Uber Technologies Inc. (UBER, Financial), the leading ridesharing company in the world, reported mixed results for the second quarter on Aug. 1. Its performance highlights the steady progress the company has made in recent years to strike a balance between growth and profitability.
Regardless, Uber remains attractively valued given the long runway for growth in both ridesharing and food delivery.
Revenue miss masks solid progress
Uber missed revenue estimates by $140 million, but reported 14% year-over-year growth to $9.2 billion, which came on the back of a 16% increase in gross bookings to $33.6 billion. The real highlight of the quarter was Uber’s operating performance. The company, for the first time in its history, reported a GAAP operating profit of $326 million at an operating margin of 1%.
In comparison, the company reported an operating loss of $713 million in the second quarter of 2022, which shows the notable progress it has made in the last 12 months. Uber’s first-ever operating profit marks an inflection point in its growth story as it highlights the company’s ability to scale profitably. Ever since the stock's market debut in 2019, many investors have been skeptical of Uber’s potential to ever turn a profit because of its aggressive expansion strategy, which prioritized growth over profits.
In recent years, Uber has pivoted its strategy to strike a balance between the two. The second-quarter performance is a testament to its progress on this front. Uber’s net income was $394 million, but this included $386 million in unrealized gains from its equity investments. Uber registered growth across almost all of its most important business metrics.
Monthly active platform consumers increased 12% year over year to 137 million, while adjusted Ebitda increased from $364 million a year ago to $916 million and the adjusted Ebitda margin improved to 2.7% from 1.3%. As expected, the freight business struggled with revenue declining 30, but this is not a core business activity for the company yet.
Cost management
In recent quarters, Uber has been successful in managing costs, which has played a key role in its progress toward operating profitability. From $3.4 billion a year ago, operating expenses declined to $3.2 billion, while gross bookings grew from $29 billion to $33.6 billion over the same period. As such, it appears Uber has determined how it can grow at a stellar pace while keeping costs low.
The global expansion continues
At the time of Uber’s founding in 2009, its mission was to disrupt the global transportation industry by revolutionizing the way people hail taxis. Over the years, the company has expanded geographically and also ventured into new products. In many Asian markets, Uber now offers rides on motorcycles and auto rickshaws, and these innovative experiences have boosted the engagement of active customers.
What sets Uber apart in global markets is the willingness to adapt to different cultures by embracing various modes of transportation. This has enabled the company to compete with local ridesharing companies. Many of its multinational competitors have failed because of their inability to adapt quickly.
Progress in the delivery segment
Similar to how Uber carved competitive advantages in the ridesharing industry through innovation and scale, it is making progress in the delivery segment as well. After launching delivery services with a primary focus on food delivery, the company has expanded to offer grocery, parcels and even prescription delivery. The company remains committed to adding new delivery verticals, which is likely to expand its addressable market opportunity in the coming years.
The delivery segment reported gross bookings of $15.6 billion for the second quarter, an improvement of 14% compared to the corresponding quarter in 2022. Delivery revenue grew 17% to $3 billion, while adjusted Ebitda came in at $329 million, a substantial improvement from just $99 million a year ago.
Promising prospects
Uber benefits from several macroeconomic tailwinds currently. The strong travel demand in the post-pandemic era has helped gross bookings of the mobility segment, and this trend is likely to continue in the future. A Forbes Advisor survey found that nearly half of Americans are planning to travel more in 2023 compared to 2022, which is surprising given the current inflationary environment. Consumers’ willingness to spend on travel highlights the effects of the pent-up demand for travel. Uber is a direct beneficiary of this trend as higher arrivals at busy airports inevitably lead to higher demand for ride-hailing companies.
Future expectations
With leisure travel demand expected to remain strong while companies phase out work-from-home policies, Uber will see steadily growing demand for its ride-hailing business in the foreseeable future. The food delivery business may come under pressure with surging inflation as consumers may opt to prepare more meals at home to save money, but, so far, the demand for this business has held up despite U.S. inflation reaching 40-year highs a few months ago.
Based on recent demand trends, the company now projects third-quarter adjusted Ebitda of $975 million to $1.025 billion, well ahead of the $925 million projected by analysts. This guidance highlights management’s confidence in Uber’s market position in both the delivery and ridesharing segments.
Shareholder returns
Uber Chief Financial Officer Nelson Chai, for the second consecutive quarter, mulled the possibility of returning excess cash to shareholders in his prepared remarks for the earnings call. He said:
"Over the next few quarters, we will evaluate returning excess capital to shareholders as our cash flows ramp, and with any potential further monetization of our equity stakes over the long term."
In the first quarter, he said that the company will look at options to return cash to shareholders given the strong cash flows it is projected to generate in the coming quarters.
Takeaway
Uber's stock declined close to 5% in intraday trading on Aug. 1 after the company missed revenue estimates for the second quarter. Despite the miss, its second-quarter financial performance had many positives, and the company seems well-positioned to capitalize on favorable macroeconomic developments for the ridesharing industry. With Uber benefiting from competitive advantages resulting from the network effect, investing in the stock at these prices should help investors beat the market in the long run.
