Uber's growth engines
Value investors may not be too interested in Uber Technologies Inc. (UBER, Financial). This is a company that is still deep in the red, making a loss on every dollar invested.
Uber's appeal comes from its growth potential, not from current profitability. It is the market leader in ride-hailing with a market share of 69% in the U.S., followed by its main competitor Lyft Inc. (LYFT, Financial) with a 31% market share (data from Statista).
Uber has three main growth engines: the mobility business, the delivery business and the freight business. Mobilitiy and delivery currently make up the vast majority of the company's gross bookings, which have grown from $59 billion in 2019 (majority rides) to $103 billion in 2021 (delivery and rides roughly equal).
Uber's ride-sharing business was seriously affected by the travel lockdowns in the beginning stages of the pandemic as people staying at home more often caused Uber’s demand for rides to decline substantially.
The good news is that demand for rides is now starting to rebound and approach pre-pandemic levels. Trips during the latest quarter grew 23% year-over-year, bringing the total to 1.77 billion trips, or 19 million trips per day on average.
It should also be noted that the ride-sharing penetration is still low at just 3.9% in the U.S. compared to 6.5% in Australia, despite the fact that, compared to the U.S., only about 7% fewer Australians have household access to a car (91% for the U.S. versus 84% for Australia).
(Source: from Uber's Investor Day 2022)
The food delivery business (Uber Eats) saw extreme growth due to Covid-19, with the delivery segment generating $4.8 billion in revenue in 2020, a massive 152% increase for the year.
There was an expected slowdown in 2021, but gross bookings were still up 35% year-over-year. In addition, this segment of the business hit adjusted Ebitda profitability of $25 million, up $170 million year-over-year.
The company also has a third segment, feight (i.e. trucking), which could be lucrative for Uber. Driven by the popularity of e-commerce, the market size for freight is expected to reach $2.7 trillion by 2026. Uber plans to penetrate this market in its own tech-first way.
Skin in the Game
The CEO of Uber has been buying shares lately, purchasing $8 million worth of shares at $44 in November 2021. This is the equivalent to 75% of his annual salary and thus to me it says he is bullish on the company moving forward. I follow the Nick Sleep investing strategy of investing into management teams which have skin in the game.
Is Uber undervalued?
For the Valuation of Uber stock, I have plugged the most recent financials into my discounted cash flow model.
I have predicted revenue growth of 65% for next year and then 45% for following 4 years. This is less growth than the prior quarter of 83% and thus conservative in my eyes.
I have predicted operating margins to increase to 9% in a six year period. Plugged in these estimates, I get a fair valuation of $39 per share. Uber share price is currently $35 per share and is therefore 12% undervalued.
The company may not be profitable now, but it has sold off many of its “moon shot” money-losing tech ventures, with a plan to refocus on the core business model. The company has made a series of acquisitions to increase market share and allowed them to expand the freight business. This market could be especially lucrative due to the very large total addressable market.
Uber's high volume, low margin model is working up to now, but also adds a risk to the company and its profit margins, especially given the vast competition and rising interest rate environment we are moving into. However, after recent declines in the stock price, Uber still seems undervalued in my view.
