UBER - Uber: Cruise Is Not A Threat Yet - But Maybe By 2025

Summary

• We view robo-taxi services as highly disruptive to the transport/delivery industry, due to their cost advantage.
• Without needing to pay drivers or adhering to union rules, robo-taxi operators or ride-hailing platforms, such as UBER or Cruise, may very well optimize their margins indeed.
• However, it is uncertain which model will work better, between UBER's proprietary platform relying on third parties or Cruise operating its own robo-taxi fleets.
• Both Cruise and Aurora Innovation have also been burning cash thus far, with market analysts expecting the latter to achieve adjusted EPS profitability only by 2031.

The Robo-Taxi Investment Thesis Is Robust

Uber Technologies, Inc. (UBER) may have faced multiple regulatory headwinds over the past few months, such as the New York City ride-share rate hike and the re-classification of gig-economy workers . However, its biggest threat may come from General Motors' (GM) autonomous robo-taxi line, Cruise. Naturally, we expect that it may occur only from 2025 onwards, when the latter plans to record up to $1B in annual revenues, with approximately 5.5K vehicles .

There is a reason why we view robo-taxi services as highly disruptive to the transport/ delivery industry. The first of them is cost, which is partly why we think UBER sued the New York City Taxi & Limousine Commission over the rate hike.

UBER Price Estimator

Based on the UBER Price Estimator, we are looking at an approximate fare of $12.94 for Uber XL or $22.71 for Comfort Electric, for a quick ride from the Twitter HQ to Pier 39 in San Francisco. While we are not able to get a hold of Cruise prices, it is estimated at $14.81, based on the published rate of $0.90 per mile, $0.40 per minute, $5 base fee, and 1.5% city tax. Due to the latter's base fleet of Chevrolet Bolt EV, affordability has improved by 34.7% indeed.

Another example provided by Cruise in June 2022 showed that its robo-taxi service might be cheaper by -16.2% at $8.72, compared to Uber X's ICE equivalent of $10.41 as well. Naturally, it remains to be seen how fares will compare moving forward, seeing that both companies operate by different metrics and may offer various price points/ fleet types to cater to a wide range of users.

The critical point is that Cruise does not have to pay its "drivers," which has been a sore point for UBER. The latter would have been looking at a notable $276M impact annually, if a judge had not blocked the potential rate hike in New York. On the other hand, some of the company's drivers were on strike over the decision anyway, causing similar operational issues.

This naturally points to our second point, which includes manpower issues, union risks, and pay hikes. Notably, based on the annual wage growth rate of 4.5% , US drivers would need to be paid more at $20.60 by 2025, compared to the average hourly wage of $18 by December 2022. It is also important to highlight that 73.6% of UBER's gross bookings of $110.5B over the last twelve months [LTM] are mostly attributed to drivers' pay and fleet, leaving the company with a minimal $29.1B of revenues at the same time.

This may be why UBER has also introduced robo-taxi / autonomous truck / driverless food delivery services in select areas thus far, in partnership with Aurora Innovation Inc ( AUR ), Motional , and Hertz ( HTZ ), among others. This interestingly leverages the former's platform and 124M Monthly Active Platform Consumers, which boasts an average of 21M trips daily and an annual ARPU of $891, respectively.

Assuming that the segment takes off, UBER may eventually benefit from the Fisker "asset-light" approach. The company will not need to own any infrastructure related to the business or pay drivers for that matter, while taking advantage of its proprietary transport/delivery platform. This strategy may revolutionize its business operations, while moderately optimizing its margins and reducing its CAPEX investments moving forward.

On the other hand, it is painfully obvious to us that Cruise is not profitable yet, with revenues of $101M and EBIT of -$1.87B over the LTM. It remains to be seen when the robo-taxi will achieve break even, due to its ambitious goal of $50B of revenues by 2030. Naturally, the former would also face immense costs of licensing, owning, maintaining, parking, and charging its robo-taxi fleet moving forward, potentially impacting its margins.

