Uber: Hailing The Light At The End Of The Tunnel

Summary

• Uber stock has performed very poorly since IPO, but I believe the company's luck will soon change.
• Financially the company is performing strongly and will reach profitability targets soon.
• Operationally Uber has performed throughout the pandemic.
• There are limited risks to the overall success of the company.
• Low valuation within the sector sets the stage for outsized returns in 2022.

MOZCO Mateusz Szymanski/iStock Editorial via Getty Images

Background Information

Uber (NYSE:UBER) is a stock that once was at the center of investors' attention in 2019. Recently due to poor performance many analysts have moved away from the stock. Currently most of the stock-based compensation packages that were being registered on the public market always seemed to skew the equilibrium of the stock. Due to these shares being public the market capitalization went from 69 Billion at IPO to 81 Billion. Currently the shares are trading at IPO level in the low 40s. At today's prices, I believe Uber is a solid buy on fundamental weakness and future growth potential.

Strong Financial Positioning

Uber has had very strong financial positioning throughout the pandemic. The company has been consistently improving its top-line and bottom-line growth. They achieved this due to improving driver relations and managing to stay out of the spotlight. Currently drivers are awarded many perks such as 20% off gas, phone plan packages, free music, and much more. I believe continuing to build driver relations will be a major boon to the stock moving forward.

Source: (Uber Q3 21 Investor Presentation)

Revenue growth numbers have been very encouraging. Currently for Q3 2021 revenue growth topped 72% YoY. Looking forward, this growth will be reflected in the valuation in the near future. Overall, the revenue growth has given way to profitability in the coming quarters.

Source: (Uber Q3 21 Investor Presentation)

Positive earnings momentum could send Uber shares on a potential bull run. I am looking forward to 2022 the most because the company will finally become profitable. With the large revenue growth from eats and mobility, Uber has a diversified portfolio that will deliver consistent returns over the long term.

Source: (Uber Q3 21 Investor Presentation)

Delivery is a key portion of Uber's operations. Over the pandemic this was a major portion of Uber's revenue as rides were shut down in many major cities throughout 2020-2021 Eats however thrived due to the contactless delivery from consumers favorite restaurants. Uber has the ability to weather these financial troubles as their portfolio is strong and prepared for the long term.

Operational Strength and Awareness

Operations have been a major strength for Uber. The versatility of the business from each eats, mobility, and freight. The company definitely has the right vision moving forward. Consumers continued to demand rides throughout the pandemic and Uber was very conscious on the rules and regulations they put in place to ensure the safety of both the driver and the rider.

Source: (Uber Q3 21 Investor Presentation)

The consumer bounced back from the pandemic with force. Uber's increase in gross bookings is just a butterfly effect from the consumer. It is clear that as vaccines continue to be disturbed gross bookings increase.

Source: (Uber Q3 21 Investor Presentation)

As the world continue to reopen, the populous of many major cities have chosen to increase their travel. Overall mobility has been thriving in most of the western world other than Australia. In my opinion, their policies around travel are hostile and their pandemic response won't allow Uber to operate in populated areas. I am encouraged by data specifically from Paris and London. Both of those cities have just recently reopened and this positive early data suggests consumers have pent up demand for mobility.

Risks to Long Term Outlook

I don't believe in the US and most of the western world mask mandates will be as harsh moving forward. As covid continues to be normalized across the world and more people get vaccinated Uber's market share should only increase. People will always need a quick ride somewhere that isn't feasible by taxi. Uber dominates this niche mobility market while maintaining eats which can perform well with or without more lockdowns. Overall I see Uber's market cap expanding as more analysts see the potential profitability and earnings power Uber's stock can have moving forward.

Valuation Sets the Stage for Performance

From a valuation standpoint I believe Uber is fairly valued. Currently at 81 Billion dollars they are the largest transportation provider in a trillion dollar market. Uber's peers are much smaller and don't have the business versatility. Lyft (LYFT) is the only serious competition to Uber however they fail on a couple key metrics.

