UBER
Nov 3, 2022
We updated our valuation model as of Nov 3, 2022. We believe that Uber is now undervalued with an estimated fair value of $88.32 (the market price on Nov 3, 2022, was $28.81).
Since its inception, one of the main risk factors to Uber’s operations has been regulations. Just recently, the share prices dropped after a proposal from the Department of Labor indicated that gig workers might be classified as employees. At the municipal level, Uber’s operations are banned in multiple large cities around the world. See our report for more details. Despite these headwinds, as Uber becomes an integral part of the operations of small businesses and the daily routines of ordinary citizens of large cities, the regulators will have to adjust to the reality and change their attitude toward the disruptive technology of Uber. Therefore, we expect the regulatory risks to become less prominent in the coming years allowing for further adoption of Uber’s technology.
Uber launched initiatives such as Uber One, Uber Ads, and an improvement in the pricing of the trips, which in our opinion will have a positive impact on both driver and rider experience. The multi-modal platform keeps the users engaged and provides a steady source of income for drivers. Uber also has invested in autonomous vehicle technology as well as starting 10-year partnerships with two autonomous vehicle companies.
Uber’s back-to-work policies are appropriate as they moved away from full remote and are adopting the hybrid method. Uber also did not lay off or announced any plans to lay off employees.
Aug 1, 2022
Ahead of Uber’s Q2-2022 earnings call on Aug 2, 2022, we analyzed the available information on the company. In our opinion, Uber is undervalued, specifically in light of the positive steps that management has taken in the past few quarters in terms of R&D and marketing. But does that mean we will see an increase in prices tomorrow after the earning call? Not necessarily, although early indications show that we might see an uptick in the share price. We assign a 50% probability that the share price increases sharply subsequent to the earnings call. However, there is still a 50% chance that we don’t see a significant change, primarily because of the weight of macroeconomic trends, industry trends, and geopolitical tensions.
Facts: Let’s start with the facts and review what occurred in Q1-2022. Following the Q1’s earnings call, the stock dropped because Uber missed the expectation by a significant amount. See the following two graphs.
Source: Yahoo Finance!
Source: Yahoo Finance!
As evidenced from the charts and graphs above, in Q1-2022, although the revenue increased, the earnings were quite disappointing, resulting in a substantial earnings miss. That, in turn, caused the stock price to drop significantly.
But a further digging in the company’s 10Q shows that the main reason for the miss was unrealized investment loss. As a matter of fact, both revenue and operating income (loss) improved in Q1-2022.
Below is the screenshot from Uber’s SEC filing.
Excerpt from Uber’s SEC filing. Figures are in millions.
We’d like to draw your attention two lines:
1. Loss from operations decreased from a loss of 1.5 billion to 482 million. This is a significant improvement. In fact, if you look at the condensed quarterly income statement we constructed (see below), you notice that operating income has been improving quarter over quarter, despite the pervasive increase in the cost of good sold due to high inflation.
But what is more important to us is the amount of money the company is spending on ‘Sales, Genaral & Administration’ (SGA), the biggest component of which is ‘Sales and marketing’. Looking at the quarterly results, it is evident that Uber did not cut on Sales and Marketing, neither did they cut on Research and Development. We view this as a positive corporate strategy that will have a tremendous impact on long-term growth.
2. We’d like to draw your attention to the highlighted row in the excerpt above: “other income (expense), net”. The $5.5 billion expense line is actually loss on company’s investments. That might sound daunting, until we look at what the investments are:
- Didi: The main ride-share company in China. Didi is considered Uber’s competition, in which Uber has 11% ownership interest.
- Grab (Nasdaq: GRAB): Grab Holdings Limited provides superapps that allow access to mobility, delivery, financial services, and enterprise offerings through its mobile application in Cambodia, Indonesia, Malaysia, Myanmar, the Phillipines, Singapore, Thailand, and Vietnam. The company is headquartered in Singapore and Uber has 27.5% ownership interest in it. Click here for additional information about the acquisition in 2018.
