Stock Fundamentals

Buy this rare, under-valued sharing economy stock

Hari Viswanath BL Research Bureau | Updated on September 04, 2021

Compared to peers, this also comes with cross-selling advantages/ability that can function like a super app

Long-term investors can buy the stock of Nasdaq listed Uber Technologies (UBER). A pioneer of the ride hailing business and now a leading player in the food-delivery business as well, Uber is well positioned to capitalise on the growth prospects for the sharing economy, which appears well set to gain further steam in the current decade.

As is the case with the entire cluster of companies in the sharing economy space, UBER too is currently unprofitable. However, trading at 4.1 times next 12 months EV/Revenue (Bloomberg Consensus), the risk reward is favourable considering consensus expectations of 43 per cent revenue CAGR for CY20-22 and expected to reach annual profitability in CY22 with EBITDA margins of 6 per cent. The company also has a strong balance sheet with negligible net debt. The stock is now more attractive after a 25 per cent decline in the last six months.

Rewards can be outsized if the company attains sustainable growth in profit. However, the risk of underperformance remains if competitive intensity across geographies sustain and profitability is delayed. In a world with exponential growth in digitisation, UBER also comes with multiple monetisation options such as around 12 per cent stake in Chinese ride hailing company Didi, and more importantly, user data for analytics from global operations and investments in driverless car technology. While UBER has sold its driverless car unit, known as the Advanced Technologies Group (ATG), to Aurora Innovation, it now owns 26 per cent stake in Aurora as part of the transaction.

Compared to other sharing economy companies that are focussed on single business verticals, Uber also comes with cross-selling advantages/ability across its platform which can function like a super app. That being said, globally the sharing economy business is still evolving. Hence, one must ensure that they have tolerance for high risk and volatility before booking this ride.

Business prospects

Uber operates in mobility segment (55 per cent of CY20 revenue) which consists of its global ride hailing business across vehicle categoriesin multiple geographies This also includes activities related to holistic B2B mobility offerings for businesses. Uber estimates it has a leading ridesharing category position in every major region of the world it operates in.

Two, Uber deals in delivery segment (35 per cent) which consists of local restaurant discovery, food order pick up/ delivery and also grocery/convenience store deliveries. Three, freight segment (9 per cent) which connects carriers (ie trucking companies) with shippers via its technology platform. Four, Uber’s interest in ATG and others (1 per cent); this segment is responsible for development and commercialisation of autonomous vehicles and ride sharing technologies. This will now be done primarily via its partnership with Aurora Innovation.

Currently Uber’s business model consists of generating revenue from fees paid by drivers (ride hailing) and merchants (restaurants/delivery, trucking companies/freight) for use of its platform. This is driven by the ‘take-rate’ i.e. revenue as a percentage of gross bookings made in its platform. In CY20, the take rate for its mobility segment was 22.9 per cent (21.5 per cent in 2019) and 12.9 per cent (9.7 per cent in 2019) for the delivery segment.

As of end CY20, Uber operated in 71 countries other than the US. For the year, North America and Canada accounted for 59 per cent of revenue, Latin America 12 per cent, EMEA 19 per cent and APAC 10 per cent. Globally, it had a significant 93 million monthly active platform users in Q4 2020 (MPAC-unique customers who used its platform at least once a month).

 

Financials, recent performance

Uber had a mixed year in CY20 with its mobility business facing the brunt of pandemic related lock downs and reduced social activities/mobility. At the same time, it benefited from the significant pick-up in food delivery business . Its mobility segment revenue for the year declined by 43 per cent for the year, while delivery segment grew at a scorching pace of 179 per cent. In terms of gross bookings, the delivery segment is now the largest segment accounting for 52 per cent of CY20 revenue, although its contribution to revenue is lower than mobility due to the lower take-rate for the segment.

The company reported consolidated revenue of $11.14 billion and adjusted EBITDA of negative $2.53 billion. The adjusted EBITDA margin of negative 20 per cent, is not unusual in the sharing economy sector, especially in a pandemic year. Also, the company is already adjusted EBITDA positive in its mobility segment.

Post the mixed performance last year, Uber has already started seeing a good rebound in CY21. In Q2 CY21, company reported revenue of $3.91 billion, five per cent above consensus and up 147 per cent y-o-y with strong growth across segments.

Adjusted EBITDA margin improved to negative 13 per cent. The company further re-affirmed reaching EBITDA break-even at company level by Q4 of 2021. This could mark significant catalyst/inflection point for the company when achieved.

Published on September 04, 2021

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