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

Uber Technologies released its third-quarter earnings report on Oct. 31. Here’s Morningstar’s take on Uber’s earnings and stock.

Key Morningstar Metrics for Uber Technologies

• Fair Value Estimate: $80.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Uber Technologies’ Q3 Earnings

• Uber reported solid results for the quarter. Year over year, gross bookings grew 16% to $41 billion and total trips grew 17% to 2.87 billion.
• While economic conditions continue to pressure consumers, we were impressed by Uber’s strength in its top line and profitability. Net revenue expanded 20% year over year and 5% sequentially to $11.2 billion. Mobility sales continued to drive the top line, growing 26% year over year to $6.4 billion.
• We maintain our fair value estimate of $80 per share and view the stock as fairly valued, even after accounting for the sharp drop in price following the earnings report. While the firm’s outlook for the fourth quarter was in line with our model, we believe investors were left underwhelmed by the expected 18% year-over-year growth in gross bookings in constant currency.
• There have been some investor concerns about autonomous taxis and potential disruption to the ride-hailing space. We see partnerships with autonomous vehicle firms like Waymo as an opportunity for Uber to leverage its strong global network.

Fair Value Estimate for Uber Technologies

With its 3-star rating, we believe Uber’s stock is fairly valued compared with our long-term fair value estimate of $80 per share, which represents an enterprise value of 3.9 times our 2024 revenue estimate. We project that Uber’s revenue will grow 14% annually on average over the next five years.

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 more quickly than selling, general, and administrative costs (especially in the sales and marketing lines) while spending relatively less on operations and support.

Read more about Uber Technologies’ fair value estimate.

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 the company a narrow moat.

Uber’s network effects benefit drivers and riders, creating a continuous virtuous cycle. As a first mover in this market, Uber began to attract riders mainly via word of mouth. Growth in demand and further word-of-mouth marketing drew in drivers, increasing Uber’s supply of vehicles. As the number of drivers has increased, the timeliness and reliability of the service has improved, attracting additional 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 like San Francisco before expanding into more cities.

Read more about Uber Technologies’ economic moat.

Financial Strength

At the end of 2023, Uber had nearly $5 billion of cash and $9.5 billion of debt on its balance sheet. The firm burned $445 million in cash from operations in 2021 but generated $642 million in 2022 and $3.6 billion in 2023. Capital expenditures averaged less than $250 million during those years.

We expect the firm to continue to generate positive cash from operations in 2024 and beyond. By 2033, we estimate Uber’s cash from operations could exceed $20 billion, outpacing top-line growth due to operating leverage. We also expect the company to remain free-cash-flow-positive beyond 2023, averaging free cash flow to equity/revenue of nearly 10% through 2028. As revenue growth moderates while margin expansion continues, the firm may issue dividends. Uber will also likely use any excess cash for further acquisitions.

Read more about Uber Technologies’ financial strength.

Risk and Uncertainty

Uber faces intense competition in the United States from Lyft LYFT, which has gained market share. It remains possible that Lyft out-innovates Uber to emerge as a winner-take-all (or most) ride-hailing provider. There are also concerns about whether Uber’s network effect can remain an economic moat source if the firm is forced to incur additional costs by municipal, state, and/or federal regulations. For example, the company may be forced to conduct more thorough background checks on all driver applicants. Such a concern is also an ESG risk related to human capital, as insufficient background checks may put riders at risk and lessen the quality of the firm’s services. At the same time, gathering more driver and rider data may increase the firm’s ESG risks around data privacy and security.

Read more about Uber Technologies’ risk and uncertainty.

UBER Bulls Say

• Uber’s position in the autonomous vehicle race could equalize gross and net revenue should it no longer need to pay drivers.
• Pressure to pay a minimum amount per trip to 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 it a one-stop shop for all transport needs.

UBER Bears Say

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

This article was compiled by Sokhoeun Noeut.