Stock of the week: Uber Technologies

- Uber to be one of the biggest IPO ever
- Ride-sharing company has a rapidly growing business
- Uber tries to diversify product-wise and in geographical terms
- Uber still incurs losses, may face a long way to profitability

Uber Technologies, the biggest ride-sharing company in the world, is set to go live in early May. It will be the second such company to debut following Lyft’s IPO on 29 March but more importantly it will be one of the biggest IPOever. In this report we present the company business model, opportunities and challenges and outly things you should now about the first trading day.

Uber - story of billions

Uber Technologies was founded a decade ago in the United States as one of the first ride-sharing companies in the world. The rumour says that the idea for Uber originated when one of the founders was charged a few hundred dollars for hiring a private driver on New Year’s Eve. An idea transformed into a transportation behemoth with operations across 63 countries and over 700 metropolitan areas. In spite of becoming the global company Uber still holds the lion's share in the US market. According to the data compiled by SecondMeasure, Uber received 69% of the US ridesharing spending in March 2019. The demand for Uber services is also growing which is perfectly pictured by gross bookings data (total amount users spend in Uber app). Throughout 2018 the company generated $49.8 billion in gross bookings - a 44% increase from 2017. In fact, Uber’s gross bookings rose on a quarterly basis in each of the past 8 quarters (the whole data history available to the public).

Competitor and a shareholder

We have mentioned that Uber has became a global company. While the company is trying to get a footprint in as many markets as possible it is reluctant to do it at all cost. In turn, Uber is withdrawing from markets where tough competition makes future prospects bleak. “Withdraw” may not be the perfect word as Uber’s strategy allows it to rip profits even from markets it had left. Namely, Uber tends to sell its assets in such markets to the biggest competitor in return for a stake in the company. The US ride-sharing company not only omits costs of competing with others there but may participate in future profits of its ex-rivals that now have close to monopolistic position in their respective markets. This was the case with 2016 sale of Chinese assets to Didi for an 18% stake or 2018 sale of assets in Southeast Asia to Grab for a 27.5% stake.

Uber generates around a fifth of revenue from five metropolitan areas - San Francisco, Los Angeles, New York City, London and Sao Paulo (Brazil). As 3 out of these 5 areas are in the US it should not come as a surprise that the company generates most of the revenues in this country. Source: Bloomberg, SEC filings

Not just car sharing

However, Uber is offering more than just ride-sharing services. The company launched the UberEats service in August 2014. Thanks to the service customers could now order food delivery for a small fee. While this may sound like regular food delivery services offered by most restaurants, UberEats differs as it does not offer its own food. Instead, it just delivers food from partnered outlets allowing its clients to get an access to numerous restaurants through a single mobile app.

More recently, UberFreight service was launched in 2017. Instead of matching drivers with passengers for short city trips, it matches freight shippers with truckers. Apart from that, Uber expanded into rental of electric bikes and scooters in 2018 thanks to the acquisition of Jump Bikes. The JUMP service is currently available only in 12 US cities, Berlin and Lisbon but the company plans to keep expanding the offering. While UberFreight and JUMP may have a potential it should be noted that the two services accounted for less than 15% of Uber’s total revenue in 2018.

While significance of Uber Eats is growing within Uber’s structure, the ridesharing remained a major source of revenue in 2018. Source: Bloomberg, SEC filings

Is Uber better than Lyft?

Lyft IPO on 29 March was seen by many as a prelude to a big and long expected UBER listing. The two are ride-sharing giants in the US but could these be compared directly? Uber is offering relatively broad range of services, especially in the United States and Europe and that makes it more diversified company than its rivals. While services outside its core activity account for a small portion of total revenue now, they may help smooth earnings in case company expands them in the future. Uber is also unique among ride-sharing companies as it is present on all continents except for, obviously, Antarctica. Summing up, Uber seems to be well positioned within industry due to its broad geographic reach and expanding offering. On the other hand, Lyft is operating only on the US market and it is not even a leader there (Uber has over twice times bigger market share).

While Uber has much higher revenue than Lyft, declining ratio of Uber’s revenue to Lyft’s signals that the latter company is growing more rapidly. However, one could expect it given such discrepancies in size of the two companies. Source: Bloomberg, SEC fillings

When will Uber start making money?

However, one thing should be said about Uber Technologies. The company is still burning cash and struggles to turn a single dollar of profit. It is true that economies of scale work in case of Uber as its net loss margin keeps declining. Slowing revenue growth could be a potential risk factor here. Moreover, the company said in the IPO filling that it expects operating expenses to increase significantly in the future and that it may… never achieve profitability. Uber also said that reclassifying drivers from independent contracts to employees would have an adverse effect on its results and such a reclassification is already being undertaken or considered in some countries the company operates in. Finally, majority of the ride-sharing companies generate losses and Didi and Grab, companies Uber has interest in, are no different. Having said that, there is a risk that these companies will eventually go bankrupt in case they fail to achieve profitability and such a development could trigger major write-downs on Uber’s balance sheet.

Uber’s business model looks promising but does financial data tell a similar story? The US ride-sharing giant enjoyed a rapid pace of revenue growth in the previous years - 209% YoY in 2017 and 142% YoY in 2018. While this growth has been slowing, it still outpaces growth in the cost of revenue leading to improvement in margins. Gross margin managed to increase from 21.6% in 2014 to 50.1% in 2018. Situation is also improving when it comes to net result - Uber still generates losses but net loss margin shrunk from 131.9% in 2014 to 25.8% in 2018. For Lyft gross and net loss margins both stood at 42.3% in 2018. Moreover, Uber had a ridesharing revenue per driver of $2354 in 2018 while Lyft’s drivers generated revenue of $1135 on average. Comparing bookings per driver data for 2018 shows similar picture - $10641 for Uber and $4263 for Lyft.

Can we value the Uber stock?

The challenge with valuing young and technological stocks is that they usually make no profits and thus cannot be valued with a use of typical methods like, for example, price-to-earnings ratio. Price-to-sales (P/S) ratio could be used but valuations of such “hot IPOs” seldom reflect economic reality. For instance, using P/S ratios from IPO dates of other long awaited debuts (Facebook, Alphabet, Lyft, Twitter and Pinterest) would value Uber anywhere in the $25-300 billion range. Metrics more suitable for young tech companies could provide a better insight. For instance, Uber has higher revenue per user than any of the mentioned companies had when it went public. However, as there are striking differences in business of, for example, Twitter and Uber, it may be wiser to compare “per user” data only with the other ridesharing company. Doing so shows us that Uber had over 75% higher revenue per user in 2018 than Lyft. On the other hand, looking at margins data can be a source of concern. Indeed, Uber has higher gross margin than Lyft or Alphabet had during their IPOs but spread between gross and operating margins is worrying. This spread is the highest for Uber and shows that the company has operating expenses that exceed its total annual revenue. Unless an improvement is achieved there, profitability may be hard to achieve as well.

Selected data for the previous “hot” Initial Public Offerings. Source: Bloomberg, SEC filings

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