UBER: Expanding Driverless Rides Will Accelerate Market Leadership Over Rivals

Key Takeaways

• Analysts expect Uber Technologies to keep using its expanding user base, product breadth and cross-platform behaviours, such as 3x higher spend from multi-product and member cohorts, to support growth and retention across mobility and delivery.
• The main thing that has to go right is that Uber turns heavy spending on autonomous vehicles, membership, AV labs and large-scale integrations such as Delivery Hero into durable unit economics that offset complexity, regulation and competitive pressure in both core businesses.
• At today’s valuation, and with management repeatedly describing Uber stock as cheap and committing over US$10b of trailing 12 month free cash flow, sizeable buybacks and AV investments, the numbers imply the market is not fully pricing in the earnings and cash flow that this narrative believes will accrue to the share price.

What Uber Technologies Does

Uber Technologies develops and operates technology platforms that connect consumers and businesses with transportation, delivery and freight services. The company earns revenue primarily through transaction-based fees on these services.

Catalysts

What are the underlying business or industry changes driving this perspective?

• Ongoing expansion of Uber Technologies into sparse and underpenetrated markets, where less than 10% of eligible consumers have used Uber in the past 12 months compared with over 50% in dense markets, is adding new users and trips that can support higher gross bookings and revenue over time.
• Cross-platform integration between Mobility, Delivery and new verticals is being reinforced by Uber One. The program has over 50 million members, is growing about 50% year on year and now accounts for roughly 50% of bookings. Any further lift in member mix and 3x higher member spend can deepen engagement and support consolidated net margins.
• Significant investments and accelerating partnerships in autonomous vehicles, including multi-partner deals, AV-focused vehicle commitments of around 120,000 cars and AV labs data collection, are aimed at building a commercialization layer that could gradually shift Uber’s cost base toward higher fixed utilization driven economics and affect long term earnings.
• Progressive scaling of higher margin ancillary revenue streams such as advertising and memberships is illustrated by Delivery Hero’s ad business running at about 3% of gross merchandise value and Uber’s own ad and Uber One programs. Rolling these out to an enlarged footprint offers scope to raise overall margin and earnings contribution.
• The planned acquisition of Delivery Hero, which would extend Uber’s delivery reach to nearly 100 markets, add more than 50 million additional cross platform consumers and is guided to be non GAAP EPS accretive at close with high single digit percentage accretion by year 3, provides a path to larger revenue and potential net margin gains once integration synergies are realized.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Uber Technologies's revenue will grow by 13.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.3% today to 14.6% in 3 years time.
• Analysts expect earnings to reach $11.7 billion (and earnings per share of $6.33) by about September 2029, up from $9.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $13.4 billion in earnings, and the most bearish expecting $8.3 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.4x on those 2029 earnings, up from 15.0x today. This future PE is lower than the current PE for the US Transportation industry at 32.6x.
• Analysts expect the number of shares outstanding to decline by 1.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.34%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Uber's heavy strategic and financial commitment to autonomous vehicle partnerships, AV focused vehicle commitments of around 120,000 cars and AV labs data collection is now backed by a stated plan to invest about US$10b over multiple years, so if partners struggle with safety, regulation or commercialization and AV trips remain a very small share of the 300 million weekly trips, this capital could weigh on free cash flow, earnings and net margins for longer than the narrative assumes.
• Competitive pressure in both human driven mobility and autonomous services remains intense, with regional players in Brazil increasing incentives for two wheeler drivers, Alphabet backed Waymo expanding robotaxis and planning new markets, and former CEO Travis Kalanick building a new robotaxi venture that already has US$1.7b of funding and an Uber partnership, which could limit Uber's pricing power and market share and in turn constrain revenue growth and operating margins.
• Uber's effort to run a broad platform that spans Mobility, Delivery, AVs and soon a much larger Delivery Hero footprint depends on complex integrations and cross selling, and management is already restructuring the workforce by about 10% and shutting operations in markets such as Nigeria and Uganda to simplify the organisation, so any missteps in integrating Delivery Hero's technology stack, harmonising shared services or scaling Uber One across nearly 100 markets could increase costs, delay expected synergies and reduce the contribution to future earnings and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $101.24 for Uber Technologies based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $150.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $80.2 billion, earnings will come to $11.7 billion, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 8.3%.
• Given the current share price of $70.5, the analyst price target of $101.24 is 30.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.