Uber: Still Room For Growth
Summary
- Despite weak profitability metrics, the Company is still showing a positive growth outlook for its most profitable segment- ride sharing.
- Uber’s only hope for material profitability may come from its ATG segment which is operating in a fiercely competitive space.
- Uber Eats is gaining ground in the food delivery industry with the acquiring of Postmates.
Introduction:
Uber’s aggressive ambitions on becoming a global leader in the transportation industry have proven to be more of a challenge than what most had envisioned. Their plans to service their self-driving cars business in 2020 fell through as well as plans to dominate certain foreign markets – which ended because of harsh regulatory burdens or mergers with rival companies. While Uber may have a significant equitable interest with their close rivals in Russia and Southeast Asia, they still pose a threat to the global total addressable market (TAM), which can hinder Uber’s long-term profitability. Dara Khosrowshahi (CEO) has been overly bullish about their strategic goals as well as boasting about a strong balance sheet, giving momentum investors a boost of confidence leading their recent IPO, but they are not generating any cash flows and are sitting on $7 billion in debt obligations. Their ATG segment is operating in a fiercely competitive space with companies that have profound amounts of capital and resources. I’m going to make the case that Uber should be a HOLD as I do believe they will see revenue growth in both their RIDES and EATS segments for several years to come. Also, they will be able to capitalize in an industry that will continue to see TAM growth as well as the significant progress they’re making in the race for consolidating the food delivery industry.
Quick Word on TAM and Covid-19:
I’m basing all of my assumptions on the fact that everything will return back to normal once the pandemic ends. I’ve read many reports about how Covid-19 is going to change this industry and how reduced air travel as well as workplace changes are going to be permanent. Yes, the ride-sharing and food-delivery industry are highly cyclical to events like this and certain industries may yield positive outcomes, but humans are deeply habitual and social. We have always found a way to reverting back to the mean. Just like the dot com boom in the early 2000s, everyone thought malls and brick-and-mortar stores were going to disappear; now we have more Walmart’s than ever. The ride-sharing industry has been growing significantly over the past decade and will continue to do so when the pandemic blows over.
Financial Analysis:
Uber’s expansion into multiple markets as well as investments in its autonomous vehicle segment have burned through their cash position in recent quarters. In 2019, Uber nearly spent $5 billion in cash from its operations even after $4 billion in stock-based compensation. This is characterized by vast increases in R&D which increased over 220% since prior year due to investments in its ATG segment. Adjusted revenue went from a 43% increase in FY 18 to a 25% increase in FY 19, showing an increase in growth at a decreasing rate. Current analyst estimates have Uber generating $13 billion in revenue in 2020 and $18 billion in 2021. These are strong figures; however, they also estimate EPS to be in the negatives as well as a negative adjusted EBITDA.
With a diminishing cash position and an expected debt ratio of around 75% by year end, they will most likely continue to look into capital debt markets to fund their ambitious strategic plans. However, their noninvestment grade credit quality will likely not see better days in the coming years. Uber does have access to multiple sources of liquidity but with increasing pressure from competition and an expected negative EBITDA for several years to come, they may not receive the funds necessary from institutional investors who are mandated to refrain from high yield debt investments. This may pose a problem as they are competing with Tesla and Amazon (to name a few)- who has superior credit quality and greater access to capital markets on top of the resources they already have - in the autonomous vehicle industry.
Uber is picking up steam in the food delivery industry:
Just when I thought Uber was going to lose the consolidation battle in the food delivery industry with Just-Eats acquiring Grubhub, they just announced a 2.65 billion all stock deal in acquiring Postmates; bringing 4 major players in the food delivery industry down to just 3. Both companies have weak financial positions with dwindling profitability yoy, but with consolidation in a market that is still in its growth stage, competition can be squeezed while increasing economies of scale.
COMPS analysis:
Uber has enjoyed strong brand equity as it has positioned itself as a first mover in the U.S and Canadian market. Nearly three years after Uber’s inception came Lyft and other Ride-Sharing companies establishing themselves in foreign markets. Despite Uber having a first mover advantage, Lyft has shown to becoming a key competitor as it focuses on U.S and Canada markets while eating away at Uber’s market share. Lyft has gained considerable ground with strong revenue growth yoy along with Uber. However, Lyft has been decreasing Sales and Marketing expense (as a % of revenue) with 22.5% in 2019 from 53.5% in 2017 while Uber has kept it steady at an average of 32% yoy. For a company that is twelve years old with a significant competitive advantage, it is alarming to see Uber inflating demand with expenses related to consumer acquisition and retention. I do want to point out that the ride-sharing industry (and food delivery industry for that matter) is not a zero-sum game. Active users can flip back and forth between apps and thus could be a big reason behind the large capital allocations towards sales and marketing.
Conclusion:
Uber has yet to see profitability and will likely be that way for several years to come. The investments being made in their non-profitable segments have been draining cash and decreasing credit quality. With a global market still seeing significant growth as well as the food delivery industry becoming consolidated, Uber still has plenty of opportunity to capitalize.
Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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