2023-09-26 04:00:00 ET
Summary
- UBER's premium valuations are well-deserved, for so long that it is able to maintain the highly profitable growth cadence and leading market share in the US ridesharing segment.
- The management's cost optimizations and use of balance sheet has also resulted in the company's first ever quarter in GAAP profitability.
- UBER is expected to generate an impressive top and bottom line CAGR of +17% and +66.6% through FY2025, respectively, resulting in our long-term price target of $94.43.
- Then again, while we may rate the stock as a Buy, investors may want to monitor the situation for a little longer, since it has been unable to break out of the $48 resistance levels twice.
- Its recent pattern has also formed a head and shoulder pattern, potentially indicating a bullish-to-bearish trend reversal, as seen in H1'21. Investors beware of this potential trap.
The UBER Investment Thesis Has Developed Optimistically Indeed
We previously covered Uber Technologies, Inc. ( UBER ) in January 2023, discussing its mixed prospects at a time when robo-taxi services had been increasingly popular.
While it remained to be seen which ride hailing model might work better, we had believed that UBER's proprietary platform and global network might still offer a compelling investment thesis moving forward.
We had posited a near term price target of $42.33 then, thanks to the drastic improvement in its profitability, ending the article with a Buy rating for opportunistic investors.
UBER YTD Stock Price
True enough, the UBER stock has rallied tremendously by +75.05% nearing our price target since then, well outperforming the wider market, the SPY at +13.02% and the tech sector, the QQQ at +35.33%.
Perhaps part of the optimism is attributed to the excellent growth in its Gross Bookings to $33.6B ( +7% QoQ / +15.4% YoY ) in FQ2'23, comprising $16.7B in mobility (+11.3% QoQ/ +24.6% YoY) and $15.6B in delivery (+4% QoQ/ +12.2% YoY).
This is on top of the growing average 25M daily trips (+4.1% QoQ/ +19% YoY) and overall trip of 2.3B (+9.5% QoQ/ +22.9% YoY).
These point to the robust consumer demand thanks to its sticky product offerings, led by the growth in its Monthly Active Platform Consumers to 137M (+5.3% QoQ/ +12.2% YoY), despite the rising inflationary pressure and elevated interest rate environment.
Much of UBER's top-line excellence is also amplified by the management's cost optimization, with moderated operating expenses of $2.72B (-14.4% QoQ/ -9.6% YoY) by the latest quarter.
These strategic events have allowed the ride hailing company to report a positive GAAP operating income of $326M (+224.4% QoQ/ +145.7% YoY) and operating margin of 3.5% (+6.5 points QoQ/ +12.3 YoY) for the first time ever .
While it remains to be seen if UBER is able to maintain its GAAP profitability momentum, it is apparent that the stock has been able to sustain its rally from the FQ1'23 earnings call since early May 2023, when the management guided the optimistic FQ2'23 numbers.
It seems that the management's promising execution has justified the stock's pulled forward recovery, with its profitability growing into the previously lofty valuations.
Does The UBER Stock Deserve The Lofty Premium?
UBER Valuations
For now, UBER's valuations may appear to be rich at FWD EV/ Sales of 2.53x, FWD EV/ EBITDA of 24.85x, and FWD P/E of 34.29x, compared to the sector median of 1.65x/ 10.85x/ 17.24x, respectively.
Then again, we believe its valuation is still reasonable, since its direct peers, DoorDash ( DASH ) is also trading at FWD EV/ EBITDA of 27.03x/ FWD P/E of 58.09x and Lyft ( LYFT ) at 17.30x/ 26.84x, respectively.
Rideshare - US Monthly Sales
Most importantly, UBER continues to command the market leading share in the US rideshare at 74% by August 2023, compared to LYFT at 26%, based on the latest data from Bloomberg Second Measure .
UBER also commands a higher average monthly customer sales at $91 in the August 2023 month, compared to LYFT at $86, suggesting the former's leading mindshare.
