Uber: The Stock And Strong Fundamentals Are Misaligned (NYSE:UBER)

Close-up on a couple using the GPS while driving a car

Hispanolistic

Amid unprecedented volatility in today’s market, it’s important to remember an important adage from one of history’s most successful investors: buy when others are fearful. There are plenty of high-quality stocks, particularly in the tech sector, that have been pummeled for lack of momentum and overwrought fear alone. Investors with strong stomachs will be able to pick up shares of iconic tech companies at pennies on the dollar.

Take a look at Uber (NYSE:NYSE:UBER), for instance. Uber’s main fundamental gripe was during the pandemic, when rideshare bookings halted and demand shifted to its nascent, less-profitable delivery business. Post-pandemic, however, Uber is thriving. Rideshare activity has recovered above pre-pandemic levels while the convenience of takeout delivery orders is here to stay; Uber has also managed to capitalize on the current inflationary environment to raise its take rates and fees without impacting demand.

In spite of blazing success, shares of Uber are down ~40% year to date and are retesting lows not seen since March 2020 – which is an incredulous situation for the stock to be in given the tremendous fundamental recovery since then. It’s a great time, in my view, for investors to re-assess the bullish case for this stock.

Chart
Data by YCharts

Uber’s fiscal second-quarter results, released in August, showed a business that was thriving – especially as the company’s new subscription program, Uber One, surpassed 10 million subscribers in a relatively short amount of time and unlocks a brand-new recurring revenue stream for the company. In light of the company’s upward trajectory in quarterly results as well as its continually sinking stock price, I’m re-rating my opinion on Uber to very bullish and am recommending that investors double down at current levels.

As a refresher, here is what I consider to be the key bullish drivers for Uber:

  • Huge $13.8 trillion TAM- Mobility and Delivery each carry $5 trillion market opportunities, and nascent Uber Freight is another massive $3.8 trillion market that is heavily underserved and ripe for tech disruption.
  • Formidable market leadership- In most of the markets that Uber operates in, the company has a leading market share, and usually by a substantial margin. The company has selectively exited markets where it lost share to a local incumbent (Grab in Singapore is a good example), so it can focus on turf where it has the advantage.
  • The sharing economy is gradually taking precedence over ownership- In 2021, a semiconductor shortage has dramatically increased the price of cars, both used and new. Even before this price shock and pre-pandemic, many consumers were already questioning the wisdom of car ownership over rideshare. Owning a car comes with maintenance costs, insurance costs, and in urban areas, often hefty parking costs. Gradually, I expect car ownership to decline and for rideshare to become the preeminent form of transportation.
  • “Other bets” are numerous- Uber Freight is the best example of a new initiative to drive growth, but grocery and package delivery are others as well. Uber’s focus on anything involving mobility gives it a massive greenfield market to operate in.
  • Profitability is sinking back in- Driven by the uptick in rideshare volumes plus higher take rates in both the rideshare and delivery businesses, Uber is driving tremendous Adjusted EBITDA growth.

When it comes down to it, consider the future. We’re already living in a world where “Uber” has become a verb (isn’t that the classic indicator of a tech company that will have long-term success?) – is there any chance that the tendency to incorporate rideshare into our daily commutes will decline, especially as cities become denser and traffic/parking become even bigger obstacles to car ownership?

Don’t miss the chance to buy an iconic brand here at an incredibly low price.

Q2 download

Let’s now go through Uber’s latest Q2 highlights in greater detail. Starting first with how the rideshare/mobility business is performing:

Mobility segment highlights

Mobility segment highlights (Uber Q2 earnings deck)

Uber’s mobility segment saw 57% y/y FX-neutral growth in bookings to a staggering $13.4 billion, more or less proving that the pandemic is far behind us. Also, in case you haven’t noticed from your own experiences riding Uber, fares have also gotten more expensive reflecting inflation – Uber has capitalized on this situation to drive take rates to a high of 26.6%, up eight points versus the year-ago quarter.

One area in which Uber has been able to boost its marketplace performance is in driver retention, which in turn has helped to bring down average wait times and surge levels versus 2021. Per CEO Dara Khosrowshahi’s remarks during the Q&A portion of the Q2 earnings call:

Then you’ve seen us invest in our driver experience chiefly with a number of new innovations, including showing your destination upfront, showing your full fare upfront, new innovations like Trip Radar. And now we’re rolling out a new Uber Pro loyalty program that gets drivers up to 2% to 6% off when they use our debit card for using in buying gas. That’s all about the driver experience as well.

And then on the incentive side as a result of just onboarding experience getting better drivers, being able to earn multiple ways on Uber and overall utilization being at very, very high levels, that has resulted in high driver earnings. So drivers in the U.S. who are cross-dispatching are earning about $30 an hour, which is very attractive earnings. And drivers who are in Mobility only that tends to pay higher are making $37 per utilized hour as a result of the strong economics, this is all the while our taking driver incentives down as a percentage of overall bookings as we drive more efficiency through the system. So right now, the machine is working, and we’re a very, very competitive place to earn and it’s showing in the driver retention numbers.”

Meanwhile, while baseline expectations for the post-pandemic recovery were that rideshare volumes would jump while delivery volumes would cool, so far this has not been the case. The company is still growing gross bookings volumes in delivery by 12% y/y to $13.9 billion (still actually outpacing rideshare bookings volumes), while revenue grew 43% y/y on a constant-currency basis to $2.7 billion. Similarly here, take rates of 19.4%, while lower than rideshare levels, grew 420bps y/y.

Delivery segment highlights

Delivery segment highlights (Uber Q2 earnings deck)

Economies of scale in both of Uber’s major segments have also led to substantial gains in adjusted EBITDA: as shown in the chart below, the company notched $364 million in adjusted EBITDA this quarter, representing a 1.3% margin against bookings and a 4.5% margin against revenue, the latter of which represents eighteen points of margin build y/y.

Uber adjusted EBITDA

Uber adjusted EBITDA (Uber Q2 earnings deck)

Key takeaways

With tremendous bookings growth, early success in the introduction of the Uber One subscription program, and rising profitability, it’s difficult not to see Uber continuing to thrive. Take advantage of the stock’s deep slide to build up a low-cost position.

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