2024-01-12 07:47:05 ET
Summary
- Uber has finally returned to all-time highs.
- The company has shown strong financial results, with resilient top-line growth and impressive margin expansion.
- Increased driver supply has enabled Uber to reduce promotional activity.
- I explain why I am downgrading the stock in spite of the strong fundamental results.
It is time to downgrade Uber ( UBER ) . The company has proven the doubters wrong - and the stock has taken off in tandem. The company capitalized on the pandemic to increase the synergistic power of its ridesharing and food delivery ecosystem, leading to improved competitive positioning in relation to its closest ridesharing peer. The company has held on to its profitability gains and continues to show operating discipline. Together with its solid balance sheet, the company appears to be well on its way to becoming a blue-chip name. But that's the problem - the stock appears to already be pricing in blue-chip valuations, reaching levels that I am no longer comfortable with. While I commend the progress at the company, the stock looks too expensive at current levels.
UBER Stock Price
Amidst a melt-up in the tech sector, UBER has seen its stock soar over the past few months to all-time highs.
I last covered UBER in September, where I rated the stock a buy due to the company's competitive advantages amidst a higher interest rate environment. I did not anticipate the stock to soar this much, this fast. This is an ideal time to take profits.
UBER Stock Key Metrics
In its most recent quarter, UBER saw 20% YoY growth in gross bookings to $35.3 billion, exceeding guidance of $34 billion to $35 billion.
That translated into 11% YoY growth in revenue, an impressive result given the tough macro environment and tough post-pandemic comparables.
The company generated a 3.1% adjusted EBITDA margin, good for $1.092 billion, comfortably outpacing guidance for $975 million to $1.025 billion.
UBER drove the profitability gains through continued cost discipline, with the company showing operating leverage on R&D and pulling back on sales and marketing expenses due to increased driver supply. I note that general and administrative costs actually rose slightly on a YoY basis as the prior year's amount was higher due to legal, tax, and regulatory reserve expenses.
UBER continued to see post-pandemic gains in its mobility segment as travel continued to recover. Mobility revenue jumped 31% YoY and the adjusted EBITDA margin rose 600 bps.
Delivery growth remained pressured due to tough post-pandemic comparables, with delivery revenue growing only 5% YoY. Delivery profitability, however, increased dramatically at 130 bps.
UBER ended the quarter with $5.2 billion of cash and $5.1 billion of equity stakes versus $9.3 billion of debt.
Looking ahead, management guided for gross bookings of $36.5 billion to $37.5 billion and adjusted EBITDA of $1.18 billion to $1.24 billion. Analysts expect that to translate to around $9.77 billion of revenue and $0.39 in non-GAAP EPS.
On the conference call , management named Japan and South Korea among their near term growth priorities given that their "penetration rate is miniscule" with Hailable Taxi being their point of entry.
Management noted that they grew the number of drivers by 30% YoY and now view this to be a "supply-led marketplace." This creates a fly-wheel effect which helps bring down rider estimated wait times as well as allowing the company to reduce promotional activity.
It seems that every tech company nowadays has tried to claim some sort of benefit from generative AI. Management noted that they have already been using machine learning algorithms to drive matching and pricing for both mobility and delivery marketplaces. Management believes that due to being the largest operator, they can gather "more data for more customers across a wider range of behaviors than anybody else." Management eventually expects to integrate generative AI to assist with customer support and further drive operational efficiencies. I am of the view that the greatest beneficiaries of generative AI will be the customers - UBER appears poised to be one such beneficiary over the long term. In the meantime, I expect the strong profitability gains to persist given the cost discipline, with management stating that they aim to stick with "flat or very small incremental headcount" moving forward.
Is UBER Stock A Buy, Sell, or Hold?
UBER is a dominant mobility and delivery platform. The company has expanded its mobility reach through launching taxi products in various cities, which in some sense marks full penetration of UBER in both traditional and modern ridesharing markets. The company continues to rapidly grow its Uber One membership base and has been integrating advertising into its applications.
While the financial results are impressive, I am surprised by how rapidly the stock has risen. As of recent prices, UBER was trading at 9x 2032 estimated earnings.
Consensus estimates have the company sustaining around double-digit top-line growth over the next 9 years.
I again use my assumptions of 15% long term net margins, 13% revenue growth, and a 1.5x price to earnings growth ratio ('PEG ratio'). That implies a valuation of around 2.9x sales, with the stock clearly pricing in several years of growth. While UBER has officially joined the S&P 500 index , I question whether the stock is offering enough prospective upside given the risk. As a frequent customer of both mobility and delivery services, I can attest to the price competitive nature of the business, and I also anecdotally am of the view that DoorDash ( DASH ) offers a far superior consumer experience than UberEats. I wonder if UBER is seeing strong mobility results in the near term mainly due to Lyft ( LYFT ) having trouble synchronizing with the higher interest rate environment, but that does not represent a sustainable advantage. I find it doubtful that LYFT would just disappear as a mobility competitor - I find it more likely that it eventually gets absorbed into a food delivery competitor like DASH to create a similarly competitive, comprehensive ecosystem.
While UBER does look like a potential long term generative AI winner, it is still arguably competing in a business with long-term price competition risks. I find it hard to justify a valuation multiple of 20x, yet even if we assume that the stock trades at 20x earnings in 2032, the stock is only offering around 10% annual return potential over the next 9 years based on aggressive consensus estimates. That is the kind of return potential that I might be comfortable with from an ultra-high quality blue chip company, but UBER is not quite of that risk profile as of yet. Due to valuation, I must downgrade UBER to a neutral rating as the risk-reward proposition does not look compelling.
For further details see:
Uber: Why It Is Time To Downgrade