- Aurora Innovation Inc (Nasdaq: AUR): an American self-driving vehicle technology company based in Pittsburg, Pennsylvania and in Mountain View, California. Uber has 25% ownership interest in Aurora.
As per Uber’s filling the loss on investment “primarily represents changes in the fair value of marketable equity securities, including $1.9 billion unrealized loss on investment in Grab; a $1.7 billion unrealized loss on Aurora investments; a $1.4 billion unrealized loss on Didi investments; and $462 million loss on Zomato investment.
What will the future look like for Uber?
In the short-term, it’s quite unclear because certain macro and industry-wide trends are in play and influence the pricing. The irrational response from non-sophisticated investors further complicates the short-term prediction of the price.
For Q2-2022, we estimate that the investment loss only will be approx $1.3 billion, comprising $253 million gain on Didi, $519 million loss on Grab, and $1.1 billion loss on Aurora. As per the image above, the consensus earnings for Q2 is close to Q1; therefore, Uber should show operating gain of $1.3 billion or more, which does not appear to be plausible.
Will investor see beyond the earnings miss and identify the real value in the company? We will find out the answer tomorrow.
Aug 2, 2022 - Update
Click here for Q2-2022 Uber’s report.
Uber’s results were better than market expectations. However, a little bit off-trend as per our forecast. This is nevertheless an excellent result, and markets responded favorably with a 19% increase in the price only in one day.
Our revenue expectation was close to the actual figures.
Operating expenses, administrative expenses, as well as research and development expenses were higher than our expectations.
The investment loss was significantly higher than what we projected. Remember that most of these investments are in the companies that are competition, and in markets that Uber has avoided.
Overall, we did not anticipate the impact of inflation and higher wages to be of such magnitude. The results are still impressive and show a good prospect of growth.
Conclusion:
At a price of $29.25 per share on Aug 2, 2022 session close (approximately 24% increase over the 2-day period), we still think that Uber has more potential for growth in the long run.
That being said, we expect an economic downturn in Q4-2022 or Q1-2023 which can impact all stocks. Uber’s CEO believes that the company is recession-resistant. Either way, if you plan to hold the stocks for more than 2 years, buying the shares at this price is reasonable.
SUMMARY OF THE COMPANY:
Uber Technologies is a global transportation network company that operates in over 700 metropolitan areas worldwide. Founded in 2009 by Travis Kalanick and Garrett Camp, the company has disrupted the traditional taxi industry and revolutionized the way people travel.
Uber's business model is based on connecting riders with drivers through its mobile app. Riders can easily request a ride and track their driver's progress through the app, while drivers can choose when and where they want to work. Uber takes a percentage of the fare as commission, and the rest goes to the driver.
One of the main advantages of Uber is its convenience. With just a few taps on their smartphone, riders can have a driver at their doorstep within minutes. This has made transportation more accessible and affordable for people all over the world. Additionally, Uber has created new income opportunities for drivers who may not have had access to traditional taxi jobs.
However, Uber's success has not come without controversy. Traditional taxi companies have accused Uber of unfair competition, arguing that Uber drivers should be subject to the same regulations and licensing requirements as traditional taxi drivers. There have also been concerns about safety, with reports of Uber drivers assaulting or harassing riders.
In response to these concerns, Uber has implemented a number of safety features, including driver background checks, two-factor authentication, and an emergency button for riders. The company has also introduced a rating system, which allows riders and drivers to rate each other after each trip, helping to ensure that both parties behave professionally.
Despite these challenges, Uber has continued to grow rapidly. In 2019, the company reported revenue of $14.1 billion, up from $11.3 billion the previous year. Uber has also expanded its services beyond ride-sharing, with the introduction of UberEATS, a food delivery service, and Uber Freight, a platform that connects shippers and carriers.
Overall, Uber has transformed the transportation industry and created a new model for on-demand services. While there have been challenges along the way, Uber's commitment to innovation and customer satisfaction has helped it become one of the most successful startups of the past decade.