Uber Technologies Inc. (UBER, Financial) was previously known for its rapid expansion yet unprofitable business. However, the company has been gradually transitioning toward generating positive free cash flow and achieving profitability. The company's recent release of third-quarter earnings results showcases notable growth.
This discussion takes a deeper look into an analysis of Uber's financial figures to evaluate if the company presents a compelling investment opportunity at its current market price.
Business segments and the impact of stock-based compensation
Uber emerged as a platform to connect passengers with drivers, offering a convenient solution to travel from point A to point B. Over time, the company has diversified its offerings to include various ride services and delivery options for food, groceries and more. The company has three main business segments: Mobility, Delivery and Freight.
The majority of revenue is derived from the Mobility segment. In 2022, the business generated $14 billion in revenue, accounting for 44% of total sales. The Delivery segment ranked second with sales of $10.9 billion, 34.2% of the year's total. Both the Mobility and Delivery segments generated positive adjusted Ebitda, with Mobility at $3.3 billion and Delivery at $551 million.
However, after accounting for corporate, general and adminastrative costs and platform research and development expenses of approximately $2.14 billion, Uber's adjusted Ebitda was reduced to only $1.71 billion. This figure does not include stock-based compensation expenses, which is a significant oversight considering the company's substantial allocation of stock options as part of its compensation. This exclusion presents a skewed view of the company's operating performance.
From 2020 to 2022, Uber's operating cash flow improved from a deficit of $2.75 billion to a positive $642 million. Despite this, stock-based compensation expenses surged from $827 million to over $1.79 billion. Adjusting for these expenses, Uber's cash flow position would remain deeply negative, with the 2022 free cash flow after adjusting for stock-based compensation being negative at $1.4 billion.
Source: Uber's 10-K filing
The shift to profitability
Uber has been generating operating profits since June, with the third quarter marking its second consecutive quarter of profitability, a positive sign for the business. This achievement stems from an increase in revenue combined with a reduction in selling, general and administrative expenses. From the first quarter of 2018 to the third quarter of 2023, Uber's quarterly revenue experienced a 3.6-fold increase, rising from $2.59 billion to about $9.3 billion.
In contrast, SG&A expenses only increased by 44.5%, from $1.1 billion to $1.59 billion. As a result, the SG&A expenses as a percentage of revenue dropped significantly, from 42.5% to just 17%. Moreover, Uber's free cash flow, even after accounting for stock-based compensation, was robust, recording $636 million and $474 million in the two most recent quarters. These figures, highlighting both operating profitability and positive adjusted free cash flow, signal strong financial health for the company moving forward.
Capital structure analysis
Uber's capital structure appears sound as of the third quarter of 2023. The company's total equity is $10.52 billion, including $6.96 billion in cash, cash equivalents and restricted cash. Its long-term debt stands at $9.25 billion. Factoring in an operating lease of $1.875 billion, Uber's net debt is calculated to be $4.17 billion.
Over the last two profitable quarters, the company has maintained a reasonable interest expense coverage, ranging between 2.26 times and 2.37 times. With various financial instruments like senior notes, convertible notes and refinanced term loans maturing between 2025 and 2030, and with principals varying from $500 million to $1.5 billion annually, it seems probable that Uber will have to continue to issue more debt to refinance a part of its existing loans in the next few years.
Source: Uber's 10-K filing
Overvaluation despite free cash flow growth
Uber has projected that in next quarter, the gross bookings could stay in the range of $36.5 billion to $37.5 billion. Similarly, adjusted Ebitda is expected to remain between $1.18 billion and $1.24 billion. If the adjusted Ebitda hits the upper estimate of $1.24 billion in the fourth quarter, the total adjusted Ebitda for the year would be approximately $4 billion.
In the third quarter, Uber's free cash flow was 43.4% of its adjusted Ebitda. If this percentage remains consistent throughout 2023, total free cash flow for the year will be about $1.74 billion. Projecting a 20% annual increase in free cash flow over the next five years, Uber's free cash flow could reach $4.33 billion by 2028. Valuing the company at 20 times its 2028 free cash flow yields a valuation of $87 billion. This is 26% lower than its current market value, suggesting Uber's current price may be overvalued.
Conclusion
Uber's journey from a rapidly expanding, unprofitable venture to a business showing signs of sustainable profitability is noteworthy. The company's strategic diversification into various service segments and its ability to adapt to changing market dynamics are reflected in its recent financial results. However, the shadow of substantial stock-based compensation expenses looms large, which could have a significant impact on the company's actual cash flow position.
As Uber strides into profitability with a sound capital structure and improved operational efficiency, the question of its market valuation remains a pivotal point for investors. While the company's growth trajectory and potential are evident, the current market valuation suggests a cautious approach. Investors eyeing Uber as a potential addition to their portfolios must weigh these dynamics — balancing the optimism of fast-growing tech giant against the realism of market overvaluation.
