Rideshare giant Uber Technologies Inc. (UBER, Financial) reported strong earnings for the first quarter of 2023 on Tuesday morning, sending its shares higher in pre-market trading.
The company, having faced several macroeconomic challenges since 2020, including worldwide mobility restrictions, supply chain disruptions and inflationary pressures, is finally moving in the right direction amid the recovery of the global travel sector. The company has yet to turn profitable, but first-quarter numbers suggest profitability is not as far away as some analysts initially predicted. Uber, as the leader of the global ridesharing industry, which is expected to grow exponentially through 2030, still has a long runway for growth, which makes the company attractively valued currently even on the back of recent price strength.
Scale advantages are becoming visible
Since its inception, the company’s strategy has been to expand into new markets and business verticals to scale aggressively to the extent that it would be able to carve out competitive advantages. This strategy made it difficult for Uber to generate positive cash flows for several years, but now it seems to be benefiting from its investments.
For the first quarter, Uber reported revenue of $8.82 billion, up 29% year over year. The loss per share of 8 cents was better than the consensus estimate for a loss of 9 cents per share. The stellar revenue growth came on the back of a 19% increase in gross bookings. Both the mobility and delivery segments’ adjusted Ebitda margins hit all-time quarterly highs, which is a clear indication that Uber is inching closer toward GAAP profitability. This expansion in margins is also a sign that Uber is benefiting from scale advantages, which has been the plan all along.
Free cash flow came to $549 million, which is another all-time high for the company. In the past, Uber has come under scrutiny from both analysts and investors who thought its aggressive expansion strategy left no room for free cash flow generation, but it is starting to prove the critics wrong.
During the earnings call, Uber noted that operating profits will continue to increase in the coming quarters, paving the way for GAAP profitability. This will be a watershed moment in the company’s growth story as, just a few years ago, it was seen as a high-growth machine that would not be able to break through to profitability for many years.
With Uber now beginning to generate positive free cash flow, Chief Financial Officer Nelson Chai believes the company will be in a position to return some excess capital to shareholders in the coming quarters. Commenting on this possibility, he said, "Over the next few quarters, we will evaluate returning excess capital to shareholders as our cash flows ramp, and with any potential further monetization of our equity stakes over the long term."
The company seems to be considering the possibility of initiating a share buyback program as well to make use of excess cash generated by the business, which is an encouraging sign for long-term investors.
The growth story is far from over
Uber is the largest rideshare company in the world, having, in the first quarter alone, completed more than 2 billion trips worldwide. Its financial performance suggests the company will be more profitable as it scales further. In complete contrast to its closest rivals, the company has been able to reduce driver acquisition costs and other variable costs, which has created a platform for it to grow sustainably in the future.
The company is showing better monetization as well, which is encouraging. Uber is closing in on profits at a time when the global ridesharing industry is still in its infancy. Fortune Business Insights projects the ridesharing industry will grow at a compounded annual rate of 16.3% through 2028, aided by the increasing internet penetration in emerging nations, the rise in the number of smartphones in use and the rising cost of personal vehicle ownership at a time when policymakers are focused on achieving net-zero emissions goals.
In the long run, Uber is likely to solidify its competitive advantages that are stemming from its scale. In the ridesharing segment, its goal is to reduce wait times even further for both riders and driving partners. As the company grows, both drivers and riders will favor it over its peers because of reduced wait times, which will create a snowball effect.
The delivery business also has a long runway for growth as restaurants are increasingly becoming positive about using third-party delivery services rather than relying on in-house delivery. This is a secular trend in the making, and Uber is well-positioned to make the most of it in the majority of its key markets.
Takeaway
Uber is on the correct path to turn profitable in the coming quarters. The stock is not valued cheaply, but it would be unreasonable to expect it to trade at cheap valuation multiples given the company is growing by double digits. Growth investors with an extensive investment time horizon are likely to find Uber an attractive bet today as the company prepares for the next leg of its growth story, which will be characterized by strong earnings and revenue growth.
