Uber Reports a Strong Q4; Expecting Quarterly GAAP Profitability in 2023; Shares Undervalued

Senior Equity Analyst

Ali Mogharabi

Monthly Active Platform Consumers

Trips

Ridesharing GB

Uber Eats GB

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Revenue segments as reported by the company.

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Free Cash Flow is the cash generated by a company from its normal business operations after subtracting any money spent on capital expenditures (CapEx).

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Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders.

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Uber has become the largest on-demand ride-sharing provider in the world (outside of China). It has matched riders with drivers completing trips over billions of miles and, at the end of 2022, had 131 million customers using its ride-sharing or food delivery services at least once a month. In light of Uber's network effect between riders and drivers, as well as its accumulation of valuable user data, we believe the firm warrants a narrow moat rating. 

Uber helps people get from point A to point B by taking ride requests and matching them with drivers available in the area. Uber generates gross booking revenue from this service (the firm’s mobility segment), which is equivalent to the total amount that riders pay. From that, Uber keeps what remains after the driver takes their share. 

As the pandemic spurred growth in demand for delivery services, Uber’s business is now more diversified. The delivery segment remains resilient despite the fading pandemic while the ridesharing business continues to rebound and grow impressively. 

We believe Uber has 30% global market share of the ride-sharing market, which we expect will reach more than $550 billion in total (excluding China) by 2027. The firm faces stiff competition from players such as Lyft (mainly in the U.S.). While Uber no longer operates in China, it does compete with Didi in other regions around the world. Globally, the market remains fragmented, and Uber competes with many local ride-sharing platforms and taxis. But, we expect the firm to remain the leader in this market as its network effect grows. 

The firm’s food delivery service, which now represents nearly 40% of total revenue compared with only 11% in 2019 before the pandemic, will continue to be one of the main revenue growth drivers. Both the mobility and delivery segments should benefit from cross-selling opportunities on the demand and supply sides of the platforms. Further utilization of Uber’s overall on-demand platform for delivery services in other verticals can also help the firm progress toward profitability, in our view.

Business Strategy & Outlook

In our view, Uber Technologies' core business, the ridesharing platform, benefits from network effects and valuable intangible assets in the form of user data. We think these maintainable competitive advantages will help Uber to become profitable and generate excess returns on invested capital. For this reason, we assign Uber a narrow moat rating.

Uber's network effects benefit drivers and riders, creating a continuous virtuous cycle. As a first mover in this market, where requests for rides from anywhere could be made in real time via a simple-to-use mobile app, Uber began to attract riders mainly via word-of-mouth. Growth in demand and further word-of-mouth marketing attracted drivers, or, in other words, increased the supply of Uber vehicles. In turn, as the number of drivers has increased, the timeliness and reliability of the service has improved, driving the number of users, which in turn attracts more drivers, all of which indicates a network effect. Uber was able to accelerate this network effect by focusing on smaller areas, such as San Francisco, before expanding into more cities. 

Demand is driven not only by more users but also likely by more rides per user. Globally, Uber's monthly average platform consumers, or MAPC, and the number of trips provided support our network effect assumption. Since the COVID-19 pandemic, total MAPCs and trips, along with trips per MAPC have returned to solid growth rates. 

Plus, increasing supply is based on both more drivers and increasing capacity utilization of each driver and vehicle. Network effects, by definition, not only allow new network participants to benefit but also existing ones. Thus, the riders on the platform benefit as more drivers are added, and existing drivers benefit from more riders, making the driver's utilization even more efficient. 

While Uber has benefited nicely from network effects, we don't believe it benefits from customer switching costs. In our view, the ride-sharing industry lacks barriers to entry or exit for customers and drivers. Both customers and drivers can easily switch to Lyft or other competing platforms, while customers also have other transportation options like taxis and public transit. In general, just as firms with network effects benefit from the positive flywheel effect when a network expands, they also run the risk of a negative flywheel if customers, drivers, or both start to depart, especially when the network lacks meaningful switching costs. Networks in tech are strong when faring well but can unwind quickly (think MySpace).