In addition, based on the consensus' optimistic forward estimates, UBER may generate a top and bottom line CAGR of +17% and +66.6% through FY2025, respectively.
While the ride hailing company has yet to demonstrate sustainable GAAP profitability, it also reports a robust Free Cash Flow of $1.14B in FQ2'23 (+107.6% QoQ/ +198.4% YoY).
UBER has also offered a promising FQ3'23 guidance , with gross bookings of $34.5B (+2.6% QoQ/ +18.5% YoY ) and adj EBITDA of $1B (+9.1% QoQ/ +93.7% YoY) at the midpoint, implying a drastic improvement on a QoQ and YoY basis.
Based on its growth cadence since FY2019 levels of $18.1B and -$615M, respectively, we believe that the management's forward guidance is not overly ambitious indeed, especially given the platform's sticky offerings and leading market share.
In addition, UBER's international segments have been accelerating in the latest quarter, with EMEA revenues of $2.41B ( +15.3% QoQ / +30.9% YoY), APAC revenues of $1.06B (+2.9% QoQ/ +31.1% YoY), and LATAM revenues of $627M (+10.9% QoQ/ +30.3% YoY).
These segments increasingly comprise much of its top-line at $4.1B (+11.1% QoQ/ +30.7% YoY) or the equivalent of 44.4% (+2.6 points QoQ/ +5.6 YoY) of its FQ2'23 overall revenues of $9.23B (+4.6% QoQ/ +14.3% YoY).
As a result of the international segment's outperformance, we believe the ride hailing company's growth drivers remain excellent, well balancing the UCAN region's decelerating revenue growth of $5.12B (+8.1% QoQ/ +3.8% YoY).
While UBER may face an elevated annualized interest expense of $576M (-14.2% QoQ/ +3.5% YoY), the sum has been somewhat stable over the past few quarters.
The management has also made great use of its robust balance sheet of $5.53B (+32.9% QoQ/ +25.9% YoY), somewhat neutralizing the elevated interest rate environment with the growing annualized interest income of $428M (+22.9% QoQ/ +529.4% YoY) by the latest quarter.
Based on the management's guidance of $1B in adj EBITDA by FQ3'23 (assuming a similar execution in FQ4'23), the ride hailing company may generate $3.67B in adj EBITDA for FY2023, in combination with FQ1'23 adj EBITDA of $761M and FQ2'23 at $916M.
Based on its FQ2'23 share count of 2,079.27M, we are looking at an estimated FY2023 adj EBITDA per share of $1.76. Combined with the FWD EV/ EBITDA valuation of 24.85x, it appears that the UBER stock is trading near its fair value of $43.73 indeed.
Based on the consensus FY2025 adj EBITDA estimates of $7.92B, it seems that there is still an excellent upside potential of +112.6% to our long-term price target of $94.43 as well.
Therefore, assuming that UBER is able to sustain the highly profitable growth cadence, we believe that the stock's lofty premiums are warranted for now, justifying the massive rally of +107.6% since the June 2022 bottom of $21.39.
So, Is UBER Stock A Buy , Sell, or Hold?
UBER 5Y Stock Price
As a result of these promising developments, we are cautiously maintaining our Buy rating on the UBER stock. However, this Buy rating does not come with a specific entry point.
Depending on individual investors' dollar cost average and risk tolerance, they may want to monitor the situation for a little longer, especially due to the stock's inability to break out of the $48 resistance levels twice.
For now, bottom fishing investors may want to wait for a potential retracement to UBER's previous support levels of between $30 and $38 for an improved margin of safety.
The stock's recent pattern has also formed a potential head and shoulder pattern, implying a speculative bullish-to-bearish trend reversal as seen in H1'21. Investors beware of this possible trap.
For further details see:
Uber's Valuations Remain Rich Here: Opportunistic Buy For The Brave