Uber Technologies: On The Path Of Sustainable Profitability (NYSE:UBER)

Investment Thesis

Uber Technologies (NYSE:UBER) followed up a history-making second quarter with yet another quarter of positive free cash flows. In this article, I outline the catalysts which, in my opinion, positions the company on the path towards sustainable profitability.

Q3 Shows that Uber’s Turnaround is the Real Deal

The company had a mixed third quarter. Revenue came in at $8.34 billion, up an impressive 72.2% year-over-year, beating analyst estimates by a little over $220 million. EPS came in at negative $0.61, falling short of estimates by $0.43. The drop in EPS can be put down primarily to the underperformance of its equity investments, mainly in Didi and Grab.

When evaluating UBER though, cash flows are a better barometer of the company’s performance, and the company registered yet another quarter of positive free cash flows, which came in at $358 million.

The other major takeaway from the company’s performance was that all divisions demonstrated strong growth in terms of both revenues and adjusted EBITDA. Mobility division saw revenues jump 83% YoY, on a constant currency basis, and saw adjusted EBITDA come in at $898 million, a YoY jump of 65%. Delivery segment saw revenues jump 33% YoY, on a constant currency basis, and the segment saw its adjusted EBITDA come in at $181 million compared to negative $12 million during the same period last year. Uber Freight, which in my opinion, is the company’s dark horse, saw revenues more than quadruple to $1.75 billion and also saw adjusted EBITDA turn positive. The resilience shown by all the company’s verticals is further proof that the company’s turnaround strategy needs to be taken seriously and that it was not a one quarter fluke.

Uber Eats: Making a Mockery of the Skeptics

One of the biggest critiques against the company was that the pandemic boom witnessed by the company’s Delivery vertical (Uber Eats) would be short-lived as more and more people start venturing out to restaurants as opposed to eating in. As I mentioned earlier, the performance of the Eats division has made a mockery of such criticism.

Achieving a 33% YoY increase (on a constant currency basis) and a 20% jump, YoY, in take rates, is no mean feat given the current macro climate and the changing consumer tastes. Having said that, Uber Eats is no longer just about food for Uber. In the quarter gone by, the company announced partnerships with the likes of Office Depot/Office Max, The Body Shop, Dollarama in Canada, and with Co-Op, Iceland and Boots in the U.K., thereby managing to expand into several verticals in its biggest markets. Furthermore, Uber Eats will now deliver Cannabis in Toronto via its partnership with Leafly. Then there’s Drizly, the alcohol delivery service that Uber acquired, which launched Drizly Ads.

The pivot towards non-food verticals has been a masterstroke and positions the Delivery vertical to actually complement, rather than substitute, the Mobility business in the coming years.

Uber is Eating Lyft’s Lunch

There has been a raging debate on whether Uber’s business is too large that it’s going to take substantially longer for the company to achieve profitability, especially compared to its smaller rival Lyft. The third quarter results tell a different story altogether.

Lyft, during the third quarter, saw a decline in total active riders. On the contrary, Uber saw a more than 20% surge in active riders, according to Business Insider. Furthermore, as a means of cost cutting, Lyft also announced that it would be letting go 13% of its staff, joining in a number of tech companies in laying off employees. Uber, on the other hand, has not announced any layoffs albeit, like Lyft, it did announce a hiring freeze back in May. However you want to look at it, Uber simply appears to be better managed than its direct rival.

This is hardly surprising given that the company is moving away from growth at any cost. The third quarter results did provide some evidence of this. Corporate G&A expenses and R&D expenses decreased as a percentage of gross bookings and driver supply investments saw a meaningful reduction. Both these factors contributed to improved YoY adjusted EBITDA margins.

On the earnings call, CFO Nelson Chai mentioned that Uber is showing strong growth across all their key geographies and given that driver shortages have subsided, the continued growth in the EBITDA margins is expected. Effective cost management together with Lyft’s struggles is further proof of the operational excellence demonstrated by Dara and Co.

Uber One: First Step Towards Super App

Finally, I am also excited about the company’s all in one membership plan: Uber One. The subscription plan crossed 10 million members during the third quarter as the company expanded Uber One into eight markets. The subscription offering, in my opinion, would allow the company to convert existing mobility users into delivery users and vice versa.

With relatively generous discounts on offer, this all-in-one subscription package should help the company drive the overall gross bookings in the coming quarters, which would subsequently be a catalyst for its top and bottom lines.

The company management, during the earnings call, was bullish about the growth prospects of Uber One. With features like priority pickups at airports set to be incorporated into Uber One, why shouldn’t they?

Valuation

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Uber expects gross bookings to come in between $30.0 billion and $31.0 billion for the third quarter. Given that in Q3, the gross bookings came in just above the lower end of guidance, I assumed Q4 gross bookings to be $30 billion. The company generated gross bookings of $29.1 billion both in Q2 and Q3, and $26.4 billion in Q1. Thus, total gross bookings for FY22 would be $115 billion. This represents a 28% YoY increase from FY21. I assumed, given the economic backdrop, growth slows to 20% in FY23. This would translate to FY23 Gross Bookings of $138 billion.

The company expects adjusted EBITDA for Q4 to come in between $600 million and $630 million. Despite the company comfortably beating its Q3 guidance, I assumed the low end of this range for Q4, simply because of the macroeconomic conditions. Therefore, I assumed Q4 adjusted EBITDA to be $600 million. Total Adjusted EBITDA for FY22 would then be $2.05 billion ($168 million + $771 million + $516 million + $600 million). That’s 1.5% of the gross bookings. I assumed the same percentage for FY23, which translates to FY23 adjusted EBITDA of $2.1 billion of adjusted EBITDA in FY23.

The company is currently trading at a forward EV/adjusted EBITDA of about 20x, according to Refinitiv, which is far below the historical multiple of 56.3x. Lyft’s historical EV/EBITDA multiple is 25.5. I assumed Uber’s EV/EBITDA multiple to be roughly double that because I believe, at this point, it’s the bare minimum that UBER deserves.

So, at a multiple of 50x, it gives the company an Enterprise Value of $105 billion. Adding cash and cash equivalents of $4.9 billion and subtracting the long-term debt of $6.85 billion gives a total equity value of $103 billion. The company has 1.97 billion shares outstanding, and if you use this figure, you get a target price of approx. $52, an approximate 80% upside to Thursday’s closing price.

Risk Factors

The biggest risk facing the company now is FX headwinds, which are having an adverse impact on the company’s gross bookings and profit margins. Then there’s the continued weakness in Uber’s equity investments such as Didi and Grab, which is continuing to put adverse pressure on the company’s bottom line. While the company is on a sound footing operationally, from a “traditional” perspective, there is some way to go before the company starts to be profitable. Finally, there are regulatory issues, which do remain in key markets within the U.S. as well as in its international markets such as the U.K.

Concluding Thoughts

I love UBER as a long-term play. I have always liked the company since Dara Khosrowshahi took on the firm’s CEO mantle and have continued to like it even now. Operationally, the company is doing a phenomenal job and it is on track to exceed its main targets set during February’s Analyst Day.

The Delivery/Eats vertical is showing signs of resilience despite the pandemic in the back mirror, thanks to the company’s timely switch to non-food sectors. Mobility division is growing strongly even at a time when Uber’s rivals are struggling. Finally, there’s Uber One, which is looking more and more like the first step towards Uber’s long-term ambition of being a Super App.

Uber is a well-oiled machine, and in the quarter gone by, we got more proof that Uber’s inflection point, reached in Q2, is anything but a false dawn.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.