2023-06-18 23:59:10 ET
Summary
- Uber has recently begun to generate free cash flow, proving its business model viable and attracting a wave of bullish investors. This has pushed share prices to 18-month highs.
- Evaluating its forward prospects, we can note that the company's unique nature as an asset-light logistics software platform offers strong economic benefits, which both protect the downside and augment the upside.
- These economic properties, along with its massive and growing target set of markets, give me confidence that Uber can continue growing at recent rates for the next 5 years.
- With a projected 25% yearly growth in revenues, Uber's share price could reasonably reach $114.35 by the middle of 2028, making the stock a good long-term buy in my book.
Overview
Uber Technologies ( UBER ) has finally crossed the threshold into generating positive free cash flow as of last quarter. In so doing it has proven its often-misunderstood business model as viable while also changing the consensus and narrative around its stock. Now, Uber bears have mostly gone silent while a fresh crowd of bulls has entered the fray.
The stock has been moving in response, recently hitting its highest levels in 18 months while pulling far ahead of the NASDAQ Composite year-to-date.
Of course, Uber is still the same company that it has always been, recent quarter aside. The good thing is that that is a company with excellent economics, a global footprint, and robust rates of growth. The same elements of its business that have made me bullish on its prospects since its IPO continue to hold. Now that the firm has a renewed level of investor interest in its shares, further appreciation could very well be on the horizon. In this article, I will provide a forward-looking view of Uber's business while also establishing a reasonable scenario for further progression in its share price.
Business
Prior to reviewing Uber's forward prospects I wanted to briefly comment on its business. As mentioned, this is a company that has often been misunderstood due to its innovative business model. This has resulted in a consistent underpricing of its forward prospects as well as a long-held skepticism that it could ever be profitable and/or cash flow generative. Now that the game has changed it is worth reviewing exactly what Uber does, how it does it, and why it works from a business model perspective.
Uber is an asset-light B2C logistics software platform. Uber allows consumers to order logistics-as-a-service without owning any of the logistics infrastructure itself. It is a software company that controls as well as provides access to real-world physical assets. It is also a platform because users can freely participate in either the supply or demand side of its offering.
The nature of Uber's business comes with a range of economic benefits. I'll walk through these step by step:
- Asset-Light
- Even though Uber leverages real-world physical assets in its business, such as cars and the people that drive them, it does not own any physical assets or employ the vast majority of people providing services on its platform. This makes it asset-light in the sense that none of these real-world assets are on its balance sheet or represent fixed costs for Uber. The end result is higher operating leverage and much higher margins.
- B2C
- Uber is a B2C company that directly interfaces with consumers. While it does technically have some offerings that are B2B, such as Uber for Business, the vast majority of its business is done B2C. This makes Uber a consumer company, one that has the responsibility and the privilege of managing consumer relationships directly.
- This means that Uber doesn't need to worry about a middleman capturing some of its margin or disrupting its business. It also means that Uber can sell its full suite of products and services into its shared customer base. It also opens the door to things such as subscriptions and loyalty programs, something the company has already been doing.
- Logistics, Logistics-As-A-Service
- Uber provides logistics-as-a-service. There are no software products out there that can do that. Immediate comparisons would be other delivery services such as DoorDash ( DASH ) or Amazon ( AMZN ). As such we must remember that Uber's offering and competitive environment are not the whole of B2C software but rather only other entities that can readily provide logistics-as-a-service. This space is quite finite.
- Software
- Uber's product, all else aside, is ultimately a piece of software. It may be a distinctly complex piece of software that matches, prices, and processes user supply and user demand in realtime, but it's still software. This means Uber gets to capture the economics of software. The fixed costs of building software, once allocated, can generate revenue with very little marginal cost, allowing for very high gross margins.
- Platform
- This is the part that most frequently gets overlooked. Uber is a platform business. A platform business is one that has more than one type of user, each of which provides value to the other types. Platform businesses deliver value through their network and the economic integration of multiple user types. This stands in contrast to standard businesses which deliver their value propositions themselves without making use of a network.
- For Uber, this can readily be understood through the lens of supply and demand. One type of user, be they drivers or delivery personnel, provide logistics supply for the platform. This is valuable to the other type of user, which forms the demand side. This would be the customers providing demand (purchasing) logistics through the platform.
