After the initial IPO-noice surrounding Uber, I have spent the good part of the weekend analysing it's prospects and decided on my game plan for the stock.
To begin with. The notion that you can't make money on ride-hailing is plain wrong. Uber has built up scale by providing convenience and very low fares, which of course has made their services popular and is key to why this is a 12b$ revenue company now. This has taken its toll on both the bottom line (obviously) and driver income and hence satisfaction. And with Lyft entering the US market, Uber had no choice but to wait longer with raising prices in order to keep revenue momentum going. Going forward it is time for more price rationality and I am actually confident that both Uber and Lyft will be able to raise prices towards a level that is still attractive enough to keep riders onboard, while at the same time increase driver satisfaction and resolve the current tense relationship between Uber and its drivers. In Lyft's Q1 conference it was made clear that signs of price stabilization is beginning to take place, which is a first encouraging step. The rationale for a price hike is bigger for Uber given its scale, but I think Lyft will accept that this is necessary also for them, in order to build a sustainable business. We will be looking at a healthy oligopoly.
Secular tailwinds in a countercyclical business. There is no question that ride-hailing is here to stay and will continue to grow in the foreseeable future. The fact that this trend has been so strong even in a really strong economy attests to it's value proposition. Imagine what it will look like in the next economic downturn – higher unemployment will mean even more available drivers, and the fact that people have less money to spend will increase the share for ride-hailing versus traditional cabs.
Autonomy. Morgan Stanley valued Alphabet's Waymo at 175b$ recently, to compare with Uber's total market cap of 69,7b. Waymo is percieved as the top dog and a premium is of course warranted, but we can't put a 0$ dollar value on ATG given how far they have come (millions of autonomous miles, tens of thousands of passanger trips, partnering with OEMs such as Toyota).
Semi-autonomy will enable drivers to plan their next pickup while on the road, whether it be ride-hailing, food delivery, freight or something else suiting that is available.
Uber eats. Taking market share in a rapidly growing segment. Benefits will be seen from cross-selling between ride-hailing and food delivery. Strong partnerships in place.
Uber Freight. This is a massive opportunity and a solid strategic choice for Uber to move into. From 0 (US launch May 2017) to 125m$ revenue as of Q4 2018 (and 359m$ in gross bookings). Europe launch announced in March 2019. I am impressed by the progress so far with CEO Lior Ron at the helm and believe Uber Freight will be a substantial value driver for the company.
Jump bikes, electric scooters and other “get around stuff”. No costly drivers. A lot of players have entered this space lately, meaning pricing is tough. Perhaps possible to be profitable in this segment in 3-4 years, after some consilidation and startups giving up. Not the biggest value driver for the company but icing on the cake if Uber are able to make money on this. Sound strategic choice to be in this area, to make it harder for others to build strong mobility platforms and thrive.
Holdings. Uber has retreated from some areas where they assessed it was not wise to stick around. But the company will still gain from the rise of ride-hailing in these regions, thanks to its stakes in Didi (CHINA), Grab (Southeast Asia) and Yandex Taxi (Russia). These three stakes are collectibely worth 12,5b$.
Careem acquisition. Expected to close Q1 2020. Gives Uber access to 15 new markets.
Valuation. Uber sells for 5,6x sales. Not rich at all and we might very well se huge growth in Freight and Eats going forward. I estimate net revenue to grow at a CAGR of 23-24% over the next five years. I see operating leverage kicking in going in the not distant future, with revenue growing at a faster pace than selling, general and administrative costs. I think it is quite hard to put an adequate price tag for Uber's stock today, but at least I see everything under 55$ dollars as attractive.
Narrative. Right now the story is all about losses and conflict with drivers. There is a lot of emphasis on Uber's loss in absolute numbers, but how many other money burning IPO's has 12b$ in revenue? You see how swiftly the narrative can change; a few months ago there was a lot of excitement about this IPO, but then Lyft's crappy market entrance started to affect the mindset on the Uber deal. Add a strike just before the bell ringing and a tariff-hike on IPO day, and you've got just the perfect brew for a grim start of Uber's life as a public company. In the coming months I expect a shift to a more benign narrative surrounding Uber, with experts and investors starting to assess the actual possibilities, rather than competing with each other on who can bash the company the hardest.
Conclusion. I think this negativity presents an opportunity for investors and I have taken an initial position in the stock, to be able to take part in what I believe will be a really great journey. I'm positioning myself as an Uber bull and expect the company to turn to a sustainable profit in 2022-2023. By then I expect the share price to have more than doubled from this level. Somewhere around 2021-2022 I foresee a bond offering, when the path to profitability is clearer and more tangible than it is today.
Disclosure: I am/we are long UBER.
Additional disclosure: Will add some in the case of further dip