Description

Thesis: UBER is a reopening play that has been made even stronger by COVID, as the pandemic accelerated growth of their Food delivery business (Uber Eats) and forced Mgmt to shed unprofitable business/ventures. As a result, the company is nearly breakeven on an EBITDA basis and will soon see an inflection upward as the Rides business continues to recover and Eats stays. Uber shares should outperform as this inflection becomes fully apparent.

Further the recent IPO announcement by Didi and pending SPAC merger for Grab should also provide some uplift in valuation for Uber’s stakes in both companies.

Despite the Nasdaq 100 being near record levels, UBER shares are now -2% YTD and ~20% off their Feb highs. Meanwhile a SOTP based on conservative assumptions (both core segments trading in-line w/Peers and investments at BS values) implies upside of ~25%, while a more realistic set of assumptions (slight premium to peers and stakes in Didi/Grab at closer to market value) implies upside of ~55%.

Shares could re-rate even higher if investors start to give the company credit for its huge platform and superior marketshare.

Company Overview & Recent History –

UBER was previously written up by another member, and you can refer to that write-up for additional background

Key Highlights

• Rides segment will benefit from the reopening and pent up demand, and may also see some tailwinds from other Covid ‘after-effects’
  • We are already seeing Uber’s Ride segment see a robust recovery in countries where the vaccine rollout is in advanced stages (UK, US) or where COVID is well controlled (Asia ex-India)
  • Reopening leads to move airport travel & night life which translates to more trips to airport and more late night trips to/from bars/clubs
  • UBER actually benefits from the uptick in crime seen in big cities as public transportation remains out of favor despite vaccine rollout lessening covid concerns
  • More telecommuting makes UBER a more viable option for less routine physical commuting
    • There is less traffic on road, and UBER is more affordable if you are only traveling 1-2 days a week (also much more convenient/easier to work during commute relative to public transit alternatives)
  • Near term the Driver shortage due to COVID & stimulus payments dynamics has been a headwind on recovery in their core mobility segment but should alleviate in Q3-Q4 as the additional unemployment benefits expire

• Eats has not been negatively impacted by the reopening and the segment continues to enjoy positive momentum, suggesting that the change in consumer behavior is more permanent than many first thought. This segment will continue to grow rapidly as they expand into new verticals beyond meals (like Grocery and Alcohol delivery) and continue to innovate (selling data, partnerships, etc)
  • EATs benefitted from COVID as users increased and learned new behavior
  • Restaurants are also now far more integrated with takeout services like Eats, DoorDash and GrubHub. They are committed to continuing this as off-premise helps drive overall comps
    • Eats has >10k brands on platform now vs 3k at beginning of 2019
      • Examples include Panera announcing deals with UberEats, Grub and DoorDash.
      • Recently Cheesecake Factory mentioned that they are now comping ~10% above 2019 levels thx to 1/3rd off premise mix
    • Driver shortages are an issue for Uber near term (especially on the Rides segment), but these labor shortages can help the Eats segment as they discourage restaurants from employing their own in-house delivery service
  • The Eats segment will continue to innovate and expand into adjacent verticals like grocery
    • Uber Bought Postmates (meals), Drizzly (alcohol) and Cornershop (grocery delivery)[1]
      • Non food delivery was also aided by Covid
        • Macy’s and Petco started using DoorDash drivers to deliver their online orders during COVID
    • UBER Eats and Softbank backed GoPuff recently announced joining forces to better compete with DASH and InstaCart
      • GoPuff is investing in infrastructure for micro distribution to meet consumer demand for lots of CPG products
  • Uber and peers have figured out how to monetize data and sell ancillary services back to vendors
    • Uber Eats and Door Dash have been able to harvest data and advise restaurants/sellers on what is in demand by specific areas/neighborhoods, timing of demand and other consumer behavior.

• Addition by subtraction – COVID Forced UBER to shed unprofitable businesses/get rid of bad stuff
  • Uber had already exited several ridehailing and delivery markets prior to the pandemic hitting – but then exited e-scooters/bikes (JUMP), autonomous vehicles (ATG), and flying taxis (OTP/Elevate).
    • They structured most of these exits to retain some upside in the business, including a 26% stake in Aurora, the entity that bought ATG.
      • The ATG sale agreement also includes a partnership in which Aurora would use UBER’s platform for autonomous vehicles in the future
  • UBER’s LT goal at time of IPO was for 25% EBTIDA margin however this included several unprofitable ventures. Meanwhile their LT goals for core segments are much higher, at 45% for Mobility and 30% for Delivery
    • Implies that Uber’s updated LT target would be higher than 25% (especially if they divest the Freight biz), whereas LYFT is only targeting ~20% EBITDA margin.

