MOZCO Mateusz Szymanski
Investment Thesis
Uber Technologies’ (UBER) recent quarterly performance showed the company delivering a positive free cash flow for the first time in its history. The company finally appears to be turning the page after a long period of traversing along a rough, bumpy road. The driver supply situation appears to have stabilized and the expansion of the Eats division into multiple verticals appears to be paying off. Then there’s the dark horse that is Uber Freight. In this article, I discuss these catalysts and highlight why this company is worth looking at.
A First Ever Positive Cash Flow Signifies an Inflection Point for Uber
One of the biggest developments coming out of the company’s recently announced Q2 results was that UBER generated a positive free cash flow for the first time in its history. At a time when every company that talks about sales growth, without providing a clear path towards profitability, is getting punished, registering a positive free cash flow for the first time ever couldn’t have come at a better time for UBER. And it looks increasingly likely that this won’t be a one-off event.
On the earnings call, CFO Nelson Chai and CEO Dara Khosrowshahi both stressed upon the fact that the company is on a sound footing operationally and that the management continues to show a tremendous amount of capital discipline. UBER’s plans to treat hiring as a “privilege,” and a renewed push towards cutting back on other costs all indicate that the company is now firmly focused on the path towards profitability. This new direction was evident in the company’s performance. Uber’s evolution towards a mature, well-run company, one that prioritizes making money for investors over meaningless growth, has officially started.
Driver Supply Improves and Uber Has Inflation to Thank For It
Another key development that’s working in UBER’s favor is the increased interest amongst drivers to come work for the company and it has the inflationary environment to thank for this. On the earnings call, Mr. Khosrowshahi suggested that over 70% of the drivers have decided to work for UBER on account of high inflation. The number of new driver sign-ups in the US was up 76% YoY, which suggests that the supply situation is improving. This is a huge boost for the company as financial incentives to attract drivers were a major overhang on the company up until recently.
The improving driver situation is translating into better performance. The percentage of surge trips has dropped from the 20s to about 14% and the average waiting time has dropped from anywhere between 5 and 6 minutes to about 4.5 minutes in the U.S. It would be interesting to see how the company manages the rapid increase in demand in the fourth quarter as back-to-school season starts, but for now, things are looking upward for the company as far as the driver supply situation goes.
Uber Eats is On Its Way to Becoming a One-Stop-Shop For Essentials
Lately, Uber Eats is increasingly looking like it handles less food and more of everything else. Uber has been diversifying its Eats division by partnering with non-food brands. In addition, it has also entered the alcohol delivery space, via its acquisition of Drizly, as a way to ensure that this division continues to deliver even as the world operates in a post-COVID world. Recently, the company announced that it was expanding its on-demand delivery partnership with Body Shop across the United States. UBER also announced that it was partnering with Office Depot, to deliver business and school supplies as we head into the back-to-school season.
All this expansion does seem to be paying off as evidenced by the 43% year-over-year revenue growth and the $4.5 billion run rate in terms of gross bookings for the Eats division. The vast improvements seen in the take rates and the adjusted EBITDA figure for the quarter gone by are also proof that the fears of a slowdown for this division in a post-pandemic world were overdone.
Uber Freight: The Dark Horse Underappreciated by the Market
Amidst all the talk surrounding UBER’s Mobility and Eats divisions, Uber Freight’s stupendous growth continues to go unnoticed. The division saw revenues jump 426% YoY and now represent nearly 23% of the company’s overall revenue. Adjusted EBITDA for the Freight division came in at 5%, which represents a huge jump YoY (the segment lost money during the same period last year).
On a gross bookings basis, the division saw a jump of 12% thanks to improved efficiency and the strong performance of the Transportation Management business. The partnership with Waymo, Alphabet Inc.’s autonomous vehicle division, is also taking shape. The company announced that, for the foreseeable future, most autonomous trucks will operate under a hub-to-hub model, where human drivers will handle the busier trip ends and the autonomous trucks will operate on the middle part of the trip, which comprises mostly of highways. Such a plan, according to UBER, should result in faster adoption of autonomous trucks and I strongly agree.