Source: (Uber SA Return on Total Assets Peer Comparison Tool)

Uber has performed better than Lyft on return on total assets for one reason alone. Eats was a major portion of Uber's momentum throughout 2021 while Lyft was restricted in many areas across the US. Moving forward I would look for Uber to maintain this lead as both their business units are thriving and nearing profitability. As Uber becomes a more profitable enterprise, it inherently gives the company higher return on assets as a result.

Source: (Uber SA EV/Sales Peer Comparison Tool)

Uber as a slightly higher EV/Sales ratio than Lyft for good reason. Uber has a more diversified and international business. Lyft primarily operates in North America and Uber has a more worldwide presence. Uber has eats, mobility, and freight while Lyft simply has mobility. The business model is not very versatile and doesn't deserve a slight premium like Uber. However I would argue that a 1 point EV/Sales different between the two is incredibly low. I believe Uber could get to a potentially 10x EV/Sales multiple. This would value shares slightly below 75 dollars and would increase the price roughly 83%. When analysts see the value behind Uber's versatility, I believe the company's shares will be more fairly valued.

Source: (Uber Q3 21 Investor Presentation)

One of my favorite parts about Uber is their equity stakes. Having a portfolio of disruptive businesses builds can be incredibly beneficial to future cash flow. Even with the cash on hand, their valuation is low relative to the value of these investments. Uber was an early investor in many of these ventures and has acted as seed money to many of these companies through multiple rounds of seed funding. This portfolio of investments should serve them well moving forward especially Joby (JOBY) as they just recently IPO'd.

Conclusion and Rating

I sincerely believe in the long term growth of Uber. This is one of the most underrated companies on the market today. Going into 2022 I am looking forward to Uber's profitability and earnings momentum. Overall, I am Very Bullish on Uber moving into the new year.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of UBER either through stock ownership, options, or other derivatives. 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.

Comments

[MrPink325]

Growing fast organically, inorganically and investing in disruptive transportation companies. With an Uber fleet of Electric Automonous Vehicles around the corner...you can bet margins will go way up. The fleet Operators that have electric autonomous vehicles is the future. Waymo, Zoox and Cruise are the competition here. Add Joby and Aurora to Uber’s ecosystem and few can compete.

[Andre55]

@MrPink325
Gonna have competition coming out of their ears. At least a dozen gigacaps and some terracaps out there who will participate.
UBER is doomed to remain profitless and quickly disappear from the landscape.

[MrPink325]

@Andre55 the real fluffy Unicorn with eternal rainbows has many suiters. 😁 it will be interesting times indeed.

[dpwroc]

Read and analyze. In short, beware of writings on finance, in which the companies own, the subject of discussion, is the only visual analytical information utilized and offered as direction of and basis of thought. Especially when UBER is the author and publisher, and the same article, using this in founding offers no substantive cross-analysis, in any form, descriptive or charted visually.

[NorEast Invest]

@dpwroc

Source: (Uber SA EV/Sales Peer Comparison Tool)

Source: (Uber SA Return on Total Assets Peer Comparison Tool)

[Blue Chip Investing]

@dpwroc I am not sure if you are trying to sound smart with your condescending and convoluted review of this article. Have you ever heard the phrase, “if you can’t explain it simply, you don’t understand it well enough.” Albert Einstein

[dpwroc]

@Blue Chip Investing Yes, I am familiar. No, not condescending just articulating my thoughts as I see fit. Respectfully, just like like yourself, we are all just expressing our opinions, here. There is enough known about UBER already, that which keeps me from needing to explain everything I beleive to know. I have stated points of my own analysis in the past more clearly, but saying the same, over and over in response to ideas that for instance UBER is the next AMZN, has become tedious, and tiresome.

[Mike Smitka]

Taxi companies historically (and again in Q3) made money, despite poor management, bad treatment of drivers and customers. If you don't aim for growth, you can earn a profit.

Until I see Uber give up the growth narrative, I won't look at their stock. They did shut down their autonomous taxi R&D, but they keep spending on autonomous delivery (a speaker from that unit at an in-person conference in Detroit in November), with no evidence they are in the top 15 AV developers. Food delivery is a bottomless pit of losses, and if/when COVID eases demand will fall; restaurants will continue dropping delivery because their margins are too thin to pay Uber Eats. Their equity investments (DiDi in particular) are worthless. As long as Uber pursues their top line, their overhead will be pointlessly high.