In the meantime, Cruise remains well funded with cash and equivalents of $1.7B in the latest quarter, with the special highlight of GM's robust balance sheet at the same time. In the long-term, a scalable robo-taxi fleet may have better economics than UBER's current driver-based model, especially once Cruise's autonomous system reaches an inflection volume point. Mary Barra, CEO of GM, said:

I would say we are going to make sure we fund Cruise and the spending is done in such a way that we can gain share and have a leadership position. We have plans that we're taking cost out as well, as the technology matures. ( Reuters )

However, in the long term, there is no way to know which model will work better, be it UBER's proprietary platform relying solely on third-party fleets, or Cruise operating its own robo-taxi fleets. Notably, the former's key partner, AUR, has yet to achieve profitability as well, with revenues of $92.57M and net losses of -$1.68B over the LTM. Market analysts are pessimistic here as well, with the projection of adj EPS of $0.38 only by FY2031 . Ouch.

Furthermore, we may also see a period of consolidation and price wars for the ride-hailing/ robo-taxi/ driverless food delivery market, as previously witnessed between UBER, Grab ( GRAB ), and Go-jek in Southeast Asia. The battle has ended poorly for the former, with the company exiting the whole region on top of recording immense losses, with SoftBank ( SFTBY ) similarly selling its entire stake in the former.

If Cruise is able to offer a cheaper service with a smooth app experience, we reckon that its consumer onboarding may eventually be as successful as UBER's original ride-hailing strategy in New York back in 2011. If things play out in the same manner by 2025, we may see another tough battle ahead indeed, depending on which company has a deeper pocket to burn.

Then again, a lack of moat may be beneficial as well, since the robo-taxi market may be large enough to accommodate multiple players, as previously discussed here in our previous article on Tesla ( TSLA ), GM, and UBER. Only time will tell who will emerge as the more profitable winner, though we think it is possible that GM may simply acquire UBER. Otherwise, a partnership is not impossible too.

So, Is UBER Stock A Buy , Sell, or Hold?

UBER 1Y Market Cap/FCF

UBER is currently trading at a NTM Market Cap/FCF ratio of 32.28x, higher than its 3Y mean of 18.67x though lower than the 1Y mean of 66.07x. This optimism in valuations is not surprising, since the company has been reporting more than decent Free Cash Flow [FCF] generation of $506M and FCF margins of 1.7% over the LTM, against FY2021 levels of -$743M and -4.3%, respectively.

On the other hand, investors must also note that market analysts expect UBER to report a normalized EPS of $0.65/ GAAP EPS of -$0.23 in FY2023. Otherwise, a normalized EPS of $1.27/ GAAP EPS of $0.61 in FY2024. This corresponds with a price target of $42.33, suggesting a speculative 41.43% upside potential from current levels.

UBER 1Y Trading Levels

However, the UBER stock has also recorded a drastic 22.66% stock recovery from the December 2022 bottom, suggesting another retest of the November and maybe, the September resistance levels. Therefore, we prefer not to chase the current rally and would rather observe more price action over the next few weeks.

The optimism in the stock price may be attributed to UBER's robust financial performance over the LTM, with an excellent revenue of $29.04B (+95.9% sequentially). The tremendous top-line growth has triggered a notable improvement in its operating margins, from -22% in FY2021 to -7.7% over the LTM, despite the increase in its expenses by 14% at the same time.

Therefore, it is understandable why Mr. Market is cautiously optimistic about UBER's future execution, assuming it could maintain its top-line cadence moving forward. For now, the company is expected to report top and bottom-line growth at a CAGR of 30.8% and 56.1% through FY2025, respectively, with projected revenues of $51.17B and adj. EPS of $1.97, then. It could also record FCF generation of $5.46B and FCF margins of 10.7% at the same time.

UBER Long-Term Debts

While we may be uncomfortable with UBER's immense Stock-Based Compensation [SBC] expenses of $1.64B over the LTM (+53.2% sequentially), its well-laddered long-term debts of $9.26B between 2025 and 2029 cannot be ignored as well. This laddering suggests improved liquidity for capital investments and expansions during the uncertain macroeconomic environment through 2023, significantly aided by the $4.86B of cash/investments in the last quarter.

As a result, investors would be well advised to wait for another mid $20s entry-level, attributed to UBER's historical support level over the past few months. The stock has consistently bounced at those levels in October and December 2022, suggesting an improved margin of safety. However, the position must also be sized appropriately in the event of volatility.

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