Uber Technologies Inc. (UBER, Financial) has received a lot of attention due to its impressive performance, with its stock price increasing by more than 118% over the past 12 months. The stock has surpassed its previous peak of $60.70 per share in February 2021, achieving an all-time high of $81.40 at the time of writing.
After the significant increase in the share price over the past year, I believe its future growth is already reflected in the current market valuation, which is overvalued.
Business snapshot
Uber is a leading pioneer in the global ride-sharing industry, connecting riders with independent ride service providers. The company has also expanded the business scope to connect consumers with restaurants, grocers and merchants through delivery services. Whether users need a ride, wish to order food and beverages for delivery or require any delivery services, they simply need to use the Uber app to place their orders. With an extensive operational network servicing 150 million monthly active platform consumers, Uber operates in 70 countries worldwide, including the U.S., Canada, Latin America, Europe, the Middle East and Asia, excluding China and Southeast Asia. In China, Didi Global (DIDIY, Financial) is the dominant player, while Grab Holdings (GRAB, Financial) exclusively serves the Southeast Asian market.
The company has three primary business segments: Mobility, Delivery and Freight. In 2023, Mobility was the largest revenue contributor, generating $5.54 billion in sales and representing 55.80% of the total revenue. Delivery ranked second, with sales amounting to $3.12 billion, representing 31.20% of the total. Freight accounted for the smallest share of revenue, bringing in $1.28 billion, or 12.80%.
High revenue growth and improved operating profitability
Uber has consistently grown its gross bookings, with the exception of the period affected by the pandemic. In the first quarter of 2016, the company's gross booking volume stood at $5.4 billion. It then experienced a steady increase, reaching $18.13 billion by the end of 2019. However, the impact of the Covid-19 pandemic caused a decline in gross booking volume to $10.22 billion over two quarters. Despite this setback, Uber resumed its growth trajectory, achieving an all-time high of $37.6 billion in 2023 gross bookings, a 22% increase from 2022.
Source: Statista
The consistent growth in gross bookings drove Uber's remarkable revenue growth. Similar to gross bookings, the company has managed to grow its revenue in six of the past seven years, with the exception of 2020. That year, its revenue decreased 14.3% to $11.14 billion. However, it rebounded strongly in 2021, climbing to $17.45 billion, surpassing pre-pandemic levels. Over the period from 2016 to 2023, Uber's revenue has increased nearly tenfold, growing from $3.85 billion in 2016 to $37.3 billion in 2023, equivalent to an annual compounded growth rate of 38.30%.
Between 2016 and 2022, the operating income suffered significant losses due to high operating expenses, including selling, general and administration expenses and research and development costs. However, over time, revenue growth consistently outpaced the increase in operating expenses, leading to a gradual reduction in operating losses. Through disciplined cost management, Uber significantly reduced its operating expenses as a percentage of revenue. Specifically, the SG&A expense as a percentage of revenue dramatically fell from 67% in 2016 to just 15.50% in 2023, while R&D expenses as a percentage of revenue decreased from 22.50% to 7.90% over the same period.
As a result, in 2023, Uber generated a positive operating income of $1.11 billion for the first time. Despite the operating margin being relatively low at just 3%, the achievement of operating profitability represents a significant milestone for the company.
Solid balance sheet with manageable debt level
Uber concluded the year with a solid balance sheet. Its shareholders' equity was reported at $11.25 billion, while its cash and cash equivalents totaled $4.68 billion. The company's long-term debt was approximately $9.50 billion, which is scheduled to be repaid between 2025 and 2030. Specifically, the total long-term debt due in 2025 was only $1.15 billion. Subsequently, the borrowings for 2027 amounted to $1.20 billion. Given Uber's current cash position and its positive operating income of $1.10 billion, the company is well-positioned to comfortably settle its borrowings.
The stock is overvalued
Uber's sales multiples have experienced significant fluctuations, ranging from 1.81 to 10.84. Currently, the stock is valued at 4.60 times its revenue, which aligns closely with its five-year average sales multiple and Grab's valuation at 4.50 times sales. However, other smaller ride-sharing competitors, such as Didi Global and Lyft, are valued much lower, with sales multiples of only 1.20 and 1.53. Therefore, considering its historical valuation and comparisons with its peers, Uber appears to be modestly overvalued.
If we optimistically assume Uber could grow its revenue by 38% per year, equal to the growth rate in the past, in the next five years, by 2028, it could generate $186.7 billion in revenue. Assuming the operating margin improves to 5% by that time, its operating income would reach $9.30 billion. Using an earnings multiple of 30, Uber could be valued at $279 billion by 2028. Applying a discount rate of 10%, Uber's current enterprise value would be estimated at approximately $173 billion, slightly below its current enterprise value of $183 billion. This analysis suggests Uber is overvalued even under these optimistic projections.
In another more realistic scenario, if Uber's revenue growth slows to 30% over the next five years, its 2028 revenue could amount to $138.50 billion. With a projected 5% operating margin, the operating income would be $6.93 billion. With an earnings multiple of 30, Uber would be valued at $208 billion by 2028. Factoring in a 10% discount rate, Uber's current enterprise value would be estimated at $129 billion, 29.50% lower than its current trading price.
Conclusion
Uber Technologies' significant stock price increase over the last year reflects the market's recognition of its growth and operational achievements. However, this share price appreciation seems to have fully accounted for the company's high growth prospects, pushing its valuation into overvalued territory. Investors considering the stock for their portfolios might find it prudent to await a correction before initiating a position. As the current valuation already encapsulates Uber's expected growth, a more favorable entry point could emerge, offering a better risk-reward balance for investors.
