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Uber: One Step From Greatness

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About: Uber Technologies, Inc. (UBER), Includes: DOORD, GOOG, GOOGL, GRUB, POSTM
by: Bill Maurer
Bill Maurer
Long/short equity, long only, short only, Growth
Summary

Shares have rebounded 30% from public trading low.

Uber Eats is a major loss segment.

Reduced losses and cash burn could drive shares higher.

As US markets have raced to new highs recently, one name that has definitely joined in is Uber Technologies (UBER). The ride-hailing firm has seen its shares rally more than 30% from their public trading lows of late 2019, as seen in the chart below. The street sees nice upside ahead, with the average price target about $10 above current levels, and that would get shares nearly back to their IPO price. For this to happen in the short term, however, there is likely one major move the company needs to make.

(Source: Yahoo Finance)

Uber has been a tremendous growth story in recent years. Q3 revenues of more than $3.81 billion were up from less than $2.95 billion in the prior-year period. Growth came across all business segments, with ride-hailing being the largest segment at nearly $2.9 billion in the quarter and providing $470 million in revenue dollar growth over Q3 2018.

The second largest revenue segment is Uber Eats, which saw $645 million in Q3 2019 revenues, up from $394 million in the prior year period. While that is nice growth, the segment remains stuck around 20% market share currently, facing off against the likes of Grubhub (GRUB), DoorDash (DOORD), Postmates (POSTM), Google (GOOG) (GOOGL), and others. In this very competitive space, Uber Eats has been a huge money loser, detailed in the graphic below.

(Source: Q3 10-Q filing, seen here)

More than two thirds of the adjusted EBITDA produced by the rides segment in the first nine months of 2019 was wiped out by the Eats segment, up from just 24% a year earlier. With a number of meal delivery names like some of those listed above gearing up for IPOs this year, it seems like a logical time for Uber to divest this segment to another player in the space.

Back in November, DoorDash detailed another funding round that valued the firm at nearly $13 billion. With the US tech sector trading around 9% higher since that point, let's say that DoorDash would now be worth $14 billion. It's unclear at this point how much Uber could sell Eats for, and how much in taxes it might have to pay on a potential gain for the sale. Would investors be happy with somewhere between $5 billion and $10 billion in the end?

Getting rid of the Eats business would take down the revenue growth picture expected moving forward, but would it be better financially in the long run? Removing the largest loss segment would certainly seem to help, but it would also strengthen the balance sheet by bringing in a good deal of cash. Some of that cash could go to reducing debts detailed below, which would then reduce interest expenses and further improve the bottom line picture.

(Dollar values in millions, graphic taken from 10-Q linked above)

A key question investors will have is in regards to valuation, especially for a money losing company that you can't rely on a P/E multiple. If we shift the discussion to price to sales, most of the large tech names like Google and Netflix (NFLX) trade for 5-6 times currently expected 2020 sales. Some of the social media names are even a little higher than that, with Facebook (FB) now over 7 times this year's forecast sales.

So, let's look a few years out for Uber. Current estimates call for a little under $28 billion in revenues for 2022. Assuming you take out the Eats segment, you're probably looking at maybe $22 billion to $24 billion for that year. Let's say Uber gets a discount to 4 times sales by then because it isn't as profitable as some of these other tech giants. That puts you around a $90 billion market cap, which would normally seem reasonable and was a valuation this name got when it was private.

However, there are certainly some risks involved here. Two major items recently in the news were the loss of a London license which Uber is appealing and California's law regarding employees and independent contractors. If you believe that issues like these might hurt Uber's growth in the next few years, especially if Uber loses licenses in key cities, maybe you take a projection down to say 3.5 times revenues and $20 billion in annual sales. That gives you a $70 billion market cap, or about 25% upside from here.

While Uber shares have rallied nicely from their public trading lows, the name seems one step away from true greatness. The Eats business does bring in some nice revenue and is growing rapidly, but it also is losing a lot of money. As investors gear up for a number of IPOs in this space in 2020, perhaps it is time for Uber to cash out and improve its financial situation. That would get the bottom line moving in the right direction and could be a major catalyst for getting shares back towards their IPO price. If the name can get its revenues into the $20 billion area a couple of years from now, even a modest price to sales ratio as compared to current tech giants would represent meaningful upside from current levels.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.