Decisive Expansion And AV Technology Drive The Company's Surge In Profitability And Market Diversification

Key Takeaways

• Expanding audience and usage frequency underscores a solid base for future revenue growth, highlighting the importance of market penetration and customer engagement.
  
• Strategic focus on delivery and autonomous vehicle technology illustrates Uber's commitment to diversifying revenue streams and improving operational efficiency for long-term growth.
  
• Reliance on AV partnerships, regulatory changes, market expansion costs, increased competition, and consumer downturn risks could significantly impact Uber's financial health.

Catalysts

Develops and operates proprietary technology applications in the United States, Canada, Latin America, Europe, the Middle East, Africa, and Asia excluding China and Southeast Asia.

• Expanding Uber’s audience and frequency of use are key drivers for revenue growth, illustrated by a 14% expansion in audience and a 6% increase in frequency of use. These factors suggest a solid foundation for future revenue expansion.
  
• A 71% year-on-year growth in adjusted EBITDA and record quarterly GAAP operating income point towards improved net margins and operational efficiency, indicating a potential for increased profitability in future periods.
  
• Uber's strategic focus on the delivery segment, especially the growth in Uber Eats and the success of the Uber One membership covering 50% of delivery gross bookings, highlights diversification of revenue streams and an increased customer base, which could impact long-term revenue growth positively.
  
• The integration with AV (Autonomous Vehicle) technology and partnerships with AV players underscore Uber's commitment to innovation and operational efficiency. This approach not only prepares Uber for future growth opportunities but also impacts the cost structure favorably by potentially lowering the cost of rides and deliveries in the long run.
  
• The mention of strong incremental margins in the delivery segment and a clear path to EBITDA profit in grocery and retail signifies Uber’s potential to improve net margins and earnings through operational efficiencies and growth in high-margin business segments.

Assumptions

• Analysts are assuming Uber Technologies's revenue will grow by 15.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 11.6% in 3 years time.
• Analysts expect earnings to reach $7.1 billion (and earnings per share of $3.35) by about August 2027, up from $2.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $8.2 billion in earnings, and the most bearish expecting $3.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.9x on those 2027 earnings, down from 75.3x today. This future PE is greater than the current PE for the US Transportation industry at 28.0x.
• Analysts expect the number of shares outstanding to grow by 2.81% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.65%, as per the Simply Wall St company report.

Risks

• The reliance on autonomous vehicle (AV) partnerships for future growth could pose risks if partnerships do not materialize as expected or if AV technology development stalls, impacting revenue growth prospects.
  
• Regulatory challenges and changes in independent contractor legislation, like the situation in Massachusetts, could increase operational costs and impact net margins.
  
• The execution of expanding into new markets or segments, such as grocery and retail delivery, involves significant costs and competitive challenges which may impact earnings if not managed effectively.
  
• The potential for increased competition in both the ride-hailing and delivery markets could pressure pricing and margins, affecting overall profitability.
  
• A consumer downturn scenario, despite Uber's confidence in its resilience, could lead to a decrease in discretionary spending on services like ride-hailing and delivery, impacting revenues and earnings.

Valuation

• The analysts have a consensus price target of $86.97 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 $102.0, and the most bearish reporting a price target of just $65.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $61.0 billion, earnings will come to $7.1 billion, and it would be trading on a PE ratio of 33.9x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $72.04, the analyst's price target of $86.97 is 17.2% 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.