GOOGL - Uber: Robotaxis Could Help Avoid Future Labor Issues

2023-03-22 16:00:14 ET

Summary

• The robotaxi service not only saves costs for both the company and the user but Uber also avoids potential labor issues.
• Its fourth quarter earnings were strong as Uber’s gross bookings increased sharply by 19% and revenues increased 49% in the same period.
• We also see a favorable stock valuation as the P/S ratio is all time low and forward P/E ratio is at market value.
• Uber may face headwinds with a possible looming recession. But considering the favorable stock valuation and high growth markets, I see Uber as a good long-term investment.

Introduction

Uber ( UBER ) has been on a roller-coaster ride in recent years. In 2018, Warren Buffett offered a $3 billion stake in Uber, but the two could not agree on terms. Uber went public in 2019, but its share price has not changed much since then. The company faced several lawsuits over labor issues , which could increase costs significantly in the coming years.

Uber is an innovative company that has developed robotaxis to drive passengers to the desired location without a driver. I see this as a strong growth catalyst because it allows the company to avoid future labor issues as well as the associated high costs. However, operating robotaxis will raise additional questions, such as insurance issues (who is responsible in the event of a collision?). Uber will also face strong competition from Waymo and GM. The overall market is large and growing rapidly; with great returns comes great risk. Uber's revenues have risen sharply over the years, while its share price has done nothing. Therefore, the share price now seems like a good buy in my view.

Introducing Robotaxis To Avoid Future Labor Issues

An increasingly well-known cab service is a robotaxi. Robotaxis are self-driving cabs that bring customers on location without a cab driver. Alphabet's Waymo ( GOOGL ) (GOOG) and China's Baidu's Apollo ( BIDU ) are strong leaders in this technology. They use LiDAR sensors on their cars to map their surroundings. This allows the software to make calculations to guide them in the right direction and actively participate in traffic. The idea works simply: using an app, users can search for a robotaxi and they will then pick them up at the specified time. The absence of a driver allows cab services to offer their service more cheaply.

In addition to Waymo and Apollo, Uber is well on its way to offering self-driving cabs, these robotaxis also have LiDAR technology just like Waymo's and Apollo's robotaxis. Uber has partnered with Motional, a joint venture between Hyundai and Aptiv. The deal involves a 10-year contract under which Motional's Ioniq EVs will be offered as robotaxis within the Uber platform. After extensive testing, the offering will be released globally.

I think Uber's focus on robotaxis is a good investment because it potentially allows the company to avoid future labor issues. Currently, Uber does not employ any staff; its drivers are independent contractors about which there has been quite a bit of controversy. There are issues around minimum income, working hours and other labor issues. This could cost Uber dearly and costs are expected to rise up to 30%. With the advent of robotaxis, these issues will likely be absent, which is beneficial to Uber.

Uber has sold its internal knowledge about self-driving cabs (ATG Group) to Aurora, in which Uber invested a substantial amount in 2020. This lowers the R&D costs that allow Uber to still make a profit by integrating their app and services into robotaxis. This is a good choice by management.

Still, Uber will face competition from Waymo, which is already much further along in development, Waymo already has 20+ million miles of real world driving on it. General Motors ( GM ) is also on track to offer robotaxis. It is still unknown through which platform they will offer this service.

Uber’s TAM Could Be Huge

Uber specializes in 3 markets: ride delivery services, food delivery services and cargo services. Consequently, their total addressable market is huge. We take a quick look at the size of Uber's potential.

Statista estimates that the market for global ride-hailing and taxi services is valued at $331 billion in 2023, and through 2027 the CAGR will be 3.5%. Statista expects most revenue to be generated in China; Baidu's Apollo robot cabs will operate here. Revenues from ride-hailing and taxi services fluctuate widely; revenues fell sharply during the Corona virus pandemic, for example.

Uber Eats is Uber's food delivery service and is one of the largest in food delivery services in the United States with 23% market share . DoorDash ( DASH ) holds 63% of the market. The online food delivery market is expected to reach $0.91T by 2023, according to Statista. Revenues are expected to grow at a CAGR of 12.3% through 2027. This market is large and growing very fast. The fastest growing component is grocery, which is expected to grow 20.6% by 2024.

Uber is leaning toward divesting its freight division to simplify the business and raise cash for buybacks. Bank of America recently said this could be a small catalyst for the stock price.

Strong Fourth Quarter Earnings

Uber is growing strongly, as revenues have increased 32% annually over the past 4 years. And because the company is not profitable, the stock should be considered a growth stock.

Fourth-quarter results were strong: gross bookings increased 19% year over year to $30.7 billion and trips were up 19% to 2.1 billion (an average of 23 million trips per day). Revenue for the quarter increased sharply 49% (59% at constant currency) due to the change in business model for the UK Mobility business and the acquisition of Transplace by Uber Freight. Adjusted EBITDA was $665 million and adjusted EBITDA margin/gross bookings was 2.2% (up from 0.3% in Q4 2021). Uber's free cash flow was negative due to the settlement of HMRC VAT claims in the UK. Excluding these claims, free cash flow was $1.1 billion for the year 2022. Free cash flow margin to revenue was 3.5%.

Looking at Uber's balance sheet, we see that its cash is $4.3 billion, and its debt is $9.3 billion; making net debt $5 billion. With free cash flow of $1.1 billion (excluding the claim), I think the net debt is well-manageable for the near future.

Uber gave strong guidance for the first quarter of 2023 with expected gross bookings growth of 20% to 24% and adjusted EBITDA of $660 million to $700 million.

Why I Think Uber Is A Valuable Buy

Uber operates in a growing market and its revenues are increasing fast. I believe the introduction of its robotaxi service could increase their profit margin while avoiding future labor issues. So, what is the valuation of the stock?

I use the price to sales ratio to assess the stock's valuation. As we can see in the chart below from YCharts, the price to sales ratio is historically low with a ratio of 2 (more than half the 3-year average). This indicates that the stock's valuation is favorable.

There are also 16 analysts predicting that earnings per share will reach $1.48 in 2025, making the PE ratio 22 in 2025. However, a recession may be imminent, and it remains difficult to estimate what will happen in the coming years. 22 analysts have revised their expectations upward and 12 downward. Since the PS ratio and PE ratio are favorable, I think the current price level is worth a long-term purchase.

Conclusion

Uber has innovated greatly and will soon introduce robotaxi services. This service offers cab services in cities and this does not require a cab driver. The robotaxi service not only saves costs for both the company and the user but Uber also avoids potential labor issues. Uber operates in a large and growing market. Its fourth quarter earnings were strong as Uber’s gross bookings increased sharply by 19% and revenues increased 49% in the same period. For the full year 2022, free cash flow (excluding HMRC VAT claims) was $1.1 billion, and with net debt of $5 billion, Uber can easily carry its debt. We also see a favorable stock valuation as the PS ratio is at an all-time low and the forward PE ratio is at approximately the market's value. However, analysts are divided on Uber's near future. Uber may face headwinds with a possible looming recession. But considering the favorable stock valuation and high growth markets, I see Uber as a good long-term investment.

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