This is the third article in our Broken Growth series where we started writing about companies that have seen a precipitous decline in their stocks from speculative heights but the company's future prospects look encouraging. Our last two broken growth stocks were Twitter (TWTR) and Coursera (COUR).
Uber (NYSE:UBER) has had a difficult decade as it battled local, state and national governments to carve out a new business model and dealt with internal company issues that lead to the ouster of its founder. The gory details have been captured in books like Super Pumped: The Battle for Uber and a TV series based on the book.
Despite all the trials and tribulations, the company managed to grow from 8 cities in 2011 to over 10,000 cities in 72 countries by 2021. It also expanded its business model by including delivery of restaurant meals and groceries through Uber Eats, matching carriers to shippers with Uber Freight and expanding its core mobility business by expanding into car rentals, incorporating healthcare related travel and adding other modes of transport like taxis, autos (tuk-tuks) and moto (motorcycles).
The appeal with Uber has always been that the network and software they built could be expanded to other verticals and we saw this play out in delivery with restaurants first and then with groceries. The company recently expanded its partnership with Albertsons (ACI) and its various brands including Safeway, Randalls, etc. to over 2,000 stores. This shift to delivery helped the company in a material way during the early phases of the pandemic when their mobility division took a big hit.
The new vertical with a lot of potential for Uber is freight, where they connect shippers like Costco, CVS, Walgreens, Home Depot, H.E.B, Colgate-Palmolive, P&G and Abbott with carriers. While freight represented less than 7% of Uber's gross bookings of $26.45 billion in Q1 2022, the division is growing rapidly.
The company has also done a great job of optimizing its market presence through a series of acquisitions, divestures and exiting sub-scale delivery markets. Just like Uber gave up its mobility division in China for a stake in Didi, it did the same with its delivery division in India for a stake in Zomato. At the same time Uber acquired Careem in the Middle East and Postmates in the U.S. The divestures and operating initiatives like exiting markets or reducing headcount has helped the company reduce $1 billion in fixed costs.
Unlike a lot of technology companies that were showing net losses but were free cash flow positive, Uber was burning cash on a consistent basis until Q3 2021. While the company reported a huge $5.9 billion net loss for Q1 2022, $5.6 billion of that loss came from a drop in value of its equity investments like Didi. Adjusted EBITDA was positive at $168 million but as investors are well aware, companies adjust all kinds of things and investors need to take "adjusted" numbers with a pinch of salt. It was however encouraging to see that cash from operations in Q1 2022 was positive. The company even managed to generate more than half a billion dollars of free cash flow in Q3 2021.
With the write-down of equity investments in Q1 2022 and a natural decline in stock-based compensation because Uber's stock is down nearly 40% since the start of this year, things should start looking better on the bottom line in the coming months and quarters.
When the company reported Q1 2022 results it guided towards gross bookings of $28.5 billion to $29.5 billion and adjusted EBITDA of $240 million to $270 million. At the mid-point of the range, gross bookings are expected to grow nearly 10% on a sequential quarter basis and 24.5% year-over-year.
As I watch the transformation of Uber, it is clear that Dara Khosrowshahi's strategic vision for Uber, since he joined the company in September 2017 is finally being realized. Prior to joining Uber, he ran Expedia (EXPE) for over 12 years and the stock outperformed the S&P 500 by more than 400% during his tenure. The outperformance however did not start until about five years into his tenure. He faced the Great Recession shortly after he took over Expedia in August 2005 and ran into a global pandemic after he took over Uber.
Warren Buffett used to love buying regional newspapers back when folks used to still read newspapers. Most cities had two dominant newspapers and they worked almost like a duopoly, generating good returns for their investors. The current situation with Uber and Lyft remind me of similar dynamics. By either acquiring competitors or exiting certain markets, Uber has attempted to create similar dynamics across multiple global markets.
While the stock is starting to look attractive at two times forward sales, I do have some concerns. A 2023 EV/Sales metric of 2.14 is cheap for a software business but Uber doesn't exactly sport software margins. TTM Gross margin of 35.67% is about half what I would expect from a pure-play software business and the company's long-term guidance points to "adjusted" EBITDA margin of 10%, which is not very exciting.
Most of the EBITDA in Q1 2022 was from the mobility division and delivery barely broke even. A friend of mine mentioned how Uber Eats constantly gives him 20% to 25% discounts on delivery and it is clear that the model in the U.S. is not much of a win for either restaurants or the delivery driver.
Current market weakness could translate to further markdowns of its equity investments in Q2 2022. While this will not impact cash flow, the headline earnings number might look ugly.
There are also some concerns that Lyft's recent disappointing results and subsequent large drop in the stock might motivate the company to spend even more to acquire market share.
Uber has managed to execute on a very complex business across dozens of geographical regions. Besides a temporary setback early in the pandemic, the company has managed to grow both within its verticals as well as expand to new verticals. The company's expansion into a subscription offering called Uber One, peer-to-peer car rental through a partnership with Getaround, products specifically tailored for businesses, and innovation within the mobility business by including autos, motorcycles, public transportation and taxis shows that it views itself as a network that can benefit from connecting people across multiple verticals.
The road is likely to remain bumpy but I am feeling optimistic about Uber's long-term prospects. The stock is likely to remain under pressure on account of market conditions and could afford an opportunity to build a position over time.
Insiders Sell For Various Reasons But Only Buy For One Reason, They Expect The Stock To Go Up.
This is especially true for insiders of recent spinoffs. We do the hard work for you by combing through hundreds of insider purchases each year to find the best opportunities. Insiders sometimes buy to "signal" the market and make mistakes because of their myopic focus on their company/industry. We cut through the noise and use insider buying as an idea discovery tool.
Beyond insider buying, Inside Arbitrage also provides ideas and tools related to buybacks, spinoffs, SPACs and merger arbitrage. Click here to learn more.
This article was written by
I am an entrepreneur and investor with a focus on event driven strategies including merger arbitrage, spinoffs, (legal) insider trading, buybacks and SPACs. I was one of the earliest contributors on Seeking Alpha and started publishing here in 2005. For more than a decade I have been writing every week about M&A and interesting insider transactions. My work has been mentioned in Barron's, Dow Jones, BNN Bloomberg and other publications.
I have been an active investor for more than two decades and my background in technology has helped me built tools that inform my investing process, especially as it relates to event-driven strategies that require updated data and processes. The focus on my Inside Arbitrage service is to provide investors with the right combination of tools and analysis to help them take advantage of strategies that can perform well across market cycles.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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: Disclaimer: Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.