Uber may change their strategy, quietly paring down their loss-making ventures. I don't think they can have both growth and profits.

[Blue Chip Investing]

@Mike Smitka are you serious? You would prefer Uber pivot their business to profits and margins vs growth and expansion? If that is what you are looking for, buy a telco, maybe T, VZ or some other trash stock that is built for retirees living on fixed income. Ubers margins are expanding at a massive rate, their moat is exploding, they own one of the largest freight companies in the us with their acquisition of transplace, they own the largest alcohol delivery service now that they bought drizzly which now is exposed to Ubers entire eco system, they are a leading player in grocery delivery in South America through cornershop and they are experimenting with ghost kitchens where Uber will roll out proprietary food delivery which will provide monster margins and through their acquisition of transplace/cornershop and drizzly, they will be able to purchase and distribute food, groceries and alcohol at wholesale prices which is not currently available with their current model. The future of Uber is a global logistics and rideshare behemoth that will be a major player competing with amazon with e commerce.

[Mike Smitka]

@Blue Chip Investing Growth is not a realistic option for them. They have lost out in international markets, they have no upside in the US – they are absent from anywhere but large cities – Eats has -100% margins, and the other businesses are likewise money pits. So I reiterate, they should not aim for growth, but they can shrink to profitability. The question is whether they will do so.

[Blue Chip Investing]

@Mike Smitka growth is not a realistic option for them? Mike I don’t mean to be rude but that is perhaps the most misinformed opinion on Uber and their business model that I have ever heard. It is patently and indisputably false. I want this statement from you to stay on seekingalpha regarding Uber because in my view, when Uber becomes the next fang and the fastest growing large cap tech company in the US, it will probably be time to keep your radical views to yourself. I don’t need even want to address every false statement you made in your previous post but I can tell you that Uber has a consensus buy a cross the board from Wall Street as is Morningstar and Morgan Stanley’s top large tech growth pick for 2022. The average target price on Uber for this year is around 70. But my apologies mike apparently you are just smarter than everyone else, including my self who has been in institutional investment consulting in a fiduciary capacity since 2010. This post is not going to age well for you.

[Andre55]

The problem with UBER is there is no moat. There are many ways to get where you need to go. Uber is just a cheap app. has no patent so can and will be duplicated and improved. It will never make enough profit to justify a multibillion capitalization.
I see bankruptcy within 3 years.

[Blue Chip Investing]

@Andre55 if you are making that bet I am afraid you are the one they may go bankrupt. Uber has a huge moat and has their hands in everything rideshare has to offer. Uber fright for logistics, which is now a 4 billion revenue biz and high margin, Uber eats for food, grocery, alcohol and drug delivery, autonomous driving through aurora innovation, scooters through like, cornershop for food/grocery delivery outside of us, and didi for non us rideshare. I could go on, but Uber is the next fang

[JerrywangK]

@Blue Chip Investing Totally agree. Uber and Didi have redefined the industry. Within 5 years, taxi will disappear due to its inefficiency. Didi has and will dominated China ridesharing market, and Uber will dominate the rest of the world. There may be new entrants but Uber gets first mover advantage. In terms of Uber's moat, I think it has network effect due to large market share, and also it has collected huge amount of user data which will help Uber consistently improve its services.

[Fred. L.]

@Andre55

If that were true, the taxicabs would have figured out how to compete by now. Moats can be created via shared scale economies.

[adamb23]

Here is my problem with Uber. They depend on drivers owning cars, which have become extremely expensive. Car prices have gone up astronomically past year, with no signs of going down. That hits the drivers pockets. Next is oil/gas prices, this takes another bite out of drivers pockets, leaving Uber with no option but to raise prices or lose drivers. Raising prices, will turn away passengers. I am an N=1, but where I live Uber prices doubled, I have since resorted back to asking friends for rides.

