In the competitive environment of the gig economy, Uber Technologies Inc. (NYSE:UBER) has succeeded in capturing market share through brand presence, expanding operations in new geographies and was added to the S&P 500 Index. The company generated positive net income for the first time in 2023, though that was due to its unrealized gain position in its Aurora investment.
Diversification into various product lines has allowed Uber to generate multiple revenue streams. However, it faces critical challenges, including increasing expenses, debt obligations, the treatment of drivers as employees instead of contractors, legal and regulatory issues hampering the company's entry into new jurisdictions and stiff competition from a number of industries.
How Uber navigates these challenges while attempting to maintain its growth rate will determine its future trajectory.
Financial analysisUber was net income positive for the first time in 2023, but this was primarily attributed to the unrealized gain of its equity investment in Aurora Innovation Inc., owing to Aurora's high stock price toward the end of the year. For the first quarter of 2024, the unrealized gain position has turned to a loss due to the depression in Aurora's stock, negatively affecting Uber's positive net income position. Regardless, the ride-hailing company was able to decrease its expenses for 2023, indicating an efficient operation.
Management's approach of focusing on Ebitda may not be the right one, however. Uber has considerable interest expenses due each year and its inability to generate sustainable profit is of concern for shareholders with a long-term vision. Current liabilities have been on a steady rise over the past several years and elevated debt levels can negatively impact the company's profits and stock price if the U.S. enters a recessionary environment.
Stock performanceTrailing 12-month earnings per share for Uber as of March 31 were 63 cents, a decline of 137% year over year. The current stock price of $67.73 gives the stock a price-earnings ratio of 107.50. For reference, Amazon's (NASDAQ:AMZN) earnings multiple is around 53.73 and Alphabet (NASDAQ:GOOGL)'s (NASDAQ:GOOG) price-earnings ratio is 28.39; both companies have produced years of record profits, but are still valued at more modest price levels compared to Uber.
The stock performance of Uber's biggest competitor, Lyft Inc. (NASDAQ:LYFT), has also been poor over the last five years. Lyft is currently trading at a price-earnings ratio of -3.50 as it has not generated a profit yet, but this is still a better position to be in since Uber's valuation is too high to buy at current levels.
Uber possesses a skilled workforce, has strong technology infrastructure and has consistently increased revenue year over year. Despite these factors, the company has not been an able to turn a profit. Investors like expected better results as the company has been in operation for over a decade. However, poor results in 2021 and 2022 may have contributed to the company lagging the S&P500 Index since its initial public offering in May 2019.
Even if Uber achieves all its growth targets and can be consistently net income positive in the coming years, an investor would be spending too much of their capital to buy a share of Uber at its current price level. The stock has rallied over the last year since the announcement of its inclusion in the S&P 500 Index. An investor in Uber would be better off cashing in on their profits at the current price and buy again when the price returns to a more reasonable level.
The chart below illustrates how a $100 investment in Uber on its IPO date would have grown through Dec. 31, 2023.
Source: Nasadq
Competitive environment and risk considerationsAs part of a growing gig economy, Uber faces considerable competition across multiple fronts that significantly challenge its future growth prospects. Due to the nature of its business, the company competes not only with other ride-sharing services, but also with local taxicab services, public transportation and private owners. The integration of technology and transportation allows for new players to enter the market in an industry where consumer tastes can shift quickly. For example, private chauffeur services are a new development within the ride-sharing industry that directly competes with Uber's business model. The emergence of companies like Zofeur in the United Arab Emirates that allow a user to hire a driver to drive their own private vehicle is a challenge for Uber, whose function is to act as a third-party intermediary between the driver and the traveler.
A significant risk to Uber is through competition with local providers with whom customers have an existing history. For example, in India, the company not only has to compete with standalone ride-hailing providers like autorickshaws and taxis, but also with local call-to-hire services like Fasttrack India that have carved niches within cities for their services. These companies offer lower prices and have also occupied a heavy share of the airport cab services market, a sector that Uber has earmarked for growth opportunities. Uber has to continually lower costs in order to remain competitive against these local providers, often affecting the bottom line.
