All major U.S. indexes rose Friday on the back of encouraging inflation data and positive earnings from big banks. That gave them a winning week. $Tesla Motors(TSLA)$ shares slumped 8.8% after the company’s “We, Robot” event disappointed investors. But the best-performing concepts is Passenger Ground Transportation.
Considering the different perceptions of the stock, this time TigerPicks chose $Uber(UBER)$ to have a fundamental highlight to help users understand it better.
$Uber(UBER)$
Uber is a global platform that allows people to book rides, order food, and transport goods easily. Despite its wide reach and essential services, the company's stock has remained steady over the past six months, showing little movement.
Uber's robust network effects and potential for increased savings through autonomous vehicles position it favorably. Moreover, its business model is resilient in the face of economic downturns. These factors present Uber as an attractive investment opportunity.
Uber Technologies
The Robotaxi opportunity
I think Uber is in a good position to take advantage of the Robotaxi opportunity. One of Uber’s significant costs is paying drivers. Regulation protecting driver’s rights is also one of the main risks; the Robotaxi opportunity consists of lowering labor costs and mitigating labor regulation risks to improve margins and predictability.
Uber’s strategy in this opportunity is to be a pure-play marketplace. That is to focus on the platform to create demand. In the beginning, Uber tried to build its own AV cars, but as you can grasp, this side of the equation will be hard to make profitable. A pure-play marketplace strategy is critical for Uber and has the power outlined in the previous section (scale and network effects). An AV manufacturer depends more on Uber than the other way around.
Uber has signed deals with $Alphabet(GOOG)$ $Alphabet(GOOGL)$ Waymo and $General Motors(GM)$ Cruise. Tesla tries to be “autonomous” and create its network, always advocating for an integrated model. As has happened in the PC world and smartphone industry, there is always room for two kinds of players: a vertically integrated and more open model.
I see two model alternatives for Robotaxi's future. The first is that Uber will have to buy the autonomous vehicle and operate it internally. The second is that the vehicle will be owned and operated by a car manufacturer (Tesla or Cruise model) or an AV provider (Waymo model).
In the first model, Uber must pay the Robotaxi vehicle upfront. Uber would have to invest in this alternative and bear the deadhead mile operating risk. I think this is not a feasible option as Uber can keep using a human driver, like now, who bears the risk. So, it has the alternative not to change the model, and I don’t believe this model will win. This model is against its strategy of being a pure-play marketplace.
In the second model, the most probable for me is that Uber will only pay for effective time. Risk is left to the Robotaxi manufacturer. Uber’s costs must be lower than the current model based on human drivers because Uber won't alter the model if the costs are the same. I think Uber's costs will be less, due to competition.
The competition in the autonomous vehicle (AV) market will be between human drivers and other AV manufacturers. I anticipate high competitive intensity in the AV market because these companies have invested significant money (for example, a substantial portion of Other Bets' annual losses of $4.2 billion in Alphabet are attributable to Waymo). Additionally, the evolution of technology will play a significant role in this industry, which will have high fixed costs. I estimate that Uber's cost savings will fall in the range of 15% to 30%.
The low-risk profile of a counter-cyclical business
Uber’s model is counter-cyclical in terms of the macroeconomic environment. In a recession, Uber would benefit from lower acquisition costs and a larger labor pool that would better meet demand. If the economy falls into recession, there will be more people with lower salaries or unemployment, making more people search for jobs. Uber is a good alternative on the supply side.
On the demand side, more people who need to change their cars prefer to use Uber instead of buying a car, maybe because they can’t afford it. Figure 4 shows how car sales fall abruptly during the most recent recession. On the contrary, if the economy grows at a healthy pace, people will prefer to buy a car and have better jobs than Uber, but as Uber works for a stickier service and expands the market, Uber will do well in a growing market, too.
I have estimated the value of this protection characteristic. Using the Black-Scholes model, I value the value of buying a put option in the long term (10 years), including a 20% decrease in price. The volatility of 4% is based on the stock's standard deviation of returns(Figure 5). The value of the put option is $1.64 per share.
Valuation
Figure shows the company's value drivers, considering a year as the last four quarters to capture the latest information. Regarding margins, I utilize a measure I call Cash Margin, which involves adjusting net income for non-cash items such as amortization and depreciation, stock-based compensation, and deferred income tax.
As stated, revenue will keep growing due to the solid business model based on network effects. As I have shown, revenue growth is affected by the growth of the number of users and the growth of revenue per user. Anyway, I will conservatively project the revenue growth rate. Figure 7 shows how growth rates decline as the revenue base grows. I extrapolate those diminishing rates to calculate total revenues in my discounted cash flow model. The revenue growth rate will increase in a business with strong network effects like Uber’s.
As outlined in the Robotaxi section, I see savings improvements of around 15% to 30%, impacting cash margins by two to 3.5 percentage points over the ten years. That change in the model will be fully implemented in year ten.
In a pure-play marketplace strategy, I estimate the CAPEX investment will be similar to the past in the range of 1.5% of revenue. Regarding cash, net working capital has been favorable because Uber gets paid immediately through credit cards and pays partners weekly. In a growth environment, this pattern generates cash, but as the growth rate decreases, this cash gain will trend to zero. That is what I have incorporated in my model.
Cash flows will be discounted at a 7.2% WACC because the beta is 1.33. The risk-free rate is 3.8%. The company's leverage is 42% of total capital, and the terminal growth rate is 3%.
As shown in Figure, my value estimate is $102 per share, a 32% premium over its current stock price. My valuation implies a Value to Free Cash Flow of 44, which is in the low range of the multiple in the last three years.
Additional value I assign to the company is the put option property that has the stock, as more recession, more drivers, and users in the platform. As far as I know, according to Black–Scholes, the put option value is $1.64 per share. So, I estimate Uber’s share value to be 104 (102 per intrinsic value + 2 per put option value).
Conclusion
Uber enjoys strong network effects and can capture additional savings through autonomous vehicles. Besides, its business is countercyclical to economic headwinds. These attributes position Uber as a good investing opportunity. I project a 32% upside in the stock, with a value estimate of $104 per share, and recommend buying the stock.
Stock Price Forecast:
Here are the target price forecasts for the next 12 months from analysts.
Based on 31 Wall Street analysts offering 12 month price targets for Uber Technologies in the last 3 months. The average price target is $89.31 with a high forecast of $100.00 and a low forecast of $77.00. The average price target represents a 20.79% change from the last price of $73.94.
Resource:
https://seekingalpha.com/article/4726260-uber-dont-miss-the-next-drive
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