Uber stock analysis and valuation - The disruptor

This week's stock analysis and valuation is Uber.

I hope you enjoy reading it and feel free to add your take and agree/disagree with what's mentioned below.

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The post is divided into the following sections:

• Introduction
• Historical financial performance
• The balance sheet
• Management's guidance
• Assumptions & valuation
• Valuation based on assumptions different than mine

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Introduction

Although Uber doesn't really need an introduction, I'll keep it short: It is a company that is disrupting the transportation industry. It is operating in 3 segments:

1. Mobility (Ridesharing, carsharing, micro-mobility, rentals)
2. Delivery (food and small packages - via Uber Eats / Postmates)
3. Freight transport

I wasn't that familiar with its freight transport, but in a nutshell, it is not significantly different in its technology compared to the other two.

All three segments are related to transportation. The first one - is the transportation of human beings, the second one - is the transportation of food / small packages, and the last one - is the transportation of goods via trucks.

What I was surprised about was how much Uber has changed over the last 5 years. To illustrate the change, take a look at the % of the revenue of the 3 segments in 2018 vs 2022:

Mobility: 83.8% --> 44.0%

Delivery: 13.0% --> 34.2%

Freight: 3.2% --> 21.8%

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Mobility increased in absolute terms but is overshadowed by the growth of the other two segments.

Despite COVID-19, Uber managed to not only grow in size (which will be shown in the next segment) but also become a more diversified business than any of its competitors.

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Historical financial performance

Between 2018 and 2022, the revenue grew at a CAGR of 30% (vs. Lyft - a CAGR of 17%) increasing from $11.3b to $31.9b.

Not only that its top line grew at an impressive rate, but the company also managed to reduce its operating expenses as % of revenue from 77% down to 44%. (For comparison, Lyft's operating expenses reduced from 88% --> 76% in the same period)

However, the gross margin is around 38% and is currently not sufficient to cover all the operating expenses of 44%, leading to a negative operating margin of 6%. (vs. Lyft negative 36%).

Analysts project the company passes the break-even point from an operating point in 2023.

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The balance sheet

Uber has kept above $4 billion in cash historically and is no stranger not only in acquiring companies but also in making investments. As of December 31st, 2022, its significant investments were:

- $1.8 billion in Didi (Chinese transportation company)

- $1.7 billion in Grab (Singaporean tech company involved in transportation, food delivery, and digital payments)

- $1.6 billion in government securities

- $0.9 billion in MLU BV (Joint venture with Yandex - The google of Russia) - In February it was announced that Yandex will buy the remaining ownership, so Uber will receive around $1b for it.

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On the other side of the balance sheet, there are 3 topics that I'd like to point out:

1. $11 billion in debt (including leases) - not extremely high comparing it to its market cap of $62 billion.
2. $5 billion liability related to insurance reserves - I will be deducting it from my valuation
3. $3 billion in accrued expenses related to legal, regulatory, drivers, and merchants liability - Same as above, I'll be deducting it from my valuation

The reason why I'm deducting points 2 and 3 is: These are recurring expenses that Uber faces and the company is deferring them from one period to the other. However, they have been incurred already. I do not do this for accounts receivable/payable as those are normally comparable in size and set off each other. However, a total of $8 billion cannot be ignored. At least, this is my approach.

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Management's guidance

Back in February of 2022, Uber had investor day and in the presentation, the management mentioned its long-term target to reach an adjusted EBITDA of 25%.

Any time that you read adjusted, my advice is to try to understand what is being adjusted. In the annual report, you can always find more information about it, including a reconciliation between the net result and this "Adjusted EBITDA", which is nothing else but an alternative profitability measure defined by the management.

In theory, to get from the net result to EBITDA, all one needs to do is add back, the interest, tax, depreciation, and amortization. However, here's what else Uber is adding back that is significant (which leads to the EBIDTA being adjusted):

- Stock-based compensation (roughly 5% of revenue - although a non-cash expense, it is an expense to the existing shareholders)

- Legal, tax, and regulatory reserve changes and settlements (I argue that these are normal and recurring expenses and should not be added back)

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When I try to assess the company's profitability, I try to estimate the EBIT in its pure form (the operating profitability). If I start with the management's target of 25% and I adjusted for Depreciation, amortization, stock-based compensation, and the expenses that I find recurring, the EBIT that the management is targeting is around 14%.

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Assumptions & valuation

As I am using my analysis to act upon them, I am always using a bit more conservative assumptions than the analysts (and the management). Here are my assumptions:

1. Revenue growth - 15% for the next 2 years, then decreasing to 10% by year 5 and further decreasing to 4% by year 10 (leading to revenue growth of 130% in 10 years time)
2. Operating margin - Breaking even in 2023, increasing to 8% by year 5 and then to 10% by year 10
3. Discount rate - 11% (WACC-based) decreasing to 10.4% by year 10

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After adjusting for what I've mentioned above related to the balance sheet (cash, debt, other liabilities) and the equity options outstanding, the value of Uber is $31.6 billion ($15.7/share).

For comparison, at the moment, its market cap is $61.8 billion ($30.75/share)

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Valuation based on assumptions different than mine

Of course, the future is uncertain and my assumptions could be significantly wrong. Let's take a look at how the valuation (per share) changes if we use different assumptions related to the revenue 10 years from now as well as the operating margin.

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Based on the table above, the market is valuing Uber as if it is going to reach the 14% EBIT that the management is targeting and grow its revenue by 200% over the next decade.

In my opinion, Uber has a great business and it has proven that it can expand both in different segments and geographically and is extremely close to becoming a profitable business.

I personally do not own any shares of Uber at this moment, but I am open to having it part of my portfolio if the price goes down to a more acceptable level. This is not financial advice, just a disclaimer.

As always, thank you for reading the post, and until next week for the next valuation!