Summary
- Uber is the leading ride-sharing company with 131 million monthly users and 71% market share in the US, being active in different fields of road transportation.
- Uber is expected to maintain its growth momentum, which will lead to reaching profitability in the near term and solid cash flow generation in the long run.
- Thanks to its highly scalable business model, Uber’s stocks, at today’s prices, can represent a good investment opportunity for us investors.
Investment Thesis
Whether you need to go somewhere, order something to eat, or even ship your products, Uber ( UBER ) will ease the process with just one click. Currently, serving 131 million monthly customers in 10 thousand different cities, Uber is the largest ride-sharing company in the world. Started as a convenient alternative to taxicabs, today Uber is active in different fields of road transportation, whether it regards people, food, or goods, and it is unlikely to stop here.
Despite the highly competitive market, Uber is expected to maintain its growth momentum, which will lead to reaching profitability in the near term and solid cash flow generation in the long run. Expecting the company to keep disrupting the road transportation industry, and to deliver positive returns to investors, at today's prices, given an intrinsic value of $44 per share, Uber Technologies represents a good investment opportunity.
In today's analysis, we will assess why Uber's business model will be able to generate strong returns despite having struggled to turn profitable so far, and why at today's price Uber's stocks represent a good buy.
Business Model
Uber's business model is divided into three main segments: Mobility, Delivery, and Freight.
Under the mobility segment, so-called Drivers, provide rides using a wide variety of vehicles to satisfy any Riders' needs whether they are individuals or businesses. The Delivery segment comprises the delivery of food, grocery, and other household goods on behalf of local restaurants and shops. Users can subscribe to the Uber One monthly membership to obtain several benefits every time they access Mobility or Delivery services.
Finally, the Freight segment is dedicated to enterprises to facilitate the connection between independent carriers and shippers, quickening booking procedures, increasing price transparency, and improving the overall efficiency of logistic processes for both parties if compared to traditional freight services, simply by using the Uber platform.
Revenues are primarily generated by service fees applied to Mobility Drivers, Delivery Couriers and Merchants, and Freight Shippers. Other revenue streams comprise logistic management services offered to enterprises, car rental services, and the recently introduced advertising services paid by businesses to access sponsored listings.
Mobility accounted for 44% of total revenues, followed by Delivery for 34%, and Freight for 22%.
Operating Performance
Looking at Uber Technologies' past performances, revenues grew at a compound annual growth rate ('CAGR') of 42.26% from $3.8 billion in 2016 to $31.8 billion in 2022.
Despite maintaining a gross margin above 30%, for the entire period, the company struggled to turn profitable and obviously delivered negative free cash flows to the firm ((FCFF)), despite both the operating margin and return on invested capital ((ROIC)) improved considerably towards profitability.
Financially, Uber has a negative net cash position of -$6.9 billion due to a considerable amount of debt outstanding, mostly represented by senior notes, that badly impacted financial ratios like the current ratio and the debt-to-equity ratio, respectively at 1.04 and 1.31.
Growth Drivers
Uber's main growth driver is represented by R&D expenses, with which the company can keep improving the platform to offer better and more innovative services to its user base. Thanks to its proprietary technologies and data collected, Uber can potentially expand its operations to different inefficient road transportation fields as it has done with the Freight segment, revolutionizing them and gaining further market share and penetration.
Future growth can be determined by looking at how much and how well a company has invested in its growth drivers. The Reinvestment Margin shows what percentage of revenues has been reinvested into the company, while the Sales to Invested Capital ratio, shows how much revenues have been generated for each dollar invested by the company. If we multiply these two values and take the median value over the years, we obtain the expected growth rate in revenues based on how much and how well a company has invested in its growth drivers.
In our case, Uber's expected growth rate is 20.9%.
Uber's expected growth rate (Personal Data)
Risks
The market in which Uber operates is highly competitive, having to compete directly against other ride-sharing, delivery, and freight companies, and indirectly with personal vehicles and public transportation services.