Inflation is here to stay, gas prices are here to stay, so is car prices. Uber is a short IMO.

[CuckTrader]

@adamb23 No they don't depend on drivers owning cars. You can rent a car straight from Uber/Lyft (a Tesla even) and use that to transport people and still turn a decent income. Prices are high because people are willing to pay for them. Basic supply and demand, high school economics really, which many fail to understand.

[MrPink325]

@adamb23 Arrival is making cheap EV ride hail cars for Uber in the UK. Coming to US soon.

[sonjacarlin]

I disagree for one reason. Their prices have skyrocketed and people are refusing to pay the doubled prices. I was at Los Angeles Airport at 10:30PM New Years Eve. Ride on Uber to my home less than 10 miles away was $63 and more depending on option you selected. I stood in a fast moving taxi line along with at least 30 others for a taxi ride which cost $36 + tip. We gave him $50. I never planned to take a taxi again and now Uber is price gauging, so will only use when fares are reasonable

[pitney13]

@sonjacarlin I live in LA. Everybody is talking about the increased prices but nobody has stopped using the product. The mindshare is there, people aren't going back to taxis. Long Uber

[hsheikh]

There is no light at the end of the tunnel when your drivers are slowly being reclassified as employees.

[Abcdefghijk]

@hsheikh customer will pay for it, Uber and Lyft will just raise prices

[Blue Chip Investing]

Sandis, a couple things to note that you didn’t bring up in your analysis but are extremely bullish for Ubers top and bottom line. Uber completed their acquisition of one of the United States largest logistics an freight companies, transplace. Based on Glassdoor estimates transplace generates between 2-5 billion in revenue and given the supply chain crunch u would imagine that it is close to the higher end 5 billion. Contextually, Uber generated about 15 billion in revenue over the last 12 months so this acquisition alone could add 33% top line growth to Ubers business. Given the favorable margin profile of logistics businesses, this business should provide a steady stream of free cash flow and bolster margins. They also acquired the largest alcohol delivery service, drizzly and I think this could be extremely accretive to Ubers business as drizzly is now connected into Ubers wide moat eco system of customers and this should fuel unprecendred growth for this early life cycle business. The acquisition of cornershop which is one of the pioneers in grocery delivery in South America will also further widen Ubers moat and create a huge fun way for growth in that market and globally. I could easily see Ubers shares over 100 by year end 2022. It seems to me, that Uber is likely the next fang.

[NorEast Invest]

@Blue Chip Investing Thanks for providing me more information and due diligence. Overall great write up I was going to say you should be a writer, but it seem you already have articles on Seeking Alpha. I would like to see you author a full article on Uber. I believe it would be really informative for a lot of people.

[Blue Chip Investing]

@Sandis Weil yeah, if I can find some time I will definitely try to put something out. Uber is on the cusp of greatness and I am glad you are shedding light on this amazing opportunity. Keep up the good work

[Fred. L.]

@Blue Chip Investing

The only issue I have with your comment is the narrow band and timeline you put on “by the end of 2022”. That’s just such short term thinking for a company that’s clearly playing the long game. If your investing in Uber right now, your investing for a 10yr hold….think buying AMZN 15yrs ago when they didn’t care about traditional analyst metrics and just kept on plowing returns back into both the business as well as the customer to build a long lived moat and virtuous circle of future returns.

[Mlack633]

Uber freight will be the biggest division of this company in 3 years

[NorEast Invest]

@Mlack633 That's a bold prediction but it could possibly come true. I am really enthralled with the COVID on COVID off synergy that eats and mobility have. In general freight doesn't get enough credit and could be a good size of Q1 22 and Q2 22 revenues.

[thegoldenchild]

I’m a believer. Q-Commerce should be a major growth driver moving forward too IMO

[astute pathways]

About 38 Analysts expect Uber to lose money this year...but not Lyft

[CuckTrader]

@astute pathways they're wrong.

[Mrmarkaallen]

IMO Uber will not survive.

[Fred. L.]

@Mrmarkaallen

Why?

[gastro4]

Thanks for analysis. Staying long

[piano-memo]

Next Megacap company