Uber Freight is the next growth driver for the company. The trucking industry is expected to reach $2.7 trillion by 2026, according to researchandmarkets.com, growing at a CAGR of approximately 5%. The U.S. trucking market currently accounts for $532.7 billion, and if it grows at a similar rate as the global market, it will hit $650 billion by 2026. According to the American Trucking Association, the trucking industry was responsible for more than 70% of the overall sales conducted in the U.S. Even if Uber Freight captures just 5% of the overall U.S. market, that should help the company’s top line grow by nearly $33 billion. Partnerships with Waymo and the acquisition of Transplace, which is already proving to be a shrewd move, should help the company towards achieving this milestone in the coming years.
Autonomous trucks may be a long time away, but Uber is putting the pieces together of this very lucrative puzzle, much faster than previously imagined.
Valuation
|
Forward EV/EBITDA Multiple Approach |
|
|
Price Target |
$48.00 |
|
Projected Forward EV/EBITDA multiple |
50x |
|
Projected EBITDA in the next 12 months |
$97.5 |
|
Cash & Cash Equivalents |
$4.4 billion |
|
Long-Term Debt |
$6.85 billion |
UBER expects gross bookings to come in between $29.0 billion and $30.0 billion for the third quarter. The company generated gross bookings of $29.1 billion in Q2 and $26.4 billion in Q1. Assuming the lower end of the outlook, that would mean that the total FY22 gross bookings as of the end of the third quarter would be $84.5 billion. With higher demand in Q4, I assumed that the total gross bookings will grow at 8% QoQ (the same growth rate seen in Q2). Furthermore, I have also assumed that gross bookings will continue to grow at the same rate for the next two-quarters of FY23 as well. This would mean that total gross bookings for the next twelve months would come in at around $130 billion ($29 billion in Q3 + $31 billion in Q4 + 33.48 billion in Q3 + 36 billion in Q4).
The company expects adjusted EBITDA for Q3 to come in between $440 million and $470 million. I have taken the lower end of the range and assumed Q3 adjusted EBITDA to be $440 million, which implies that adjusted EBITDA comes in at 1.5% of gross bookings. I have maintained the same margins for Q4 as well as for the first two-quarters of FY23, which results in a total adjusted EBITDA of $1.95 billion ($440 million + $470 million+$502 million + 542.4 million).
The company is currently trading at a forward EV/adjusted EBITDA of 25.61x, which is far below the historical multiple of 63x. I have applied a 50x multiple, close to its historical value, (this is not an unrealistic assumption given that its competitor Lyft’s historical fwd. EV/EBITDA multiple is 27x and Lyft only operates in the U.S.), which gives UBER an Enterprise value of $97.5 billion.
The company, according to Refinitiv, has cash and cash equivalents of $4.4 billion and long-term debt of $6.85 billion. Adding the cash & cash equivalents and subtracting the long-term debt of $6.85 billion gives a total equity value of $95 billion.
The company has 1.97 billion shares outstanding, according to Refinitiv, which results in a target price of approx. $48, an approximate 65% upside to Friday’s closing price.
Risk Factors
One period of positive cash flows does not equate to a hyper-successful business. The question is whether the company can sustain this performance.
Driver supply appears to be stable for now but given that the labor market continues to remain hot, the company is not quite out of the woods yet. Key markets such as San Francisco and Boston, for example, continue to see driver shortages, and the company will have to provide the required financial incentives to attract drivers in these areas.
Then there is the matter of regulatory issues, which continue to persist in key markets within the U.S. as well as in its international markets such as the U.K.
Finally, the macroeconomic conditions continue to remain highly challenging, which is a strong headwind for ride-hailing companies such as UBER.
Concluding Thoughts
UBER, I believe, is at an inflection point. The generation of a positive free cash flow for the first time in the company’s history is a remarkable achievement and should give the company some momentum and create a positive buzz among current and future investors.
Mobility and Delivery verticals continue to deliver, and its Freight business, which is the company’s dark horse in my opinion, is silently growing at a phenomenal rate. The company is also starting to see driver supply normalizing, because of which, the financial incentives, which have been a major overhang, are starting to fall.
From a valuation standpoint, despite a huge run seen in the stock, it continues to remain undervalued. UBER finally seems to be turning the page and this time around, it appears to be a breakout rather than a false dawn.
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