Despite the strong competition , Uber, with its subsidiaries, is the undisputed leader in the US market, where it eclipses Lyft ( LYFT ) with its 71% market share , while worldwide the main competitors are the European Bolt, which operates only in 500 cities, especially in emerging countries, and the Chinese DiDi ( OTCPK:DIDIY ), of which Uber owns a 13% stake in the company.
However, even being the market leader, the presence of competitors will limit Uber's future margins expansion, having to keep its prices and fees competitive with market standards.
DCF Model
I use the discounted cash flow analysis method to value companies. The aim of a DCF analysis is to determine the present value of expected cash flows generated by the company in the future. The first step is to project the growth rate at which revenues will grow in the future. Secondly, we will need to assume the degree of efficiency and profitability at which the company will turn revenues into cash flows.
Efficiency is represented by the operating margin, and profitability by the ROIC. Having the revenue projections and future operating margins, we obtain the EBIT and, after subtracting taxes, we get the net operating profit after taxes. The ROIC is used to determine the reinvestments needed to support future growth, determining how much profit the company generates from every dollar reinvested into the company.
Future cash flows are calculated by subtracting the reinvestments from the net operating profit after taxes. The higher the growth rate, the higher the reinvestments needed to support it, hence the lower future cash flows will be.
The last step of a DCF analysis is to apply the discount rate to future cash flows, usually calculated using the weighted average cost of capital ('WACC').
Projection
Now trying to project Uber's future performance, the story we are telling here sees Uber maintaining its growth momentum, keeping revolutionising road transportation, and start delivering positive returns as its business model capitalizes on its growing user base and the increasing number of transportation-related services.
As regards future revenues, we start by applying the expected growth rate of 20.9%, based on how much and how well the company has reinvested in the past, and then let it slowly decline as the company reaches maturity. With these assumptions, revenues are expected to be around $80 billion by 2032, almost tripling in 10 years, at a CAGR of 10.17%.
We can expect Freight revenues to increase their relevance to 30% of the total, as more companies will adopt Uber's freight solutions, while as regards the other two segments we can expect Mobility to remain the main revenues generator, at 40%, and Delivery to remain around 30%.
As regards future efficiency, for the Mobility and Freight segments, I have based my assumptions looking at the Trucking Industry's average operating margin of 10%. I have assumed Uber to reach margins double the industry average, around 20%, as they can rely on a far better and less capital-intensive business model easily expandable to different markets with relatively small marginal costs. As regards the Delivery segment instead, basing my assumption on the Internet and Direct Marketing Retail industry, I expect margins to remain low, around 5%, as there will be many players competing for prices and fees that will drive margins down.
Therefore, we can expect Uber to turn profitable in the next 2/3 years, following the positive trend towards profitability of the past years, and then reach an overall operating margin of 15.5% by 2032.
The ROIC is expected to be around 20% by 2032, again almost double the average value of the Trucking industry of 12%, as Uber's business model doesn't require considerable investments in capital to run and scale its operations.
With these assumptions, FCFF are expected to remain negative in the coming years, as Uber will have to reinvest big to support future growth, and then, as the company reduces the investments approaching maturity, we can expect to see strong cash flow generation reaching $8 billion by 2032.
Valuation
Applying a discount rate of 7.85%, calculated using the WACC, the present value of these cash flows is equal to an equity value of $87.8 billion or $44 per share.
Conclusion
Given my analysis and assumptions, Uber stocks result to be undervalued at today's prices.
Despite struggling to turn profitable in the past, Uber has created a powerful business model that can potentially be scaled to any inefficient road transportation field with limited marginal costs. Thanks to such an incredible business model, and the strong brand awareness it possesses, Uber's stocks, at today's prices, can represent a good investment opportunity for us investors.
For further details see:
Uber: Delivering Value, Bringing You Everywhere And Everything