Uber exists within a landscape that is fiercely competitive and the decision to venture into freight may prove to be a poor one. The company has not been able to generate adequate revenue from the business while adding significant costs and diverting resources away from managing its core businesses that have been the primary drivers of growth, Mobility and Delivery. Within these two industries, Uber retains its competitive advantage with its superior tech infrastructure and strong brand presence generated over the past decade. But in the freight industry, Uber is in competition with companies with a long-standing history and strong logistical networks. Profit margins within the freight industry are tight, with companies like DHL generating a profit margin of 6.40% in the first quarter of 2024. Uber may not have the resources to generate this division into a profitable enterprise over the long term.
Legal and regulatory challengesThe effect of negative media coverage has dampened Uber's brand image over the last 10 years. A primary challenge is the legal consideration of drivers as employees and not as independent contractors. In Massachusetts and New York, Uber paid settlement fees of $175 million and $290 million.
Uber also paid $172 million in a class-action lawsuit in Australia after being sued by taxi drivers for aggressively moving into the country. The company has been in multiple other controversies throughout its history, ranging from sexual harassment and racism charges to tax evasion and evading local regulations.
Such negative publicity is of detriment to a company for whom brand image is critical to driving revenue and capturing market share.
Uber also faces restrictions in markets like Brazil, India, Germany, Spain and Japan. These countries, identified as expansion markets, have adopted laws and regulations that can affect ride-sharing platforms. For example, the government in Barcelona, Spain has imposed restrictions aimed at reducing the number of private cars transporting passengers through apps like Uber in order to protect the interests of taxicab services.
Results and growthIn a highly competitive environment, Uber has managed to grow at a consistent rate. The company has one-fourth of ride-hailing market share, far ahead of the next biggest competitor.
Source: Statista
Gross bookings have increased multi-fold in multiple geographies:
Source: Uber Investor Update
Despite gaining a quarter of the market and expanding its user base in multiple jurisdictions, there remains a question over whether such consistent results can be expected to continue at the same rate in the future. In Spain and Latin America, for instance, the company faces competition from Cabify. It is also seeing competition in Indonesia from Gojerk and in India from Ola. It may be the case that Uber soon reaches the maximum possible growth in these markets.
As a result, the company is focusing on increasing its presence in the airport transport sector. Airports are a $10 billion industry, but Uber is still less than 10% penetrated on global airport trips. After multiple lawsuits, there is potential for growth with the company's collaboration with local taxicab drivers, which has generated more revenue for both Uber and the taxi drivers, eliminating a competitor from driving away sales. Increasing its market share in developing economies like Brazil and India can contribute to significant growth.
There is big opportunity in the number of trips per user segment as well. Currently, 50% of users take only one to two trips per month. If all the one-time users became two-time users, that would lead to an increase in gross bookings of $4 billion. If the company can transform the occasional users into regular customers through offers and price discounts, there is an opportunity to increase revenue.
Another area of focus is the increase in the monthly annual platform consumers. Currently Uber has less then 5% monthly consumer penetration. With more young people turning 18 and using smart phones for their day-to-day activities, there is a large opportunity to increase the MAPC count across both Mobility and Delivery.
TakeawayAlthough the company has delivered consistent results and has continued to expand over the last two years, increasing revenue at over 15% year over year while simultaneously tightening operations by reducing inefficiencies in the value chain and cutting expenses, I believe Uber has a long way to go before I can consider it an appealing long-term opportunity. As I have explained, the positive net income the company generated in 2023 was mainly due to unrealized gains on its equity investments that have since turned into unrealized losses. For the paltry level of earnings, the stock appears to be largely overvalued at its current level.
From a long-term investment perspective, the stock price has been volatile and the company's commitment to not paying dividends for the foreseeable future implies gains for a stockholder in Uber can only arise from capital appreciation. The stock has been unable to beat the S&P 500 Index since its IPO.
Uber also faces competition across the multiple domains it is involved in and there are various risk factors to consider that can seriously impact its performance over the medium to long term. The company has also been embroiled in lawsuits and controversies since its inception.
At this point, considering the high share price, I would suggest a long-term investor sell their shares as I believe Uber is overvalued. The investor can pocket the gains they received if they have held the stock for six months or longer. If second and third-quarter results are positive and the company can start generating profits, Uber has the potential to become a long-term holding.
This content was originally published on Gurufocus.com
