Uber Technologies (UBER, Financial) recently reported first-quarter 2023 earnings results that have changed the prevailing narrative surrounding the company and have been well-received by investors. This year, the stock has seen stellar growth compared to the market, establishing it as one of the best-performing stocks in the tech industry.
Uber was once considered just a ride-hailing service, but it soon built out its tech ventures, and now it's evolving into a logistics software company that uses its technology to enter new business lines. Uber's subscription service, Uber One, already has 12 million subscribers and offers numerous benefits for businesses. Let's take a closer look at why Uber is thriving, and why I expect it to continue doing so for the foreseeable future.
An evolving business model
Following in the footsteps of Amazon (AMZN, Financial), Uber is at its core a tech-driven logistics business that leverages software to transport physical assets (and people in Uber's case). It doesn't own the physical assets it controls, such as cars or drivers, but rather uses algorithms to control them, making it a "pure software" company. This allows Uber to pivot and scale its business model to new ventures easily.
Uber's recent results have shifted the prevailing narrative, with the company delivering impressive free cash flows, strong revenue growth rates and record profitability.
Although the stock is not cheap considering its low level of profitability, I am encouraged by the recent turnaround of the underlying business. The company's gross bookings for the second quarter point to steady growth, which could lead to strong revenue growth rates in 2023. Moreover, Uber's significant improvement in Ebitda profitability and free cash flow generation in the first quarter suggests that it is a growth business delivering solid free cash flows.
The subscription model is a gamechanger
Uber One has revolutionized the ride-hailing experience, similar to how Amazon Prime revolutionized online shopping. Uber One is a subscription package that offers numerous advantages to its customers. This program has been designed to make it easier and more convenient for users to use Uber services. For $24.99 per month, Uber One members get 10% off rides, free deliveries on Uber Eats, priority airport pickups and more.
The service's success has been indisputable, boasting 12 million users signing up already. One of the economic benefits of Uber One is improved consumer retention. With the subscription model, users are likelier to continue using Uber's services since they feel they have already paid for them. This also translates to higher spending per user, as subscribers are incentivized to use the service more often to get the most out of their subscriptions.
Another benefit of Uber One is the smooth revenue stream it provides for the company. Since subscribers pay a monthly fee, it gives Uber a more predictable and consistent revenue stream compared to the volatile nature of ride-hailing revenue. This helps the company better plan for the future and invest in new business lines. Overall, Uber One should be a significant driver of results for Uber and has the potential to cement its position in the market further.
Talking about the valuation
Uber's first-quarter earnings surpassed Wall Street estimates, leading to a 10% surge in its stock price. Despite management's confidence in improving profitability in the second quarter and achieving its adjusted Ebitda projections of $5 billion by the fiscal year 2024, I would still suggest investors exercise caution.
While Uber's valuation is not considered particularly high in my view as the price-sales ratio is just 2.24, which is great for a growth stock in the grand scheme of things, the company is not very profitable, so one could argue it will remain expensive on the earnings front until it can dramatically improve its margins. Compared to other software industry companies, Uber's price-sales ratio ranks better than 50.5% of peers.
I believe investors who missed buying the stock at lower levels should be wary of joining the momentum surge for its earnings release because it may not last. Despite posting strong earnings, there are potential macroeconomic risks that could intensify.
Takeaway
Uber's business is more complex than it seems, with a diversified and fast-growing revenue stream aided by its logistics software core competency. Its new subscription service, Uber One, is driving growth and increasing user retention.
Overall, it seems Uber is putting the pieces together for a spectacular business model, one that is lean and focused on growth. Considering these aspects, I think several years of extraordinary growth could be in store for the company. The company's ability to innovate and diversify its business, coupled with its logistics software core competency, makes it an attractive investment opportunity for the long term in my view. The market may not necessarily realize that now, which is understandable for a variety of reasons, but it is definitely one for the watch list.
