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This feels crazy to say, but this is our first time initiating coverage on Uber.
After years of burning money and basically trading in lockstep with Lyft, Uber has finally emerged as a viable investment opportunity.
And down 50% from its all-time high, Uber is beginning to look like a company that is surprisingly undervalued.
And that’s because Uber is way more than meets the eye.
What on the surface appears as another ride-sharing company, is actually a growing monster, ready to dominate global logistics as we know it.
While more downside is certainly possible, Uber has become of one of our top mobility plays over the next decade.
Let’s get into the why👇
As one of the more recognizable brands in the world, I think we can skip over our usual intro of what this company does, and just get straight into it.
And looking at Uber’s most recent earnings report, there’s a lot to really get excited about. Let’s double click into our three favorite items:
- 10% of Uber’s customers drive 50% of its total revenue. We’ll admit, this discovery was hard for us to fully digest. On one hand, such a large density of small users driving so many bookings made us cautious. However, we ultimately viewed this as a bull signal because of the upside opportunity associated with the other 90% of Uber’s user base. This user base is estimated to use Uber’s platform roughly 3 times per month. If we were to increase this number to just 4-5 bookings per month, we’d see an incremental $80B in net revenue. Now, we’re not usually ones to hypothesize on different scenarios, however with ride-sharing estimated to increase over the next several years, paired with lower anticipated pricing to come, we believe this cohort is likely to achieve this incremental lift on their usage of Uber’s platform. If they do, Uber would be able to sustain over 23% annual compounded growth.
- But expanding their business via their existing user base is just one lever Uber plans on pulling. Uber also plans to expand to new geographies with new products. And the plan they laid out, is extremely realistic based on their historical operating model. Looking closer, we see that Uber plans to have 50% of its revenue come from UberX and the other 50% of its revenue to come from new products (~35%) and new geographies (15%).
- On the new geographies side, Uber is still in its early innings. That’s because at its current scale, Uber has only captured 3% of its total addressable user base. And that user base is continuing to expand. It’s estimated that Uber’s potential user base of 2.5B users will grow by 14% by 2024 via population growth and by expanding to new geographies.
- On the new products side, in addition to its food delivery business, Uber has rolled out: Taxi, Uber For Business (U4B), Shared Rides & Uber Reserve. These may seem like small offerings, but each one of these business lines are on target to reach billions of dollars in gross bookings by 2024.
- But what have been saying for over the last 12 months? None of this matters, unless Uber can prove that they’re scaling their operations in a profitable manner. And when we look at Uber, we’re seeing a business that is quickly making the strides necessary to be on a path to real profitability. The two most important metrics we saw were in regards to EBITDA and margins.
- With respect to their EBITDA, Uber blew this out of the water and guided investors to over $1.68B. Uber has shown a knack for increasing profitability over the last few quarters, and this quarter was no different with EBITDA over 13% better than expected.
- With respect to their margins, Uber also blew these expectations out of the water. Margins came in at 38% which was 90 basis points better than expected! What’s even more notable is that while their competitors like Lyft and DoorDash, saw lower margins due to higher insurance costs, Uber was able to mitigate these costs because their global business allows them to offset them. While it may seem insignificant, over the long run, these higher margins will allow them to scale faster and offer a more competitive product.
Long story short, while everyone has always loved Uber’s product, 2022 marks the year that this product finally scaled.
Profitability is increasing and their opportunity is increasing too.
But guess what? We haven’t even gotten to the good part yet.
Did you know that ~75% of Uber’s costs are its drivers? Well, imagine a world where those costs were eliminated.
While it’ll be awful for all of the drivers affected, from a business perspective, this is an extremely unique opportunity.
There’s really no other business on the planet, that is this mature, that one day can eliminate 75% of its costs via technology.
While this is still years away, we know this is an eventuality for the ride-sharing global giant. So when will it happen?
It’s tough to truly say. Some sources say over a decade away while Cathy Woods thinks it’ll be integrated by 2026.
It’s likely somewhere in the middle — which still leaves us over 5 years away from this possibility.
While that may feel early to invest in, that’s really just the cherry on top for our long-term thesis.
In isolation today, Uber is still a business that is proving it can scale profitability while also expanding to new geo’s, products, and service lines.
And at its current price, that scalability is being undervalued! When comparing this to their peers, we see that Uber is trading below comparable companies of their growth trajectory.
Long story short, while Uber comes with significant risk (mainly due to timing and regulation), we’re comfortable initiating a position now, knowing we’re close to the stock’s all-time bottom price.
Uber could fall further and is not out of the clear yet, but we’re holding this stock for the next decade, knowing that the multi-year upside is at least over 300% from here.
Stock: Uber Technologies ($UBER)
Risk/Reward: High/Very High
Market Cap: $58B
Dividend Yield: 0%