In early 2017, Uber faced much criticism for appearing to support an immigration order signed by President Donald Trump and attempting to profit from protests related to that event in New York City, both of which led to the #deleteUber campaign launched on Twitter and eventually tainted the Uber brand and reputation. Then CEO Kalanick was appointed to Trump's economic advisory council, to which some employees at Uber objected. The lack of exit barriers and switching costs for riders and drivers was on display during this period, as other ride-sharing providers, such as Lyft, made headway in New York City and experienced faster growth in trips as riders easily downloaded apps for other services. While we witnessed a slight pause in Uber's network effect in 2017, the firm's return to faster growth in trips provided supports our assumption that the platform still benefits from the network effect. 

In our view, Uber's ride-sharing network effect has also helped the firm tap into other markets and generate additional revenue streams. An example is the delivery market, in which Uber has gained traction with its Uber Eats service. According to data from Bloomberg Second Measure, Uber is now the number two player in the delivery business, below DoorDash, both of whom quickly displaced the former market leader, Grubhub. 

Regarding the network effect, the same can be said about Uber extending its reach into the bike-sharing and freight brokerage markets. Perhaps a good comparison for adjacent network effects, where one strong network enables a firm to expand elsewhere, is Microsoft: Its dominant network around Windows allowed it to leverage its strength into the productivity software market with Microsoft Office. Similarly, Uber's strength in ridesharing is leverageable elsewhere.

As Uber benefits from its network effect, we think it gains access to valuable intangible assets in the form of user data, which we suspect helps the firm improve its services and increase its vehicles' capacity utilization. In turn, Uber's service may become more effective as it further monetizes its riders via real-time supply and demand-driven pricing. Uber may also use this extensive data and knowledge to tap into other markets as it has in advertising. 

Uber gathers data about riders and drivers. As the firm compiles data from the rider app about the location and timing of ride requests, Uber can get a clearer picture of its users' tendencies. When combined with the user-generated driver ratings, we think such information helps Uber improve the timeliness of matching riders with drivers. Such overall enhancement in service could help the firm strengthen its network effect by increasing users and ride requests per user, which helps Uber gather additional data, possibly further increasing the overall value of the data. 

Simply put, data can also be considered an indirect network effect moat source. Google's search engine is an example of the benefits of indirect network effects associated with data, as more searches have led to better algorithms, better results, and in turn, more searches. Similarly, more rides with Uber may lead to better algorithms and supply/demand balance, thus reducing wait times for riders and idle capacity for drivers, leading to more ride requests.

Narrow

Economic Moat

Uber

Uber Eats  is an American online food ordering and delivery platform launched by Uber in 2014 and based in San Francisco, California.

Uber Eats

Swipe allows users to share private photos and videos that wouldn’t get posted on Facebook.

Swipe Labs

Social Bicycles Inc., doing business as Jump, is a dockless scooter and electric bicycle sharing system operating in the United States, Germany and Portugal.

Jump Bikes

Otto was an American self-driving technology company founded in January 2016 by Lior Ron and Anthony Levandowski.

Otto

Careem is a transportation network company based in Dubai, with operations in over 100 cities in 14 countries in the Middle East, Africa, and South Asia. The company was valued at over $2 billion as of 2018. In March 2019, Uber acquired Careem for $3.1 Billion. As part of the deal, Careem maintains an independent brand and operates separately.

Careem

Uber Technologies, Inc. is a technology platform, which engages in the development and operation of technology applications, network, and product to power movement from point A to point B. The firm offers ride services and merchants delivery service providers for meal preparation, grocery and other delivery services. It operates through the following segments: Mobility, Delivery and Freight. The Mobility segment refers to products that connect consumers with Mobility Drivers who provide rides in a variety of vehicles, such as cars, auto rickshaws, motorbikes, minibuses, or taxis. The Delivery segment offers consumers to search for and discover local restaurants, order a meal, and either pick-up at the restaurant or have the meal delivered and, in certain markets, Delivery also includes offerings for grocery, alcohol and convenience store delivery and other goods. The Freight segment leverages proprietary technology, brand awareness, and experience revolutionizing industries to connect carriers with shippers on Uber’s platform, and gives carriers upfront, transparent pricing and the ability to book a shipment. The company was founded by Oscar Salazar Gaitan, Travis Kalanick and Garrett Camp in 2009 and is headquartered in San Francisco, CA.

Earnings data Q2 2023

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