Is Uber overvalued? Can Uber rebound? November 2020 update

While Uber’s key business segments (ride hailing and food delivery) are expected to grow rapidly over the next 5 years, the road to profitability for Uber is unknown in the next 1–2 years. Uber is struggling to maintain market share in its core offerings while continuing to spend heavily in R&D on its future technology goals (e.g., autonomous vehicles). While the company may be profitable in the future as it is able to lower its costs and operate at scale by on-boarding new customers to its “transportation” platform with various services (and hopefully recurring revenue — e.g., Uber Pass), it seems unlikely that this will occur in the next 1–2 years.

Key Uber Drivers:

Strong industry growth

Uber has positioned itself as a global leader in the fast-growing ride hailing market, which is expected to witness strong growth; market reports estimate the global ride sharing market to grow at a CAGR of ~20% between 2019 and 2025, although temporarily negatively impacted by COVID-19

Uber has heavily invested both organically and inorganically in other fast-growing segments such as food delivery, which has accelerated given COVID-19 and stay-at-home orders, along with its freight and logistics business

Strong market share

Uber’s Mobility business has strong market share in most of the regions the country is present in, especially the U.S. at nearly ~70% market share, which translates into its ability to provide better value to its customers with lower wait times and sometimes lower prices. Uber also has a larger number of drivers given its dual mobility and delivery business lines offering a win-win scenario for its drivers with strong consumer demand and for its consumers with lower wait times and sometimes lower prices

Key Uber concerns:

No foreseeable route to profitability in next 1–3 years 

Over the long-term, it is difficult to identify how Uber will be able to generate a profit in its core markets of ride sharing and food delivery. The company is continuing to heavily invest in autonomous technologies to ultimately lower ride sharing costs (i.e., labor) and spending capital to gain market share in food delivery (i.e., acquisition of Postmates), making many analysts believe the company may be profitable in the future one day, but that is many years away; the company also has a large amount of long-term debt ($5B+) and continues to burn through cash

While Uber has witnessed strong growth in Q2 2020 in food delivery given stay-at-home orders as frequency and average order sizes increased, Uber has found it difficult to generate a profit with -$232M delivery adjusted EBITDA on $885M adj. net revenue in Q2 2020

Growing competition and loss in market share 

Uber is viewed as the market leader in the global ride sharing sector, but its market share has decreased in key regions (e.g., U.S.) with new entrants, making it difficult for Uber to retain customers as consumers may view Uber’s value proposition as the same as its competitors 

The delivery space is extremely crowded, and Uber is less prominent compared to its presence in ride hailing, competing against brands such as Grubhub and DoorDash, and the company continues to face profit generating worries as well

Employee cost concerns 

Uber continues to face pressures from legislative bodies (e.g., California) and other groups, especially in the U.S., to classify their drivers as employees versus contractors, which would raise the cost of operations and further negatively impact already bleeding Uber margins

Consumer headwinds / adoption 

COVID-19 negatively impacted the ride sharing / Mobility segment of Uber given stay at home orders and travel bans. The large shift to work from home has negatively impacted Uber, and this trend is expected to continue to some extent into the foreseeable future with many companies offering employees the opportunity to partly or fully work from home post-pandemic. This is expected to negatively impact demand for ride sharing 

Uber has already seen increased competition from other business models / substitutes like car-sharing as platforms like Turo and Avail have grown in the marketplace as consumers may prefer the ease of having a car, the privacy, and not having to be driven around by a stranger

Business Overview 

Source: Uber financials

Uber operates a transportation technology platform designed for mobility of people and things. Current offerings include people transportation (mobility), restaurant food delivery (delivery), and connecting freight carriers and shippers (freight). In addition, Uber is continuing to invest in autonomous vehicle technology and other mobility / platform offerings including Uber Works. Uber segments its offerings into 5 main categories:

