Description

Uber Thesis:

We believe Uber’s equity is grossly undervalued – trading at 10x our estimate of 2024 unlevered FCF – given longstanding investor skepticism of its earnings power. Relative to its 2019 financials, Uber is on pace to 2.5x its revenue while generating substantially improved profitability —2,000 bps of operating margin improvement and now FCF positive —yet the enterprise is trading at a 30% lower valuation than at its IPO. Despite persistent media headlines to the contrary, Uber’s core ridesharing business, which enjoys approx. 70% market share globally, is already highly profitable (+25% EBITDA margins), and generates incremental margins north of 50%. We estimate that Mobility earnings alone value the enterprise at a mere 10x 2024 EBITDA (inclusive of pro-rata unallocated corporate overhead) for what we view as a dominant, highly profitable, network-effected platform with significant growth potential. This valuation entirely excludes its Delivery business, Uber Eats, which today accounts for 60% of total bookings—having grown 90% annually since 2018 despite being largely ignored at the time of the company’s IPO. The success of Eats, the largest food delivery platform in the world (ex-China), is evidence of Uber’s ability to leverage its brand, technology, and global customer base to cross-sell products that reinforce customer loyalty to Uber as a one-stop shop where users can ‘get anywhere, get anything’ within an hour while elevating utilization and earnings opportunities for drivers within its network.  

We believe Uber’s multi-product capability is an underappreciated structural competitive advantage versus its single-product competitors (Lyft, DoorDash, etc.). As the world reopens and, for the first time at scale, Mobility and Delivery are relevant consumer offerings, Uber is well positioned to leverage its multi-product capability to convert single-product users (83% of total out of 118mm monthly users) to cross-platform users (17%). The successful execution of this strategy should lead to compounding financial benefits considering cross-platform users spend 4x more, retain better, and can be acquired at a fraction of the cost relative to single-product users given native cross-promotion within the app. Uber is strengthening its cross-platform appeal by expanding into adjacent product categories such as grocery, alcohol, and non-food retail as well as through its newly enhanced membership program, Uber One, which has over 10mm U.S. members and is now being rolled out globally. In essence, Uber’s unique multi-product functionality leads to more value for the consumer, and thus more earnings potential for drivers and couriers – creating a virtuous cycle that deepens Uber’s competitive moat.

Uber is set up to meaningfully exceed investor profit expectations post-issuance of highly conservative 2024 EBITDA guidance of $5bn. While the market was unimpressed with management’s outlook, we believe management was wise to set a reasonable bar to establish a consistent record of financial outperformance. We believe strong and consistent execution should spotlight the enormous look-through profit potential within Uber’s business and its associated undervaluation. We note that management’s $5bn EBITDA target implies only a 15% margin, well below the company’s blended incremental margin target of 35%, which itself is weighed down by substantial reinvestment to support +20% top-line growth. However, we would underscore that the presence of massive TAMs, winner-take-most dynamics, and the disproportionate profitability that accrues to the market leader support management’s capital allocation strategy. Mature Mobility and Delivery markets are already generating 65% and 30% margins, respectively, which blends to a 45% margin. This puts Uber’s 15% margin guide for 2024 into proper light and clearly shows that 2024 profit expectations represent only a modest fraction of end-state profitability.

With Uber firmly in profit territory going forward, we expect investors will start appreciating and valuing the company based on its medium-term earnings power. We underwrite significant profit growth post-2024 as Uber’s consolidated margin gradually approaches its incremental margin target of 35% and, ultimately, its mature margin potential of 45%. For example, applying a 35% incremental margin to our 2024 revenue estimate yields $12.5bn of look-through EBITDA – implying that Uber is trading at only 3.5x. We estimate the intrinsic value for the shares is between $60 and $80 currently, implying a massive margin of safety with the stock at approx. $30. By 2024, we believe Uber’s equity could be valued at $100 per share when applying a 25x multiple to NTM EBITDA. We believe this multiple is warranted for an asset-light business with a semi-permanent earnings stream (i.e., global network effects) that would be still growing profits by 40%-50% annually.

