This is the third article in our shattered growth series in which we have begun writing about companies that have experienced precipitous stock drops from speculative highs, but the company’s future prospects seem encouraging. Our the last two broken growth stocks were Twitter (TWTR) and Coursera (YARD).
Uber (NYSE: UBER) had a tough decade as it battled local, state and national governments to carve out a new business model for itself and dealt with internal corporate issues that led to the ousting of its founder. The gory details have been captured in books like Super Pumped: The Battle for Uber and a TV series based on the book.
Despite all the trials and tribulations, the company has managed to grow from 8 cities in 2011 to over 10,000 cities in 72 countries by 2021. It has also expanded its business model to include restaurant meal delivery and groceries through Uber Eats, pairing carriers with shippers with Uber Freight, and growing its core mobility business by expanding into car rental, incorporating healthcare-related travel, and adding other modes of transport such as taxis, cars (tuk-tuks) and motorbikes (motorbikes).
The appeal of Uber has always been that the network and software they’ve built can be extended to other verticals and we’ve seen that play out in delivery with restaurants first and then grocery stores . The company recently extended its partnership with Albertsons (ACI) and its various brands including Safeway, Randalls, etc. to more than 2,000 stores. This shift to delivery helped the company significantly during the early stages of the pandemic, when its mobility division was hit hard.
The new vertical with a lot of potential for Uber is freight, where they connect shippers like Costco, CVS, Walgreens, Home Depot, HEB, Colgate-Palmolive, P&G and Abbott with carriers. While freight accounted for less than 7% of Uber’s gross bookings of $26.45 billion in the first quarter of 2022, the division is growing rapidly.
The company has also done an excellent job of optimizing its market presence through a series of acquisitions, divestitures and exits from small-scale delivery markets. Just as Uber divested its mobility division in China for a stake in Didi, it did the same with its delivery division in India for a stake in Zomato. At the same time, Uber acquired Careem in the Middle East and Postmates in the United States. Divestitures and operating initiatives such as exiting markets or downsizing have helped the company reduce fixed costs by $1 billion.
Improve bottom line
Unlike many tech companies that posted net losses but had positive free cash flow, Uber was burning cash steadily through the third quarter of 2021. While the company reported a whopping $5 net loss $.9 billion for the first quarter of 2022, $5.6 billion of this loss came from a decline in the value of its holdings like Didi. Adjusted EBITDA was positive at $168 million, but as investors well know, companies adjust all sorts of things and investors should take “adjusted” numbers with a pinch of salt. It was, however, encouraging to see that operating cash flow in Q1 2022 was positive. The company even managed to generate more than half a billion dollars of free cash flow in the third quarter of 2021.
With equity investments depreciating in the first quarter of 2022 and a natural decline in stock-based compensation as Uber’s stock is down nearly 40% since the start of this year, things should start looking up. improve in the months and quarters to come. .
When the company reported its first quarter 2022 results, it was looking for gross bookings of $28.5-29.5 billion and adjusted EBITDA of $240-270 million. In the middle of the range, gross bookings are expected to grow nearly 10% on a sequential quarterly basis and 24.5% year-over-year.
Looking at Uber’s transformation, it’s clear that Dara Khosrowshahi’s strategic vision for Uber since joining the company in September 2017 is finally coming to fruition. Prior to joining Uber, he led Expedia (EXPE) for more than 12 years and the stock outperformed the S&P 500 by more than 400% during his tenure. The outperformance did not begin until about five years into his tenure, however. It faced the Great Recession soon after taking over Expedia in August 2005 and ran into a global pandemic after taking over Uber.
Warren Buffett loved buying local newspapers back when people still read newspapers. Most cities had two dominant newspapers and they operated almost as a duopoly, generating good returns for their investors. The current situation with Uber and Lyft reminds me of a similar dynamic. By acquiring competitors or exiting certain markets, Uber has tried to create a similar dynamic in several global markets.
Assessment and risks
Although the stock is starting to look attractive at twice the forward sales, I have some concerns. A 2023 EV/Sales metric of 2.14 is cheap for a software company, but Uber doesn’t exactly have software margins. The TTM gross margin of 35.67% is about half of what I would expect from a pure-play software company and the company’s long-term guidance indicates an “adjusted” EBITDA margin of 10 %, which is not very exciting.
Most of Q1 2022 EBITDA came from the mobility division and delivery barely broke even. A friend of mine mentioned that Uber Eats constantly gives him 20-25% discounts on delivery and it’s clear that the model in the US isn’t very good for restaurants or the delivery driver.
The current market weakness could result in further writedowns of its equity investments in the second quarter of 2022. While this won’t affect cash flow, the overall earnings figure could look lousy.
There are also concerns that Lyft’s recent disappointing results and subsequent sharp drop in the stock could motivate the company to spend even more to gain market share.
Uber has managed to run a very complex business in dozens of geographic regions. Apart from a temporary setback at the start of the pandemic, the company managed to grow both in its verticals and expand into new verticals. The expansion of the company into a subscription offer called Uber One, car rental between individuals thanks to a partnership with Getaround, products specially adapted to businesses and innovation in the mobility sector including automobiles , motorcycles, public transport and taxis shows that it sees itself as a network that can benefit from connecting people across multiple verticals.
The road will likely remain bumpy, but I’m optimistic about Uber’s long-term prospects. The stock should remain under pressure due to market conditions and could offer an opportunity to build a position over time.