Uber Technologies Inc. (UBER, Financial) is known for its market-leading ride hailing business and its recently successful UberEats food delivery segment. However, the company has regularly been criticized for being “unprofitable” and running a low-margin business overall. A positive is the company changed that narrative in the second quarter by reporting its first ever operating profit.
In this discussion, I will break down Uber’s financials to determine its invesment potential. Let's dive in.
Strong financials
Uber reported solid financial results for the second quarter of 2023. Its revenue of $9.23 billion missed analyst forecasts by $110 million, but still rose by 14.33% year over year. This was driven by strong gross booking of $33.6 billion, up 18% on a constant currency basis. Further, it saw solid growth in monthly active platform consumers to 137 million, up 12% year over year.
Mega mobility segment
Breaking down the performance by segment, Mobility reported gross bookings up $16.7 billion, up 28% year over year (foreign exchange neutral), while sequentially bookings rose by 12%, which was a positive sign.
Mobility contributed to 52% of total revenue with $4.9 billion reported, up 38% year over year. This was primarily driven by higher trip volumes, which rose by 22% year over year to 2.3 billion.
The company has also continued to roll out its Uber One membership program, with new launches in South Africa, Sri Lanka and Costa Rica. This is a great tactic in my mind, as the program should hopefully promote greater cross-selling between Uber Mobility and Eat, while also improving retention.
Uber is focusing its growth plan on two main factors, audience and frequency. For example, its average frequency is 5.6 uses per month. However, in markets such as Brazil, the usage is over 7 times per month. Therefore, by adding new services, the company can drive up this usage number per customer.
UberX Share is also being rolled out across 18 new U.S. markets and 50 markets globally. Given the rising cost of living, the proposition of sharing your Uber (and the cost) with another person offers huge potential.
Uber Carshare could also be immensely powerful as this basically offers a way for private individuals to share their vehicle and earn in the process. There are competitors in this space, but none with the scale of Uber.
The company has also partnered with Ford (F, Financial) to offer flexible leases on the Ford Mustang electric vehicle, in addition to enabling flight bookings directly in the app for U.K. consumers.
Advertising is also a surprising area Uber has moved into with in car tablets offering a series of brand videos. So far, Uber’s advertising revenue run rate has surpassed a staggering $650 million, with 400,000 merchants adopting the technology. This was driven by a collaborative partnership with Omnicom, a media giant.
Delightful delivery segment
Uber’s Deliver segment has a surprisingly strong quarter with gross bookings of $15.6 billion, up 14% year over year. This caused revenue to reach $3.1 billion (33% of total), up 14% year over year.
These strong results were driven by a landmark partnership with Domino's, which should be beneficial for both brands.
The company also launched its Group Grocery, orders which enables multiple people to add shopping list items and split bills.
Uber also announced an integration with Amazon's (AMZN, Financial) Alexa for hands-free order tracking.
Failing freight
Uber's Freight business is facing challenges with $1.3 billion in quarterly revenue reported, down 30% year over year.
This was driven by lower revenue per load and less volume overall. Uber blamed this result on a “challenging freight market cycle” in its earnings report. However, the potential for this segment is still huge given the rise of e-commerce and the shortage of truck drivers.
When will we have autonomous taxis?
In the second-quarter earnings call, Uber CEO Dara Khosrowshahi said the company is “very, very early” with regards to autonomous vehicles, but he is excited about the new partnership with Waymo, Google’s (GOOG, Financial) self-driving vehicle business. Waymo's self-driving taxis are currently operational in Arizona and being tested in San Francisco, thus this technology is a reality today for many people.
I believe this partnership is exceptional for Uber, as the company will avoid disruption by self-driving vehicles and it could effectively lower its cost structure long term will a full self-driving fleet.
On its delivery side, Uber has partnered with Serve to deploy up to 2,000 sidewalk-based robots to deliver food for Uber Eats.
Profitability and expenses
Moving onto profitability, Uber reported operating income of $326 million, up a staggering $1 billion year over year, making this the company’s first ever operating profit. The company also reported adjusted Ebitda of $916 million, up a solid $532 million year over year. The improvement in profitability was driven by lower operations and support expenses, which fell to 1.8% of gross bookings, down from 1.9% in the prior year.
Sales and marketing expenses were also reduced to $1.2 billion, making up 3.5% of gross bookings compared to 3.9% in the prior year.
Research and development costs were $488 million, which was level with the prior year at 1.5% of gross bookings. Additionally, general and administrative expenses fell to 1.5% of gross bookings, down from 1.6% in the prior year.
Valuation
Uber trades with a price-sales ratio of 2.71, which is lower than its five-year average.
The GF Value Line indicates a fair value of $75 per share based on its historical ratios, past financial performance and analysts' future earnings projections. Thus, the stock is significantly undervalued at the time of writing.
Final thoughts
Uber is a tremendous company that is truly innovating. It is hard to believe that during 2020, the business was in a terrible state as demand for rides fell off a cliff and Eats was still in its infancy. However, that period looks to have been a blessing in disguise, as Uber Eats has grown to be a substantial part of the business. Therefore, the company looks to have strong potential as a long-term growth investment.