1. Mobility: Uber’s Mobility division, previously known as Rides, is its ride-hailing business, which used to make up most of its revenue up until Q2 2020 given COVID-19 impacts. While Mobility revenues shrunk from ~$2.5B in Q1 2020 to ~$790M in Q2 2020, Mobility continues to remain Uber’s only segment that generates a positive adjusted EBITDA at $50M in Q2 2020
2. Delivery: Uber’s Delivery division, previously known as Eats, allows consumers to use its UberEats app to place orders to restaurants for delivery or pick-up. Uber leverages its ride-hailing platform to connect drivers to consumers for food deliveries. Given COVID-19 and stay-at-home orders, Uber’s delivery business skyrocketed in Q2 2020 reaching ~$1.2B in revenue, a ~48% increase from Q1 2020, though operates in the red, generating negative ~$232M in adjusted EBITDA given low margins
3. Freight: Uber’s Freight business is focused on connecting truck drivers to shippers looking to move freight in the most efficient way possible. The platform operates on a similar premise to the ride-hailing / delivery platforms in that it connects drivers with people looking for a ride / shipment needs. Uber Freight is a growing piece of Uber’s business up ~26% YoY, but only ~9% of Uber’s revenue as of Q2 2020
4. Advanced Technologies Group (ATG) and Other Technology Programs : Uber’s ATG program is focused on developing autonomous vehicles and autonomous vehicle technology with its numerous OEM partners (e.g., Volvo, Toyota) along with Uber Elevate, its concept for vertical takeoff and landing (VTOL) aircraft ride-hailing. Given the early nature of these projects, revenues for this segment are very small at ~$25M in Q2 2020
5. Other Bets: Other Bets originally consisted of Uber’s JUMP electric bike rental service, which ultimately was sold to mobility start-up LIME, and other segments such as UberWorks. Q2 2020 revenues for the segment were listed as ~$4M

M&A Activity update

In July 2020, Uber announced its actions to purchase Postmates for ~$2.65 billion. Postmates operates a similar business model to Uber’s delivery segment, but with greater market share in certain regions (e.g., U.S. West coast) and customer types  This acquisition was strategic given the rise in the food delivery market, and shows Uber commitment to growing within this sector as also seen by Uber’s previous actions to try and acquire GrubHub  As a result, Uber is most likely expected to go after other food delivery companies in the next few years as it competes to gain market share to gain economies of scale, potentially entering into the attractive grocery delivery market by acquiring Instacart

Financials update

Uber has seen a slight improvement in its current ratio since Q2 2019. After a large dip in Q2 2019, the steady improvement has brought it back in line with its peers and to a more acceptable and less risky level  While Uber’s gross profit margins are fairly stable, their operating and net margins fluctuate to a much greater extent, demonstrating an inability of the company to manage its expenses appropriately. The spike in expenses in Q2 of 2019 can largely be attributed to an increase in R&D expenditure. While gross margin of Uber is slightly better than its main competitor Lyft, the operating and net margins are not. This could be due to Uber offering complementary services with higher expenses as well as a weaker ability to manage its expenses

Key Uber risks

Operational: There is concerns on Uber’s business model and its ability to generate a profit as it continues to compete for market share in its mobility and delivery markets while continuing to heavily invest in R&D into future segments. While Uber may be able to generate a profit on a long horizon (e.g., 5–10 years), it is not expected in the near-term

Regulatory: Uber faces concerns of potentially having to classify their drivers as full-time employees vs. “contractors” which creates a major risk to the company as this would put strong pressures on already low margins

Competition: As it is relatively easy for consumers to switch between vendors given low switching costs, Uber will need to develop strategies to become extremely competitive to retain and build its customer base as that is the premise to get to profitability. The more customers that Uber can add to its platform through its services is the key to generating revenues, but given increasing competition, especially in food delivery, Uber may face challenges to differentiate in both local and global markets

Strategic: As Uber focuses its business across 5 different segments globally, Uber may lose focus and market share in certain segments / regions that could result in Uber being an average player across multiple areas versus a leader in one or two