Examining Most Cited Bear Points:

• Uber cannot achieve ridesharing profitability without raising prices, but doing so would curb demand and shrink its TAM
• Uber’s pricing power is underappreciated given the false narrative that ridesharing is an intensely competitive and commoditized industry with no network effects
• Uber’s +65% share in nearly every market reflects the unrivaled liquidity of its network that offers better earnings to drivers and greater convenience to riders through faster and more reliably ETAs
• As a result of this differentiated value proposition, Uber has been able to leverage pricing with both drivers and riders historically:
• Drivers: Uber has increased its take rate on driver earnings from 17% in 2016 to 27% in 2Q 2022 (note; some of the take rate increase is due to accounting changes)
• Riders: UberX and Lyft ridesharing fares have increased by 25% from 2019 to 2022, according to Yipit data, while U.S. trip volume is on a path to fully recover. This point firmly underscores the magnitude of demand inelasticity for ridesharing services
• While Uber’s currently elevated fares are a function of a supply-demand imbalance that should abate as more drivers return to the platform, we anticipate fares will normalize at levels higher than pre-pandemic levels without creating an undue weakening of demand given the historical existence of a consumer surplus for its services
• Uber has historically subsidized fares to build market share at the expense of short-term profit. However, now with 1) +65% share in nearly every market with a consolidated set of rational and mostly publicly-traded competitors (i.e., Lyft) focused on enhancing profitability; and 2) having habituated its customers to both the superior convenience and variable pricing model of its services, Uber should be able to maintain premium pricing.
• Importantly, Uber sits at the nexus of two highly fragmented groups that individually have few like-kind substitutes for Uber’s service, a structural industry dynamic that has and should continue to allow Uber to appropriately leverage pricing
• Drivers: Uber represents a low-skilled, flexible earning platform that is truly on-demand unlike contract driving for Amazon or FedEx. Driver hourly earnings net of depreciation, fuel, insurance, etc. easily exceed the minimum wage, but this does not account for the intangible value of the working flexibility afforded by the platform. Given the vast majority of Uber drivers drive less than 35 hours per week, this supplemental, on-demand source of income is critical to their decision in joining the network
• Riders: Uber’s network liquidity and mobile interface create a user experience that is unrivaled by analog modes of public and private transportation (i.e., buses, taxis, car services, etc.). Post-Covid, Uber is gaining share, not only at the expense of Lyft but more so from public transportation, per MTA data.
• Most importantly, despite persistent and arguably lazy media headlines to the contrary, Uber’s ridesharing division is already meaningfully profitable, having generated a 22% EBITDA margin in 2Q22 despite accounting changes that inflate revenue margin (take rate) and thus artificially lower EBITDA margin

