UBER - Re-Rating Uber Driven By Redeployment Of The Freight Division Capital Into Delivery

2023-03-22 10:11:27 ET

Summary

• Uber plans to IPO or sale of the Freight division. I estimate the value of this division from $3.5 billion to $6.0 billion.
• Growth opportunities lie in the delivery segment, particularly in the food and grocery delivery industries, with a projected CAGR of 10.5% between 2023 and 2028.
• Threats include intense competition from Lyft and the possibility of larger technology companies or car manufacturers entering the market.
• There is a 15% upside to my target value of $38 per share, driven by the potential shift in revenue toward the Delivery segment.

Uber Technologies Inc. ( UBER ) is a world-renowned ridesharing industry leader that has revolutionized transportation by utilizing technology to offer a variety of services such as ride-hailing, food delivery, and freight logistics. With a presence in over 70 countries, Uber has established a strong user and driver network, resulting in a thriving platform ecosystem. This article will examine recent developments, evaluate the value of the freight division, identify strengths and weaknesses, explore opportunities and threats, and provide a valuation.

Recent Developments

In recent news, UBER experienced a significant win in the California court system, which ruled that gig economy drivers are to be classified as independent contractors rather than employees. This decision is a major victory for UBER and other gig-economy companies such as Lyft ( LYFT ) and DoorDash ( DASH ). However, the battle may not be over, as the ruling may still be appealed to the California Supreme Court. Additionally, UBER is reportedly considering the divestiture of its freight logistics division through an IPO or an outright sale. This move is aimed at enabling UBER to focus more on its core ride-sharing and food-delivery businesses.

The value of the Freight Logistics Division

The Freight Division manages a transportation and logistics network, linking shippers and carriers via a digital marketplace. This on-demand platform provides clear pricing and live shipment tracking, rivaling logistics providers like C.H. Robinson ( CHRW ), XPO Logistics ( XPO ), DHL, FedEx ( FDX ), and Expeditors ( EXPD ). Check out my article here for my perspective on C.H. Robinson.

In November 2021, the division took steps to bolster its trucking business by acquiring logistics service Transplace from TPG Capital for roughly $2.25 billion. This acquisition was intended to position its Freight unit as a top player in arranging and tracking shipments of goods. As a result, gross bookings surged from 400 million pre-acquisition to 1.8 billion post-acquisition.

In 2022, Freight's revenue saw an increase of $4.8 billion, an increase of 226%. The growth was largely driven by the acquisition of Transplace and a rise in the number of shippers and carriers on the network.

On the EBITDA front, the division made significant progress, going from a loss of $227 million in 2020 to a loss of $130 million in 2021 and breaking even in 2022. The EBITDA improvement was partly offset by certain Shipper payments and employee headcount costs.

To arrive at a valuation for the Freight division, we would use the EV-to-sales ratio as it still has no EBITDA. Based on peer multiples ranging from 0.5x to 0.9x sales, I estimate the division to hold a value of between 3.5 billion to 6.0 billion.

Strengths

UBER's primary strength lies in its vast global network and market-leading position in the ride-sharing industry. Its platform connects millions of riders and drivers, creating a strong network effect that enhances its competitive advantage. UBER has been successful in diversifying its business through its growing UBER Eats segment, which is now one of the largest food delivery services in the world just behind Meituan, a China-based shopping platform. The acquisition of Postmates for 2.65 billion in 2020 and Cornershop for 1.4 billion in 2021, as well as investments in other international ride-sharing platforms such as Didi and Grab, demonstrate UBER's commitment to expanding its reach and solidifying its market dominance. In 2016, UBER exchanged its Chinese operations for a 17.7% stake in Didi's business, while in 2018, it sold its Southeast Asian operations to Grab in exchange for a 27.5% stake in Grab.

Weaknesses

UBER’s primary competitor, Lyft, has been steadily gaining market share in the U.S. from 7% in 2015 to 30% as of 2022.

