UBER - Uber: Compelling Value In Tech As 2024 Targets Remain Intact

Summary

• Uber stock is trading 40% lower than its IPO price.
• The company has made great strides in growth and profitability.
• The company maintains a cash-rich balance sheet with a considerable investment portfolio.
• The stock is offering nearly 200% upside to my fair value target.

At first glance, you'd think that Uber ( UBER ) would be particularly vulnerable amidst this tough macro backdrop. But because UBER had to face the perils of pandemic lockdowns, the company had already prepared for tough macro conditions through a much leaner cost structure. As UBER works towards a full recovery to pre-pandemic levels in its mobility business, it has already begun increasing the profit margins in its delivery business. UBER is now ironically well positioned amidst a recessionary environment and continues to make progress towards its 2024 targets. The stock is a clear bargain here, trading at more than 40% lower than its IPO price.

UBER Stock Price

UBER priced its IPO at $45 per share. After facing a pandemic and most recently a crash in tech stocks, UBER is trading 40% lower than that price.

I last covered UBER in September where I explained why I was buying based on the ambitious long-term targets. With the stock down 16% since then, the value proposition is only getting better and better here - stay long.

UBER Stock Key Metrics

Even as it laps tough pandemic comparables, UBER has sustained solid growth - highlighted by strength in its mobility business as travel demand has returned in full force. While gross bookings grew 45% YOY, revenue grew by 83% YOY, largely boosted by business model changes in which, among other things, UBER began receiving cash directly from the rider instead of the rider directly paying the driver. That business model change switched some operating expenses up into the cost of goods sold which inherently boosts revenues. Adjusted EBITDA though was up significantly showing that the company is still making progress on profitability even excluding any business model changes.

But take rates were also very strong, experiencing a 560 bps rise YOY. Some of that was due to the fact that monthly active drivers has now most nearly fully recovered to 2019 levels. The increased amount of supply of drivers means that UBER no longer has to be so promotional and can drive higher margins on the driver side.

Meanwhile, its delivery segment showed solid double-digit growth as it lapped tough comparables, with revenues growing more rapidly due to the higher take rate. UBER saw significant adjusted EBITDA margin expansion in the quarter.

The company generated $358 million in free cash flow in the quarter - this crash in tech stocks has made many unprofitable tech companies particularly vulnerable, but UBER has ironically shown strong financial results in spite of being the poster child for unprofitable tech stocks only a few years ago.

UBER ended the quarter with $4.9 billion of cash, $4.4 billion in equity stakes, and $9.3 billion of debt.

The vast majority of the debt is fixed rate and mature after 2025. Only $2.5 billion of the debt was floating rate.

Looking ahead, management expects total gross bookings to grow by up to 20% YOY. Like many other companies, UBER is facing currency exchange headwinds. On a constant-currency basis, gross bookings are expected to grow by up to 27%. Management expects mobility gross bookings to finally return to being the largest segment - mobility had taken a backseat to delivery revenues amidst a plunge in travel demand and rise in delivery demand. Management expects mobility gross bookings to grow in the "mid-to-high 30%" range and for delivery gross bookings to grow in the "low-teens percent" range. Management expects to generate total company Adjusted EBITDA of $600 million to $630 million.

On the conference call , management noted that their advertising business generated a $350 million runrate in the quarter. Management remains confident in their goal of generating at least $1 billion of advertising revenue on an annual basis by 2024. Management also reiterated confidence in their 2024 targets given at their Investor Day .

Just as a reminder, management guided for up to $175 billion in gross bookings and $5 billion of adjusted EBITDA by 2024.

Is UBER Stock A Buy, Sell, or Hold?

At recent prices, UBER was trading at just 1x 2025 revenue estimates.

At its Investor Day, management had guided for 25% adjusted EBITDA margins over the long term. Assuming 20% long term net margins, a 1.5x price to earnings growth ratio ('PEG ratio'), and 15% growth, I can see UBER trading at 4.5x sales, representing a stock price of $73 per share or 190% higher.

What are key risks? It must be noted that UBER might not be an ideal stock in this environment, at least from a sentiment perspective, as it remains unprofitable on a GAAP basis and there may be higher perceived risk considering the steep slowdown in the mobility business amidst the pandemic. It may take some time before the stock can earn the expected valuation multiples - investors may have to wait for greater execution on profitability targets before seeing solid returns.

I note that UBER recently announced a partnership with Capital One ( COF ) in which certain Capital One credit card holders would get complimentary membership to UberOne and earn 10% cash back on all in-app purchases through November of 2024. No, that was not a typo. As a frequent ridesharing and food delivery customer myself, I must admit that I am confused by such a strategy. Price and customer service have proven more valuable than brand as I favor using DoorDash ( DASH ) than UberEats (I realize this is very anecdotal). Perhaps UBER may be able to bring more merchants onto its platform, helping to improve its network reach, but I am doubtful that this initiative will lead to enough long term customers to offset the steep cost. Unit economics may be pressured over the next few quarters due to the initiative.

Another risk is that of competition. In mobility, UBER faces a great competitor in Lyft ( LYFT ). While LYFT lacks the same diversification in food delivery, its network is already big enough that it should be able to compete adequately on price at some point. I have already mentioned DASH as being my preferred food delivery app. I would not be surprised if UBER needs to constantly rely on heavy promotions in order to drive loyalty to its platform, which may impact the timing of projected long term profit margins.

I wonder how UBER may fare in a deep recession. Would consumers become unwilling to pay for food delivery services, instead opting to pick up takeout themselves (or dare I say, cook?). These are unknown as UBER has not yet made it through that many economic cycles. UBER is not yet profitable on a GAAP basis with low unit-level margins and has a considerable debt load - the stock would be a high risk in such an environment.

As discussed with subscribers to Best of Breed Growth Stocks, this is the time to be investing wide across undervalued tech stocks amidst the tech stock crash . UBER fits right into such a basket, with the stock offering secular growth and large upside potential upon a recovery in tech valuations.

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