After Earnings, Is Uber Stock a Buy, a Sell, or Fairly Valued?

Uber Technologies UBER released its second-quarter earnings report on Tuesday, Aug. 1, 2023, before the market open. Here’s Morningstar’s take on Uber’s earnings and stock.

Key Morningstar Metrics for Uber

• Fair Value Estimate: $68.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Uber’s Q2 Earnings

The company’s first operating profit: Uber reported its first-ever GAAP operating profit, as top-line growth and lower user acquisition costs created operating leverage. We expect margin expansion to continue, driven by a return to growth in the freight segment, continuing growth in high-margin advertising, growth in Uber One, and further streamlining of mobility and delivery.

Revenue growth continues: Gross bookings increased to $33.6 billion (a 16% increase) resulting in net revenue of $9.2 billion (up 14%). Mobility gross bookings and net revenue grew 25% and 38%, respectively. Delivery gross bookings increased 12%, while net revenue was up 14%. Strong demand and supply on the platforms pushed take rates of the two segments up 270 basis points and 20 basis points, respectively, from last year. An increase in user count (12%) and total requests (22%), drove usage to 5.55 times per month from last year’s 5.11. The supply side (drivers and couriers) increased by 33%, and hours worked per driver increased by 7% year over year. These improvements pushed user monetization 13% higher than last year.

Fair Value Estimate for Uber

With its 4-star rating, we believe Uber’s stock is undervalued compared with our long-term fair value estimate. Our $68 fair value estimate represents an enterprise value of 4 times our 2023 revenue estimate. We project that Uber’s revenue over the next five years could grow 17% annually on average.

We expect revenue to grow faster than portions of Uber’s cost of revenue, including hosting, transaction processing, and insurance costs, which will result in gross margin expansion. With its network effect, we think Uber should also be able to increase revenue at a faster pace than its selling, general, and administrative costs, especially in the sales and marketing lines, while spending relatively less on operations and support costs.

However, we anticipate that research and development costs will remain elevated, as Uber is likely to invest in new ventures within the on-demand delivery services market, though we also expect declines in R&D as a percentage of net revenue. We assume the firm will begin generating GAAP operating income in 2024, and we expect operating margin expansion to 8% by 2027.

Read more about Uber’s fair value estimate.

Uber Historical Price/Fair Value Ratios

Ratios over 1.00 indicate when the stock is overvalued, while ratios below 1.00 mean the stock is undervalued.

Economic Moat Rating

In our view, Uber’s core business—its ride-hailing platform—benefits from network effects and valuable intangible assets in the form of user data. We think these maintainable competitive advantages will help Uber 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, in which ride requests could be made from anywhere in real time via a simple mobile app, Uber began to attract riders mainly via word of mouth. Growth in demand and further word-of-mouth marketing attracted drivers, increasing Uber’s supply of vehicles. As the number of drivers has increased, the timeliness and reliability of the service have improved in turn, attracting more users, which consequently draws in even more drivers—all of which indicate a network effect. Uber was able to accelerate this network effect by focusing on smaller areas like San Francisco before expanding into more cities.

Read more about Uber’s moat rating.

Risk and Uncertainty

Uber faces intense competition in the United States from Lyft, which has gained market share. It remains possible that Lyft out-innovates Uber to emerge as the premier ride-hailing provider. There are also certain concerns about whether Uber’s network effect can maintain its moat if the firm incurs additional costs imposed through regulations at the municipal, state, and/or federal levels. For example, Uber may be forced to conduct more thorough background checks on driver applicants, such as adding costlier fingerprinting to the process. Such a concern is also an ESG risk related to human capital, as substandard background checks could put riders at risk and lessen the quality of the firm’s services. At the same time, more drivers and subsequently more data gathering may increase the firm’s ESG risks around data privacy and security.

Other regulatory issues may also serve to inhibit Uber’s network effect, like whether Uber will have to pay each driver or courier a minimum amount per trip. While the firm may have to concede on such policies, it will also likely take an overall higher percentage from the gross revenue generated per ride, as its prices are likely to remain competitive with Lyft’s. Lack of adequate compensation and/or benefits is also a human capital ESG risk, in our view, which can lead to drivers jumping to other platforms and reversing the firm’s network effect. We note that both Uber and Lyft are likely to demand higher take rates.

Read more about Uber’s risk and uncertainty.

UBER Bulls Say

• Uber’s position in the autonomous vehicle race could equalize gross and net revenue, if such developments mean it would no longer need to pay drivers.
• Pressure to pay a minimum amount per trip to its contracted drivers could create a barrier to entry for smaller players, helping Uber in the long run.
• Uber’s aggregation of multimodal offerings will drive in-app stickiness, making Uber a one-stop shop for all transport needs.

UBER Bears Say

• The development of autonomous vehicles, especially Google’s Waymo, could eliminate the need for all existing ride-hailing platforms, driving Uber out of business.
• Ride-hailing is still a relatively new industry, which leaves plenty of room for increasing regulations that could hurt the company.
• Uber’s public perception has suffered in recent years because of data breaches and bad culture of sexual misconduct and internal racial discrimination issues.

This article was compiled by Monit Khandwala.