• Inflection will drive outperformance
  • According to Mgmt Uber is currently on track to turn EBITDA positive in H2’21, and ST also has FCF inflecting to positive by Q4’21
    • With $5.7b of cash vs consensus FCF burn of ~$1.25b in 2021, Uber is fully funded and wont have to come back to market
  • Stock will outperform as this inflection in EBITDA/Cashflow becomes apparent
    • We've seen this happen before with numerous other tech companies – most recently with SNAP

• New Mgmt will take Uber to the next level
  • New Mgmt is better equipped to lead UBER into next phase, with a focus on margins/profitability, rather than only focusing on sheer growth while wasting money on autonomous and other projects
    • Prior Mgmt was good for getting Uber to where it needed to be, but was overly combative with many govt’s and had other issues (scandal, etc)
    • New CEO has been with Uber since 2017 and has a solid track record at Expedia and IAC

• Regulatory issues have taken a back seat for now
  • UBER had been weighed down by regulatory concerns given DOL on driver’s employment status, albeit Mgmt made positive commentary here about convos with regulator and “varying views within the biden admin”.
  • Meanwhile DOL also recently said they are not ready to offer new rules near term.

• Combination of a massive platform and leading marketshares across segments/geographies is deserving of a premium valuation vs peers
  • Uber has #1 market share in almost all their markets for Rides
    • Uber has market share of 65%+ in every region other than India at ~50% and has nearly 70% marketshare in US vs. Lyft at closer to ~30%
      • Note the few exceptions here are countries like Russia and China, but UBER has stakes in a number of their foreign ride share competitors[2]
  • Eats is the largest global Online Food Delivery platform outside of China, with leading category positions in many international markets incl Japan, France, Mexico, Australia, and Portugal. Uber also made several acquisitions in delivery in recent years to either consolidate competition or expand into related submarkets.
    • Eats is the #1 or #2 player in nearly all of its geographies, but the space is becoming increasingly crowded, especially on the international side.
    • Mgmt claims that Eats is currently #1 in 8 of its top 11 markets
    • Data from Second Measure and Edison Trend estimate UBER’s US marketshare at ~30% behind DoorDash at ~45% and ahead of GrubHub at ~20%
  • Uber can exploit lots of cross platform advantages here, which helps margins provides a competitive advantage
    • Bulls point to the network effect as increasing the value of Uber’s data
      • They draw analogies to companies like Google and Facebook which sees benefit from network effects associated with data. Basically more searches lead to better algorithms and better results, which creates positive momentum and leads to even more searches
      • UBER can see similar benefits for their own algos and optimizing items like supply/demand which could lead to more rides, etc
    • Potential for Uber to be seen a disruptor which could further help valuation (think more controversial names like Tesla)

• Other stakes represents further upside optionality (call option on other ride sharing and other businesses)
  • Majority of investments is tied to Didi equity (~13% stake value on BS at ~$6b), and Grab debt (~16% stake in Grab via convertible debt value at ~$3.6b). Their 26% stake in Aurora (ATG) was only valued at ~$570m
    • Didi is pursuing an IPO, and Bberg had previously reported that the company was pursuing a valuation of ~$70-100b, which would imply Uber’s stake is worth ~$9-13b
    • Grab is combining with a SPAC, Altimeter Growth. Although the transaction was recently delayed until Q4, Grab’s filings in April set their pre-money valuation at ~$31b implying ~$5b value for Uber’s 16% stake

Valuation:

• Uber Trades at ~4.4x EV / 2022 Revenue vs LYFT at 3.9x and Food Delivery peers at ~4.6x
  • Excluding investments valued at ~$10b (same as BS), Uber trades at ~4.0x ’22 Revenue
  • Ex investments valued at $18b, Uber trades at 3.6x ’22 Revenue
• Using relatively conservative assumptions, SOTP produces implied value of ~$62/sh, representing upside of ~25%
  • Rides gets slightly premium to LYFT, while Eats segment multiple in-line with recent deals by TKWY/GRUB, investment stakes at BV and relatively little value assigned to Freight)
• A more realistic scenario produces above >$75, representing upside of ~55%
  • Assumes Rides at a 1x premium to Lyft’s current multiple, while Eats segment trades at ~6x ’22 rev (in line with Avg multiple of peers DASH, TKWY and DHER)

Catalyst

-          Uber reaches positive Adj EBITDA in Q4 as driver shortages and Covid headwinds dissipate

o    Delivery continues momentum and while Rides segment sees faster recovery

-          Uber’s other stakes receive more credit from investors as recent deals to go public close

o    Didi IPO is successful

o    GRAB Merger with Altimeter Growth SPAC closes in Q4

-          Regulatory issues are settled favorably

o    Driver Classification issue with DOL is an overhang

-          Divestiture of Freight Brokerage

o    Likely margin accretive and would further simplify Uber with just 2 core segments remaining (Rides & Eats)