be a part of the mobility fabric of the future. Our strategy is to be the platform partner of choice for AV tech. Our strategy is to be the platform partner of choice for AV tech. Rather than building AVs ourselves, we are bringing developers' fleets onto our network. There are lots of ways we add value for AV players, but our unique ability to offer a turnkey adoption path for one stop access to a global marketplace of mobility, delivery, and freight makes us truly the best platform partner. We now have 10 successful partnerships live. Uber is interested in the technology because of AV's potential ability to reduce costs by eliminating the driver, resulting in increased margins. If Uber can implement its hybrid driver-AV strategy, investors may award the stock a higher valuation. However, there are reasons investors can't factor AVs into Uber's potential upside today. First, self-driving cars are still experimental, and some believe the technology won't be ready for prime time until 2035. Next, Uber has significant competition in the space, like Tesla (TSLA) and General Motors (GM), which may not want to join Uber's network. Last, if the concept of self-driving cars takes off in the long term, Uber may suffer from the Innovators Dilemma, which is the disincentive from investing in self-driving cars as it could cause problems within its drivers' network, which management currently considers vital to growth. AVs can potentially eliminate the need for drivers over the long term, and Uber's extensive driver network may be an anchor in a pure-play AV world. Valuation According to most valuation ratios, Uber's valuation looks high. Seeking Alpha Quant rates the stock a D. The company has a price-to-earnings (P/E) ratio of 80.47, much higher than the sector median of 23.80 -- a sign that the market may overvalue the stock. Uber's one-year forward P/E is 33.86, below the company's estimated EPS growth rate in 2025 of 64.99%. When a company's forward P/E is below its forward EPS growth rate, it suggests potential undervaluation. Let's look at Uber's reverse discounted cash flow (\"DCF\") to determine what the April 19 closing price implies about the stock's cash flow growth rate over the next ten years. Reverse DCF    The fourth quarter of FY 2023 reported Free Cash Flow TTM (Trailing 12 months in millions)  $3,362   Terminal growth rate 3%   Discount Rate 10%   Years 1 - 10 growth rate 19%   Stock Price (April 19, 2024, closing price) $69.20   Terminal FCF value $19.693 billion   Discounted Terminal Value $94.907 billion   FCF margin 9%   Click to enlarge According to my assumptions about the terminal growth and discount rate, the company's implied FCF growth rate over the next ten years is 19%. That might not be easy to reach since, according to analysts' revenue estimates listed on Seeking Alpha, the stock should grow revenue at a 12.10% CAGR over the next ten years. However, Uber should expand its FCF margin over the next ten years. The question is, by how much? Since there are no mature competitors in the ride-sharing industry for comparison purposes, determining the FCF margin that Uber can ultimately reach may be difficult. The best I can do is make an educated guess. The company has increased its FCF margin from 0% to 9% in a little under two years. Still, since Uber has many costs, I don't expect FCF margins to continue expanding at a similar rate. I will assume it can eventually reach an FCF margin of 14%. Uber would only have to grow its FCF at 12.8% over the next ten years at a 14% FCF margin to justify today's stock price. I believe Uber's April 19 closing price of $69.20 is the stock's approximate intrinsic value, based on everything we currently know about the company's future opportunities. However, investors should consider whether Uber can get its autonomous platform to work without disrupting its current business using drivers. If it can, there is further room for FCF margin expansion, and the stock's intrinsic valuation could be much higher. Investing considerations  In my opinion, Uber is a speculative investment at the current stock price. Conservative investors should be cautious, avoid buying the stock today, and wait for a +20% pullback. However, if you are an aggressive investor willing to take a risk on some of Uber's future opportunities, like self-driving taxis and possibly air taxis (through its Joby partnership), consider buying the stock today. I rate Uber a buy, but only for aggressive investors.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2429301234"}