Opportunities

The food delivery industry has experienced steady growth over the past few years, with market revenue increasing by 204% in the past five years alone.

As of 2021, the U.S. food delivery industry is valued at $21.2 billion, a testament to its sustained growth despite the reopening of many restaurants. In fact, the market value in 2020 was $18.5 billion, indicating a 13% increase in the industry's market value between 2020 and 2021. Looking ahead, the US online food delivery market is projected to continue its growth trajectory, with a projected CAGR of 10.5% between 2023 and 2028, and an estimated market value of almost $33.7 billion by 2026.

So, I think one of the most significant growth opportunities lies in UBER's delivery segment, particularly with the acquisition of Postmates and the expansion of UBER Eats. As the food delivery market continues to grow, UBER's strong brand recognition and vast network of drivers could help it capture a substantial share of this market.

Moreover, the acquisition of Cornershop presents new opportunities for UBER to tap into the growing demand for grocery delivery services. The grocery delivery sector is projected to experience revenue growth of 24.2% in 2024. The COVID-19 pandemic has significantly boosted sales from grocery delivery and pickup in the US. In response, grocery retailers have had to re-evaluate and adjust various aspects of their operations over the past few years due to changes in both macroeconomic factors (such as supply chain disruptions and inflation) and shifting customer preferences.

UBER's investments in mobility businesses like Didi and Grab provide opportunities for future growth and expansion in international markets. Additionally, UBER's capital allocation strategy prioritizes innovation and growth, which may help it remain a market leader and stay ahead of competitors. This strategy will be further strengthened as UBER reinvests the anticipated proceeds from the sale/IPO of its freight division, allowing it to pursue new growth opportunities and stay at the forefront of the evolving transportation industry.

Threats

The intense competition with Lyft in the US market is a major concern, as Lyft continues to gain market share and poses a risk of out-innovating UBER. The possibility of larger technology companies, such as Alphabet's Waymo ( GOOG ), or car manufacturers like General Motors' Cruise ( GM ), entering the ride-sharing market also presents a significant threat. "Waymo One" is a commercial ride-share service launched by Waymo, which started a competition among automakers, tech companies, and other firms to launch autonomous ride-share services. Another company planning to launch a similar service is General Motors' subsidiary Cruise. The driverless ride-share market was further expanded when the California Public Utilities Commission issued Drivered Deployment permits to General Motors’ Cruise service and Alphabet’s Waymo service. Both companies are authorized to collect fares from passengers and may offer shared rides.

Valuation

I think there is an upside in the shares of UBER. The Mobility and Delivery segments currently generate 44% and 35% of UBER's revenues, respectively. With the redeployment of the proceeds from the Freight division into the Delivery segment, I expect UBER's revenues to shift more towards Delivery.

This shift may lead to a re-rating of UBER's shares, with a potential valuation closer to that of a pure delivery player like DoorDash. In the best-case scenario where UBER trades at the same multiples as DoorDash, the shares would be worth $45. However, considering Mobility will still represent a significant portion of revenues, I estimate a multiple of 2.6x, which would value the shares at $38, presenting a 15% upside.

Conclusion

UBER's global network and market-leading position in the ride-sharing industry, along with the diversification of its business through UBER Eats and other international investments, give it a significant advantage in the evolving transportation industry. The growth opportunities in the delivery segment, particularly in the food and grocery delivery industries, present significant potential for future revenue growth. However, intense competition from Lyft and the threat of larger technology companies and car manufacturers entering the market pose significant challenges. Nevertheless, UBER's capital allocation strategy prioritizing innovation and growth, as well as its planned redeployment of the expected proceeds from the Freight division, position UBER to stay ahead of its competitors and maintain its position as a market leader. Based on this, I believe there is a 15% upside in UBER's shares, primarily driven by the potential shift in revenue toward the Delivery segment.

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