Uber Stock: It’s All About Clean Up Earnings and Profits and Stop Dilution (Rating Update) (UBER)

There aren’t many companies on the scale of Uber (NYSE: UBER) that present attractive long-term opportunities for growth, margin expansion and increased cash flows.

While the threat of the autonomous vehicle is the popular explanation for Uber’s poor performance in recent months, I I argue that Uber is perfectly positioned to benefit from AVs.

Instead, I offer my own explanation – Uber needs to continue to clean up its financial profile, accelerate shareholder returns and show consistent back-to-back improvements in GAAP profitability.

Let’s dive in.

Recaping six months of underperformance

In July, we published an article covering Uber under the headline “Confused profit trajectory offsets growth outlook.” At the time, Uber shares were in the midst of a sharp selloff following record highs after the investor day.

At its investor day, Uber set the following ambitious growth goals:

In addition, the company announced a $7 billion buyback program and there have been several media reports of a potential sale of its freight business. Investors have been justifiably excited about a company that is poised to grow at a rapid pace for the foreseeable future, but is no longer at the expense of shareholders. Rather, Uber has committed to becoming a low-cap margin expansion story and shedding non-core activities.

However, the first-quarter report immediately poured cold water on investor enthusiasm as Uber’s GAAP numbers took another step in the wrong direction. Additionally, the impending launch of Tesla’s Robotaxi has sparked fears of disruption.

As a result, Uber shares have underperformed the market by more than 20% over the past six months, although it should be noted that the stock is up more than 3x from its 2022 lows.

So is this a buying opportunity? Let’s find out.

The Uber investment thesis

While I hate that Uber provided mid-term targets using the wrong metric like adjusted EBITDA, I don’t think you can be anything but impressed with such ambitious targets.

I don’t know of many companies that can commit to mid-to-high-teens growth with a $40B+ revenue rate and a 30%-40% EBITDA growth target reflecting a near-doubling of margins.

The revenue growth algorithm

Double-clicking on the trajectory, Uber’s revenue growth algorithm consists of three main pillars – Users; Frequency and engagement and; New products.

First, the users. Uber has under 20% penetration in its top 10 markets and much lower than in the others. The last time they provided this figure, the company was talking about 10% penetration, so there is already a significant improvement. With 156 million monthly active customers, up 14% y/y, I see Uber reaching 300 million by the end of this decade.

Second, frequency and engagement. Through Uber One membership, merchant discounts, an expanded selection of delivery and mobility options, and improved targeting capabilities, Uber is consistently increasing engagement and usage. The average consumer interacts with Uber six times per week, and trips per monthly active customer reached an all-time high of 17.7 last quarter.

Finally, new products. Currently, this primarily includes advertising, but we can also put a wide selection under this bucket. As Uber continues to introduce more offerings that monetize its highly engaged customer base, it is increasing its consolidated growth rate. For example, advertising has a run rate of $1 billion, growing over 50% y/y. Merchant-financed deals are up 70% y/y, and grocery is also growing fast.

In short, I see Uber’s mid-to-high-teens growth target as more than achievable for the foreseeable future.

Margin expansion and cash flow opportunity

If you look at markets like Booking Holdings (BKNG), they can be extremely profitable businesses. The main reason is that below the gross margin line, which for Uber is about 40%, all other costs are fixed.

This means that as the platform scales, Uber should benefit from significant operating leverage.

As you can see, almost all lines of operating expenses as a percentage of sales are in sharp decline, and there’s no reason why this won’t continue. I don’t expect such significant improvements in the future because there isn’t as much fat to trim as there was a few years ago, but I do expect a steady margin expansion.

Plus, Uber is already a very capital-light business, with less than 1% of revenue going to investments.

The bottom line here is simple. This is a growing teenage company with a clear path to more than doubling profit and cash flow margins. Such trajectories are the kind that have led to significant market returns.

Market positioning and autonomous vehicles

Not long ago, Uber’s mobility and delivery markets were highly competitive and very crowded. Most players were “buying” their customers and operating at huge losses. Back then, it wasn’t really clear whether these businesses could become profitable.

Then came the market correction. Many players were crushed and went out of business, while others were forced to rationalize their prices and costs.