- This integration of the supply and demand sides of a network allows for a positive-sum effect from increased marginal participation on either side of the platform. This is commonly referred to as 'network effects'. As more users sign up for Uber, there is more money for its drivers and delivery personnel to earn. As more drivers and delivery personnel sign up for Uber, users can get what they want more readily (higher liquidity) and at a better price.
- Network effects are a powerful force and can create an excellent, self-sustaining, moat. This is because of the feedback loop inherent in a platform's network; as the network becomes more valuable, the incentive to join the network increases for all sides of it, thus driving it to become even more valuable. Platform network effects are self-reinforcing. For a business that is just entering a market, they are nigh impossible to replicate from scratch (cold start problem). An excellent illustration of this is Microsoft's ( MSFT ) LinkedIn product, an unrivaled network that continues to generate ever-higher fees from its own growth.
- Platform network effects thus allow for an acceleratingly valuable feedback loop at the center of Uber's business, one that becomes increasingly resistant to competition as it grows.
We can see why Uber is a unique business. It has multiple elements to its business model that make it distinctly appealing from an economic perspective, as well as a unique combination thereof. Investors should keep these factors in mind when evaluating it as an investment. With that being said we can chart Uber's trajectory going forward.
Forward View
I think Uber is set to continue its current growth trajectory in the near to medium term. This is because I believe that Uber has more than enough in terms of target market size to retain current growth rates for at least the next 5 years. Indeed, Uber's total addressable market has been expanding with each new product offering. At this point, the company sells rideshare, food delivery, grocery pickup, alcohol, freight shipping, and more. Its market size is some increasing portion of overall global logistics demand. This is something quite sizeable and far larger than just the rideshare market in which it began. Interestingly, this was a notable point of contention amongst early Uber investors. At this point, it is clear that the broader perspective as to its market size is winning out.
As such I think it is fair for us to extrapolate recent growth rates into the future. Uber has had an exceptional run of recent growth, including an 83% growth in revenues between 2021-2022 and plenty of recent triple-digit quarters. The latest quarter, however, showed a year-over-year revenue increase of 28.73%. While it is possible for this number to increase again, I want to take it as a fairly conservative estimate for Uber's forward growth.
To that end, we can assume a 25% yearly growth in revenues going forward. I will also assume that the company's overall share float continues to increase at roughly the rate that it has been, about 3%. I'll distill this into a share float index with its 2022 share float as a starting point. We can then project the firm's forward market capitalization and subsequently calculate an implied share price using Uber's current forward price/sales multiple of 2.34.
Year | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 |
Revenue () | $31,877.00 | $39,846.25 | $49,807.81 | $62,259.77 | $77,824.71 | $97,280.88 |
Revenue Y/Y Growth | 25% | 25% | 25% | 25% | 25% | |
Share Float ((MM)) | 2005.50 | 2065.67 | 2127.63 | 2191.46 | 2257.21 | 2324.92 |
Share Float Growth | 3% | 3% | 3% | 3% | 3% | |
Share Float Index | 1.00 | 1.03 | 1.06 | 1.09 | 1.13 | 1.16 |
Mkt. Cap at 2.34 P/S, () | $88.08 | $110.10 | $141.75 | $187.98 | $256.77 | $361.24 |
Share Price at 2.34 P/S | $43.44 | $52.72 | $63.98 | $77.64 | $94.23 | $114.35 |
Data Source: Seeking Alpha
This yields a share price of $52.72 by the time we get results for fiscal year 2023 and a $114.35 share price by the time we get results for fiscal year 2027.
Conclusion
I think Uber will match the growth trajectory that I outlined above and see its shares benefit as a result. The unique parameters of its business should make it reliably continue to grow as well as maintain its current premium in its shares, thus yielding further appreciation in its share price as per the table above.
The risk here is if Uber starts showing growth rates below these projections. This would hamper its growth premium and likely lead it to start trading at a lower multiple, while also extending the timeline for it to attain the results outlined above. As a growth stock now trading on its growth momentum, this should be a central concern for investors. This shock can be catalyzed by significant macroeconomic disruptions or economic dislocations, which are not out of the question for the decade ahead.
Ultimately I am still bullish on Uber and will assert a price target of $114.35 by May 15, 2028. This should allow for enough time for the company's full 2027 results to be released and to get priced into its shares. Overall I consider these estimates to be fairly conservative and that the stock could well outperform them over this timeframe. In either case, Uber stock is a buy.
For further details see:
Uber: Growth Just Getting Started