In principal, there are five ways for a company to allocate cash: by investing into its operations via capital expenditures, by growing inorganically through acquisitions, by paying down debt or by returning cash to the company’s owners through either share repurchases or dividend payments.
Some capital allocation strategies make a company’s stock more suitable for growth-oriented investors who seek maximum share price gains, whereas other strategies, such as the commitment to raise the company’s dividends continually, make a stock more suitable for income-oriented investors who seek steadily growing dividend streams in retirement or for other reasons.
Uber Technologies Inc. (UBER, Financial) is a well-known tech company that recently had its initial public offering and that is clearly in its growth stage right now. Its investor base consists of investors who seek capital appreciation primarily, whereas shareholders who are focused on income generation are most likely less interested in Uber’s shares, as the company has not made any dividend payments so far.
What is the possibility of dividend payments by Uber in the future, and will it turn into a dividend-paying company over the next couple of years?
Company overview
Uber is a leading ridesharing company that develops technologies that enable the users of its applications to order rides, meals and delivery services, which then are provided by independent partners that use the company's technology. Ridesharing was Uber’s original business model, but it has started to move into additional markets over the last couple of years in order to broaden its portfolio and bolster its growth rates.
The San Francisco-based company was founded just 10 years ago. Despite its young age, it has grown into a large company that operates in many different countries around the globe and that is trading with a market capitalization of $74 billion following its IPO earlier this year.
Uber is in its hyper-growth phase
Even though it operates globally, Uber is still a very young company. The market for ridesharing and related services such as delivery is growing rapidly. Thus, it looks like Uber and its peers could expand their businesses at a meaningful pace for many years before reaching a point where growth is harder to achieve.
Between the first quarter of 2017 and the first quarter of 2019, Uber’s gross bookings rose from $6.9 billion a quarter to $14.6 billion a quarter, more than doubling in just two years. This shows that Uber is growing rapidly right now.
The company's growth is the result of several contributing factors. First, Uber is rolling out its services in new countries and cities, and the addition of new geographic markets increases the potential customer count. In the markets where Uber is active, its market penetration is increasing as more and more potential customers are downloading and using its applications.
Finally, users increase their use of Uber’s applications over time as they get used to the technology and use the company's services more frequently.
The combination of these factors allows Uber to increase bookings across its platform at a meaningful pace, and the same factors should remain in place going forward, which makes it likely its growth rates will remain high over the next couple of years.
Uber is active in more than 60 countries right now, but its market penetration has reached just 2% of potential customers. As a result, there is room for user count growth, even assuming that ridesharing will never be used by the majority of people. If the company’s market penetration rose to just 5%, it could increase bookings by 150%, all else equal.
Uber’s growth comes at a cost, though: The company has to invest heavily into its technology, marketing and advertising, and into things like rewards programs. These costly items are why Uber has, so far, not been operating profitably. During the most recent quarter, the company's earnings before interest, taxes, depreciation and amortization was negative at $870 million, for an annual Ebitda loss of more than $3 billion. Thanks to Uber receiving many billions in investments before its market debut, and taking in more money through its IPO a couple of months ago, investors don’t have to worry about it going bankrupt anytime soon.
Due to Uber being in a phase of rapid growth, which requires heavy investments and means that it is not operating profitably, it does not generate meaningful cash flows right now. If the company’s strategy works and becomes profitable several years down the road, thanks to a larger revenue base and operating leverage, it could get profitable during the 2020s.
Even if that happens, Uber will likely still remain committed to growing its business, and it could start to operate the way other high-growth tech companies such as Amazon (AMZN, Financial) and Alibaba (BABA, Financial) are operating: Despite the fact they generate meaningful cash flows, they do not pay dividends, instead focusing on growing their businesses further through organic investments and acquisitions.
The point where Uber is operating profitably and generating strong cash flows is still years away. Even once that point is reached, it is unlikely the company will start to make payments to its owners immediately.
Takeaway
Uber is a fast-growing tech company that has a lot of potential to grow its business further over the coming years. Its market penetration is still very low, and Uber’s expansion into services such as deliveries show its platform and technology provide a lot of potential to enter additional markets on top of its core ridesharing business.
The company is, on the other hand, not profitable at all as it is racking up billions in losses every year, and that will not change in the immediate future. It is likely that Uber will become profitable during the 2020s, but even if that happens, it is not at all guaranteed that the company will start to make dividend payments.
Many tech companies are more growth-oriented instead of focusing on shareholder returns, and Uber will likely remain one of these non-dividend-paying companies for the foreseeable future. Investors should not buy Uber’s shares if they want dividend payments from their stock holdings.
Disclosure: No positions.
Read more here:
- Alibaba: Growth Stock With the Potential of a Dividend Over the Long Term
- Netflix: Fantastic Growth Stock, but Don't Expect a Dividend
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