• Uber Eats/Delivery is a bad business as evidenced by not reaching meaningful profitability despite achieving significant scale
• Uber has borne heavy upfront investments across headcount (technology, operations), marketing and marketplace incentives in building Uber Eats into now the largest food delivery business globally (ex-China) having only started 6 years ago
• These investments, which were warranted given the presence of a massive TAM, winner-take-most industry economics, and cross-platform synergies with both riders/drivers that deepen Uber’s competitive moat, masked Uber Eats’ economic potential at scale  
• After incurring substantial historical losses, Uber Eats/Delivery reached breakeven in 2H 2021, improving its margin by 2,200bps over 2020; the only way a company goes from a (22%) margin to 0% margin in a matter of a year is by scaling attractive unit economics
• As background, Delivery unit economics are highly sensitive to take rate which itself is a function of Uber’s commission on both restaurant and courier earnings
• Delivery bookings are split between three parties: restaurant (60%), courier (20%-30%), and Uber (10%-20%); as a point of clarification, the restaurant takes over 80% of the retail food cost, but its take rate is closer to 60% as bookings are inclusive of delivery fees, tax, and tips
• Uber has increased its take rate from 10% in 2019 to 19% in 2Q 2022 as it has been able to leverage courier pricing in parallel with improvements in network liquidity/density, which enables couriers to complete more trips per hour
• Uber monetizes this productivity improvement by reducing the per trip fee it pays to couriers while still enabling couriers to earn higher hourly wages by completing more trips per hour on its platform as well as batching orders
• In this way, logistics scale is critical to extracting unit-level profitability and hence why being #1 or #2 in a market is so important to long-term margin prospects. Uber Eats is #1 or #2 in 97% of its Delivery markets globally on GBV weighted basis
• Compounding advantages of marketplace scale, Uber Eats benefits from low customer acquisition costs given the natural migration of ridesharing customers within the app; Uber acquires more Delivery customers from Mobility than from its entire marketing budget, a structural advantage vs its pure-play competitors.
• Uber is targeting a 30% EBITDA margin in Delivery and notes that within its top 20 markets, 11 are meaningfully profitable with 5 well over a 30% margin
• Notably, the Delivery business generated incremental margins of 88% and 139% in 1Q22 and 2Q22, respectively, well above the long-term guidance targets; we believe this execution reflects Uber’s ability to rationalize marketing investments while still delivering strong bookings growth from customer loyalty, increased order frequency and upsell of new verticals (grocery, alcohol, convenience, etc.)
• Uber is also extremely early in monetizing the Uber Eats platform via ads ($225mm run-rate or 0.5% of bookings), which support significantly higher margins (+80% incremental)
• There are many case studies where vertical marketplaces lever advertising as a key monetization driver including Meituan (2% of bookings), Instacart (3%) and Amazon (5%)
• Uber is targeting $1bn+ of ad revenue by 2024, up from $141mm in 2021; while this rate of growth is impressive, $1bn of ad revenue would represent 1% of Delivery GBV by 2025, suggesting significant upside thereafter

• Uber could be disintermediated by driverless cars after divesting its ambitions for autonomous driving vertical integration
• We believe autonomous driving technology will represent a tremendous asset, rather than a liability, for Uber over time
• While there are many OEMs pursuing autonomous technology, including Aurora in which Uber owns a 26% equity stake, we believe full-scale commercialization of level-4/5 autonomous driving will likely be rolled out in stages over the next 5 to 10 years
• In addition to the extended timeline for commercialization, we believe the accessibility of autonomous will be anything but ubiquitous
• We expect that local governments to administer varying regulations concerning the use and availability of autonomous vehicles within their respective jurisdictions; as a result, the advent of autonomous driving is likely to be an incremental, not binary, phenomenon that plays out locally and over a protracted period
• If this is the case, it would imply that autonomous vehicles will be first and primarily used as a supplement to human-driven vehicles (i.e., safest routes are dispatched to autonomous vehicles while human drivers handle more complicated routes) within ridesharing networks
• As a result, whoever develops autonomous technology first will be inclined to license the technology to Uber’s global network, which not only includes the necessary human-based drivers to supplement the gradual inclusion of said autonomous but possesses a massive installed customer base with 120mm monthly active riders, in order to maximize the efficiency and scale of distribution and, as a result, return on invested capital
• Given this dynamic, we expect that Uber, as the largest global ridesharing and delivery network, will be in a competitively advantaged position to access autonomous vehicles, whether via Aurora, third-party providers like Waymo or GM’s Cruise, or both, when the technology is commercially and politically viable on favorable business terms
• Importantly, we expect the introduction of autonomous vehicles to substantially lower the cost per ride, which will not only improve unit economics by removing drivers that capture 75% of the fare and lowering insurance costs given safety improvements but massively increase the affordability of the service, thereby increasing the TAM – the ultimate bull case for the equity over the next 5 to 10 years

Catalyst

Earnings.