Uber Earnings: Network Effect Is Strengthening; Future AV Capital Expenditure Is an Uncertainty

Key Morningstar Metrics for Uber Technologies

• Fair Value Estimate: $93.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Uber Technologies’ Earnings

Uber Technologies’ UBER third-quarter earnings exceeded management’s forecast for 20% growth in bookings. The firm estimates similar growth for the next quarter and only a 100-basis-point increase in adjusted operating margin, which we suspect is the primary reason for the shares selling off.

Why it matters: Despite what we see as an uneven economic recovery wherein lower-end consumers have poor sentiment, Uber is capturing demand with low-cost formats, strengthening its network effect. Autonomous vehicles remain an open capital expenditure question, however.

• An asset-light business model has always been the goal, but it’s no longer a certainty, given ambiguity over which player in the AV value chain will assume vehicle ownership. Uber believes private equity will step up, but we think this is an outcome that management wishes for, rather than expects.
• Monthly active platform consumers, trips, and trip frequency—all metrics we use to quantify network effects—are at all-time highs and accelerating. We are typically cautious about substituting price for volume, but we believe affordability investments are strengthening Uber’s offering.

The bottom line: We maintain our narrow moat rating while raising our fair value estimate from $90 per share to $93, reflecting a declining insurance cost curve due to the recent legislative victory in California and balancing this with our view that Tesla’s Robotaxis pose a significant disruptive threat.

• After a recent partnership announcement with Toast whereby Uber becomes a preferred delivery and advertising platform for Toast restaurants, we believe the runway for food delivery growth and margins is now clearer than ride-hailing growth, considering AV competition in the latter.
• Operating performance, free cash flow, and network effects are all strong. However, the company is only fairly valued, given AV risks. Should more AV companies besides Waymo and Tesla emerge, those risks will diminish, as Uber could then benefit from more profitable partnerships.