Today, Uber has DoorDash ( DASH ) as its main competitor in delivery, and Lyft ( LYFT ) in mobility. In both categories, Uber is the number one player in terms of revenue, with a much more significant lead in mobility. In fact, DoorDash has surpassed Uber in gross booking deliveries and continues to gain market share, but its take rate is much lower. On the contrary, Lyft is losing market share to Uber.

Participation in both markets is highly beneficial as there are significant synergies between technology, customer acquisition and driver adoption. Plus, there are tons of cross-selling options that no one else can offer.

With Uber’s lead in these markets all but certain, investors see autonomous vehicles as the only real threat to the company’s success.

Frankly, I think the risk of AV is greatly exaggerated. If anything, it could be another engine of growth.

Here’s what Uber CEO Dara Khosrowshahi had to say on the recent call:

Uber is uniquely positioned to deliver tremendous value to AV players looking to deploy their technology at scale. While the operation of a hail network may seem simple, our technology hides a great deal of complexity. We handle approximately one million trips per hour and our average ETA globally is approximately four minutes. This is possible thanks to marketplace technology that makes over 10 million predictions per second, and more mundanely, we handled over 25 million lost items last year alone.

We also know that a key factor in AV commercialization will be asset utilization. AV players will need to ensure that their expensive assets are used as close to 24 hours a day as possible, while also managing the daily and weekly peaks and valleys of hail activity. Uber can deliver enormous demand without AV players having to invest capital in acquiring customers or building the marketplace technology that delivers reliability to the standard consumers have come to expect.

That means Uber will be an indispensable partner for AV players of all kinds. We are in advanced discussions with AV players globally to join our platform and will have more announcements in the coming weeks and months.

Sorry for the length, but I think it does a perfect job of explaining why Uber has nothing to lose from AVs. In fact, Uber has already partnered with more than 10 AV players, including leader Waymo.

As of this writing, Uber shares are up nearly 5% following a Waymo partnership announcement. This is further evidence of Uber’s appeal to AV manufacturers.

The big elephant in the room is, of course, Tesla (TSLA). Many people assume that Tesla will operate its own platform for Robotaxis, which is a key factor in the recent wariness of Uber stock. Tesla is expected to have a Robotaxi as early as October, which should shed some light on its plans.

Personally, I think history shows us that expectations from Tesla are usually overblown, both in terms of launch timing and its impact on competitors.

In short, I think this is a risk that investors would be wise to exploit.

Cleaning up the P&L and stopping the dilution

As I wrote in my previous article, Uber is one of those companies whose GAAP numbers are always noisy due to relatively large shareholdings, constant legal fees, high exposure to FX and other non-operating expenses.

I think the company can do a better job of making it easier for investors to understand their relevant numbers, and their reliance on an adjusted EBITDA figure that excludes certain basics like stock-based compensation only makes it more difficult.

In fact, I’m pretty confident that if it had set its 30%-40% operating profit guidance, the stock would be trading much higher.

Another topic to consider is dilution, as despite announcing a $7 billion guidance, Uber is still buying fewer shares than it is issuing.

I assume the recent debt issuance will help accelerate buybacks, and stock compensation has been relatively flat for 9 consecutive quarters.

So Uber is making good strides, but it’s not quite there yet. This brings us to evaluation.

ASSESSMENT

Uber trades at a forward FCF yield of 3%, minus SBC. This is quite low given the company’s growth prospects.

However, call me old fashioned, but I believe P/E is still the most important metric to consider for a simple understanding of a company’s valuation.

Uber currently trades at 65 times ’24 earnings and 34 times ’25 earnings. However, noisy P&L makes these estimates less reliable.

All in all, I think Uber is pretty overrated or slightly underrated considering all of the above. If it was a clean P/E of 34x, it would be a hugely attractive buying opportunity, but it isn’t.

My short-term price target is $82, reflecting a 37x multiple on 2025 estimates.

Conclusion

Uber has one of the most attractive growth trajectories for a company of its size, in addition to a clear path to margin expansion and accelerating buybacks.

The company’s noisy P&L, dilution and reliance on adjusted metrics make it difficult to assess its underlying earnings strength. That, combined with AV risk that I consider overstated, weighs on the stock.

I think the right path for investors is to initiate a position here and continue to add to it as Uber’s financial profile matures. I’m sure that when buybacks accelerate and the company delivers a few consecutive quarters of GAAP margin expansion, the stock will rise.

So I’m upgrading Uber to “Buy”.