UBER Stock: Undervalued Growth Opportunity

Uber Technologies (UBER) is a company with a promising future, if it can make it there. UBER’s game plan for years has been to adopt autonomous vehicles, but macro headwinds are making it more difficult for the company. 

The recent broad sell-off of tech and growth has made UBER more appealing. I am bullish on UBER. 

Autonomous Shift

The long-term bullish argument is that UBER’s large market share and brand power will allow it to take control of the expected autonomous ride-sharing and delivery industry. 

Autonomous driving is key to UBER because it will reduce operating costs. For 2021, UBER ran a gross margin of 46%, down from 2020’s 54%. However, this is largely due to increasing fuel costs. Fuel costs will most likely stay high in the short term due to the conflict in Ukraine, but UBER’s platform allows for easy price adjustments to pass costs onto consumers.

Full automation would remove the need for drivers, reducing operating costs. Since an autonomous fleet would likely be made up of EVs, they will likely lower fuel costs, ultimately increasing gross margin. 

The year 2025 is when many analysts expect the major shift to autonomous will start. The expectation is based on the autonomous car company Aurora’s (AUR) expected ride-hailing launch of late 2024. This is by no means a guarantee, even if the technology arrives on time regulatory restrictions may occur. 

UBER owns a 26% stake in Aurora after exchanging its own autonomous segment ATG for AUR shares, as well investing an additional $400 million.

Focusing on Profitable Segments

UBER trimmed overhead and fixed costs, while divesting from non-core businesses. This allowed UBER to have its first positive EBITDA in Q4 2021. The divestment is a great decision, as UBER still has a few years to slug out before autonomous vehicles are available for use. 

Besides divesting from non-core businesses, UBER increased its focus on delivery. Delivery grew from $17 billion in bookings in Q4 2019, to $54 billion in Q4 2021. 

UBER acquired delivery companies Cornershop and Drizly in 2021. These acquisitions allow for accelerated growth into the delivery business. 

Short term growth is being powered by taking advantage of synergies between its Delivery and Mobility (ride-share) segments. For drivers, consolidating allows for ease of use, as well as allowing both services to share a single larger pool of drivers.

For customers comes the addition of Uber One, a membership program which charges a monthly fee. Uber One should increase cross-transfer of customers, increase retention of customers, and lower the cost of acquiring customers. 

High cost to acquire customers was a previous complaint by many bears. Now that the ride-sharing industry as a whole isn’t seeing the same explosive increase in ridesharing startups as it did previously, the acquisition cost should naturally decline as well. 

Freight has been a winner for UBER. The COVID-19 driven freight shortage was an opportunity of which UBER has taken advantage. Freight revenue increased to $2.1 billion in 2021, a 111% year-over-year increase. 

Wall Street’s Take

Turning to Wall Street, ETSY earns a Strong Buy rating based on 25 Buys and one Sell rating over the past three months.

The average UBER stock price target of $59.67 implies 81.4% upside potential.

Macro-Risk

UBER is going to face macro-driven headwinds. Inflation and the resulting higher interest rates will hurt UBER’s growth. 

Goldman Sachs estimates a 35% chance of a recession in the next 24 months, which lowers consumer discretionary spending. Lower average spending per user should be expected in a recession scenario. 

Short-term interest rates are volatile, a slight inverse of the 10-2 year treasury yield occurred recently, and has since reverted. The inversion implies that the market is worried about short-term rates exceeding long-term rates. Although the inversion has reversed to normal, that does not mean higher interest rates won’t occur in the near future. 

UBER holds $11.6 billion in total debt, so it will likely face an increase in interest expense as it rolls its debt. The next major debt repayment is in 2025, so UBER will likely face higher interest rates if it needs to roll. 

Overall, the macro environment is currently against UBER.

Although UBER is facing risks, the strong growth figures and ability to pivot during the pandemic shows a bright future for the company.

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