Uber Technologies Inc. (UBER, Financial) is a global ride-hailing and transportation network company that has been operating since 2009.
On Aug. 1, the company reported its first-ever operating profit, along with some other positive news. However, investors did not appear to get too excited as the stock closed 5.68% lower at $46.65.
Is Uber finally making a shift by becoming profitable? I would argue that it is too early to tell as the company still faces quite a few business risks.
Second-quarter results
Uber reported GAAP earnings of 18 cents per share, which beat estimates by 19 cents, and revenue of $9.23 billion, which fell short of expectations by $108.11 million. Other than its first operating profit of $326 million, up by $1 billion year over year, the company also reported several other positive results. Its gross bookings grew 16% year over year to $33.6 billion, while revenue increased 14% to $9.2 billion and it saw record quarterly free cash flow of $1.1 billion.
In a statement, CEO Dara Khosrowshahi said, “Robust demand, new growth initiatives and continued cost discipline resulted in an excellent quarter, with trips up 22% and a GAAP operating profit for the first time in Uber’s history. These results also translated into strong driver and courier engagement, with 6 million drivers and couriers earning a record $15.1 billion during the quarter.”
Chief Financial Officer Nelson Chai added, “The unique power of the Uber platform and the team’s relentless focus on profitable growth was on full display in Q2, with record profitability and over $1 billion of quarterly free cash flow.”
Business prospects
Uber has undeniably made huge progress. It is also promising that Khosrowshahi expects the company to be profitable every quarter from here on out. However, I am skeptical as Uber reported growth in its ride-hailing and delivery businesses, but a decline in its freight business. While year-over-year mobility revenue grew 38% and delivery revenue increased 14%, freight revenue declined 30%.
Another concern is the company's gross margin has been in long-term decline. The average rate of decline per year is -4.3%.
Expansion and diversification
According to data from Grand View Research, the global ride-hailing market is expected to grow at a compound annual rate of 15.7% between 2022 and 2030. This growth is being driven by several factors, including the increasing popularity of ride-hailing services, the growing number of urban areas and the rising demand for transportation options that are more convenient and affordable than traditional taxis.
Uber has been expanding its services beyond ride-hailing. The company now offers a variety of other transportation options, including Uber Eats (food delivery), Uber Freight (cargo transportation) and Uber Elevate (flying taxis). This expansion is helping the company to diversify its revenue streams and reach new customers. It is also investing heavily in self-driving car technology. If the company is successful in developing and deploying self-driving cars, it could significantly reduce its operating costs and improve its profitability.
Challenges
Of course, some challenges could hinder Uber's future growth. The ride-hailing market is becoming increasingly competitive as more and more companies enter the space, including Lyft (LYFT, Financial), Bolt and Didi Chuxing. This competition could put pressure on Uber's pricing and profitability.
Further, the company has been involved in some public relations issues, such as allegations of sexual harassment and discrimination. These issues could damage the company's reputation and make it more difficult to attract new customers.
Uber's future success will also depend on its ability to continue to innovate, improve its profitability and build an ever-stronger brand. It needs to continue to innovate in order to stay ahead of the competition. This could involve developing new services, such as Uber Air, or improving its existing services, such as Uber Eats.
The company has also been struggling to turn a profit, and this is a major concern for investors. It needs to find ways to reduce costs and improve margins.
If Uber can address these challenges, it has the potential to be a major player in the transportation industry for many years to come.
Final thoughts
In addition to increasing competition and criticism in regard to its safety record, a global economic downturn could have a significant impact on Uber's business. If people have less disposable income, they are less likely to use ride-hailing services. This could lead to a decline in ridership and revenue for Uber.
Uber also faces risks related to its technology, its data privacy practices and its corporate culture. The company will need to continue to innovate and improve its operations to mitigate these risks and maintain its competitive advantage.
I consider the milestone of positive operating profit very important, but I would like to monitor this over the next several quarters. If it proves to be not sustainable, then Uber Technologies may face tough times for the remainder of the year.
