Uber: Makings of a Solid Long-Term Investment

I am bullish on Uber (UBER). That is not a popular statement nowadays. The company suffers from weak profitability and high cash burn. Not to mention its investment in China’s leading ride-hailing company, Didi (DIDI), caused a host of other problems.

However, I believe all those factors are already reflected in the stock price. So, you have a company that recently turned a profit with considerable competitive advantages and a healthy outlook. (See Analysts’ Top Stocks on TipRanks)

It has already shattered taxi cartels worldwide. The verb “Ubering” is part of the lexicon all over the world.

It is hard to believe the ride-hailing giant traces its roots to a wintery night in Paris in 2008 when Garrett Camp and Travis Kalanick could not get a cab. It’s been a long journey from that point till now, and there were many ebbs and flows along the way.

It had one of the best IPOs ever in 2019. It expanded worldwide and saw a fair share of success. Then the pandemic hit. The company’s core taxi business virtually collapsed. However, it weathered the storm by focusing on increasing its food delivery operations. Then, a $3.2 billion Didi writedown meant that it lost $2.4 billion in the third quarter.  

However, there are bright spots you cannot ignore. The company has strong opportunities to expand in high-margin business segments. It turned a profit for the first time on an adjusted basis in Q3, while issuing upbeat guidance for the fourth quarter.

First Operating Profit Is Big News

Ultimately, you invest in companies with strong fundamentals and trade stocks with momentum. For several quarters, Uber felt like a momentum trade. Retail investors used to time their entries and exits alongside broader market news and earnings releases. However, we are now in a situation where Uber is making a case, on financials, of becoming a solid long-term investment.

Ever since Uber first launched, it’s been on a steady path towards profitability. Last quarter was no exception. The world’s largest ride-sharing company is doing very well, thanks to both Ride-Hailing and Restaurant Delivery segments.

Total revenue jumped 72% year-over-year to $4.8 billion. Adjusted earnings before interest, taxes, and amortization increased significantly to reach $8 million, recording a first-time profit. It is also a very healthy uptick from last year’s loss of $625 million.

Uber’s Delivery business deserves a lot of credit for the turnaround this quarter. Restaurant food and store deliveries are a major chunk of this segment.

However, UBER did not shoot to the moon post the earnings release. You can chalk it down to its 20% stake in Didi. When it went public on the NYSE earlier this year, Didi stock did very well. There was a lot of excitement surrounding its debut, with the company finishing its first trading day with a valuation of $68.49 billion.

However, Chinese stocks are getting hammered recently because of intense domestic regulatory activity. Didi itself is facing an antitrust probe over whether it utilized anti-competitive behaviors to force out smaller rivals. Naturally, this is not great for Uber.

Burn Rate Is a Key Factor

Uber’s disruptive technology and explosive growth are the chief reasons it is the top company in the ride-sharing space. The strong market position and well-known brand are major competitive advantages. Expansion into new markets such as food delivery has helped it tap an even greater addressable market.

However, despite all of its success, Uber is unable to take advantage of its position. The major reason is cash burn and lack of profits.  

Uber has spent a fortune training and recruiting drivers and giving away free rides. It set up an elaborate global system of offices, and hired lawyers to deal with lawsuits or regulators if necessary. Since it does not own vehicles or employ drivers, it saves a fortune in capital and workforce costs. However, the asset-light model does not help when you want to conquer the world.

Uber is taking a lot of risks to grow as swiftly and profitably as possible. However, outspending the competition is not a great way to win favor with investors. Consequently, it may want to revisit its aggressive pricing policies. The company needs to cut down costs so it can and become a leaner enterprise.

Some argue Uber has a substantial footprint and needs to build on it. However, the company can invest strategically elsewhere. China is a great case study. Uber left the market in 2016 after a bruising two-year fight with local rival Didi. However, not before negotiating a very good deal. Uber sold its China business to Didi in exchange for a 20% stake in the combined entity. Simultaneously, Didi poured $1 billion into Uber at a $68 billion valuation.

Uber Acquisitions Are a Silver Lining

Although Uber just turned a profit, it has never shied away from aggressive M&A activity. Last year, Uber purchased the food delivery app Postmates. It was a $2.65-billion all-stock deal. A big deal during a pandemic is unusual.

However, in the larger scheme of things, it makes perfect sense. The ride-sharing segment suffered heavily last year. Hence, the San Francisco-based ride-hailing giant needed an impetus.

With the food delivery business growing at a rapid pace, the Postmates deal complements Uber Eats excellently. Therefore, Uber’s stock hit an all-time high after the merger.

In 2018, Uber joined forces with Alphabet’s GV (GOOG) to invest in Lime, a transportation company specializing in electric scooters. It was part of a $335 million investment round that valued the company at $1.1 billion.

he lightweight and convenient vehicles are available for rent all over several major cities, with customers simply leaving them on their sidewalks. It makes for an environmentally friendly business model. That doesn’t hurt in the current investment climate where ESG is taken very seriously.

Wall Street’s Take

Turning to Wall Street, sentiment is bullish for Uber. The stock has a Strong Buy consensus rating based on 19 Buy ratings, one Hold rating, and zero Sell ratings assigned in the past three months. The average Uber price target of $69.75 implies upside potential of 66.4%.

Conclusion

Uber has a strong competitive advantage in the mobility industry. Furthermore, Uber’s treasure trove of consumer data gives it an edge as artificial intelligence becomes increasingly important for applications like autonomous vehicles that rely on machine learning to function properly; particularly when using mapping technology or other AI capabilities.

Investors are not biting, though. It makes sense. The company was unprofitable for several years. It only recently managed to eke out a profit. If you combine this with issues surrounding its investment in Didi, you understand why price momentum is sluggish.

However, for a value investor, Uber looks attractive because of the sharp pullback. Wall Street analysts predict that shares of this company will rise over the next year, with an average price target suggesting massive upside. At these rates, Uber can only grow from here.

Disclosure: At the time of publication, Faizan Farooque did not have a position in any securities mentioned in this article.

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