UBER

Uber Technologies: Disruptive Does Not Mean Profitable

Ride hailing apps such as Uber Technologies (UBER) and Lyft (LYFT) are one of the most disruptive technologies of the 21st century. Uber remains the leader with approximately 69% market share as of October 2021.

Uber operates in over 63 countries with over 110 million users that order rides or food at least once a month. Approximately 76% of its gross revenue comes from ride-sharing and 22% from food delivery.

I am neutral on UBER as I believe the near halving of the stock this year may provide a short-term trading opportunity. However, despite its leadership position, the lack of near-mid term profitability, and the small possibility of it never being profitable, puts a ceiling on long-term appreciation. (See Analysts’ Top Stocks on TipRanks)

COVID-19 Effects in 2020

2020 was a tough year for the company, as the COVID-19 pandemic was responsible for nearly shutting down the ride-sharing business. Ride-related gross bookings declined approximately 45%, however due to lockdowns and other stay-at-home orders, the Delivery business increased gross bookings 110%.

However, the delivery Segment is smaller than the Ride segment, so total revenues decreased 14% in 2020.

Operating Losses

Uber is not profitable at any level and is still cash flow negative. EBITDA losses over the past three years has been $2.5 billion, $2.7 billion, and $1.8 billion.

EBITDA is expected to be negative again in 2021, but at a much improved rate of under $1 billion in operating cash flow losses. For 2022, analysts expect positive EBITDA in the $1 billion to $2 billion range. However, net profits are a long way off. It’s possible profits may never occur as this is an unproven long-term business model. The company itself explains why:

“The mobility, delivery, and logistics industries are highly competitive, with well-established and low-cost alternatives that have been available for decades, low barriers to entry, low switching costs, and well-capitalized competitors in nearly every major geographic region. Consumers have a propensity to shift to the lowest cost or highest-quality provider; Drivers have a propensity to shift to the platform with the highest earnings potential; restaurants and other merchants have a propensity to shift to the delivery platform that offers the lowest service fee for their meals and other goods and provides the highest volume of orders; and shippers and carriers have a propensity to shift to the platform with the best price and most convenient service for hauling shipments.”

Uber Eats

Uber’s Food Delivery business operates in a highly competitive market – and it shows with the large operating losses in this segment. Possible tailwinds include the theory that food delivery habits acquired during the COVID-19 pandemic are lingering well after lockdowns have expired.

However, this is questionable as human interaction and fundamental social activity will likely return as strong as ever.

In addition, the regulatory environment remains risky as the gig economy labor model remains under attack.

Valuation

Uber stock currently trades at an EV/Revenue of 4.6x. The calculation of EV/EBITDA and P/E ratios are not currently possible.

Merrill Lynch values UBER on a sum-of-the-parts basis and applies an EV/2022 revenue valuation of 4x for Mobility, 7x revenue for Delivery and 3x revenue for Freight.

This SOTP valuation implies segment values of $42 billion for Mobility, $69 billion for Delivery, and $6.5 billion for Freight, which provides an enterprise value for Uber of $118 billion.

Wall Street’s Take

Turning to Wall Street, UBER has a Strong Buy consensus rating based on 19 Buy ratings and one Hold rating assigned in the past three months. At $69.75, the average UBER price target implies 99.3% upside potential.

Disclosure: At the time of publication, Tom Kerr did not own shares of any stocks mentioned above.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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