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Uber is the second most controversial stock I’ve ever owned (first place goes to Softbank). Most people have used Uber’s service, and thus everyone has an opinion and the media loves writing articles about Uber. The company has a history of not making any money. I’ve written a long research piece on why Uber, despite (or maybe because of) being a controversial company, has the makings of being a terrific long-term investment.
The pandemic had a mixed impact on Uber. Its core ridesharing business, which was supposed to turn profitable right before the pandemic, was significantly affected by the virus. The impact was immediate – people stopped traveling and started socially distancing.
But even after the economy reopened and people were willing to take Ubers again, the company did not just snap to profitability; it had to rebuild its driver network. Uber had to pay extra bonuses to drivers, whose pockets had just been stuffed with government stimulus checks, to get them to put their Netflix remote controls down, get off the couch, and start driving again. This was very expensive but necessary – one of Uber’s competitive advantages lies in the depth of its driver network. Without drivers, Uber rideshare has no product. Consumers expect to push the button on their Uber app and get a car in 15 minutes or less. I remember worrying in spring 2021 that Uber would take a conservative stance in bringing their drivers back in order to preserve cash. Uber did anything but – it showered its drivers with cash, burning billions of dollars in the process. It was the right thing to do. Lyft has been slower to respond and is still struggling with a driver shortage, where Uber doesn’t have this problem. I am glad that I bet on the right company and the right management.
At this point in time, Uber’s international rideshare business has recovered to the pre-pandemic level, but the U.S. business is lagging at 70% of its pre-pandemic highs.
The pandemic was a tremendous help to Uber Eats, which at the time was still a nascent food delivery business. Today Eats generates similar revenues to the rideshare business. During the pandemic, Uber Eats was fighting with U.S. competitor Doordash for market share and losing a lot of money in the process, but its profitability turned positive in the latest quarter.
Today, Uber Eats is barely profitable, but management believes this business has the potential to be very profitable, and it is profitable outside of the U.S. I’ll believe it when I see it. But I think Uber can build a very profitable advertising business on top of this. The Uber Eats app is a giant marketplace for restaurants, where they are competing for consumers’ dollars throughout the day. Just as Amazon is making billions on advertising on its platform, so can Uber. These advertising dollars come with an 80-90% margin, and it takes little effort (cost) to generate them. The bulk of these revenues will fall straight to Uber’s bottom line.
Recent progress
Uber reported a terrific quarter in May. Its revenues and bookings were up 39%. It was the third positive EBITDA quarter in a row. The market yawned at these results and sent the stock down with the rest of the NASDAQ.
A week later, in a memo to Uber employees, CEO Dara Khosrowshahi admitted that the environment has changed – the market doesn’t want EBITDA profitability; it wants cash flows. EBITDA is an acronym; it stands for “earnings before a lot of important stuff,” like interest expense, taxes, depreciation, and amortization.
Dara pointed out in his memo that the company needs to pay attention to costs, to slow down driver incentives, to be more cautious in hiring (he wrote, “working at Uber is a privilege”); and the company needs to learn how to do more with less. In other words, EBITDA and the unlimited funding party are over; investors want the company to show them the money – free cash flows.
(Uber’s EBITDA is about $1 billion greater than the company’s free cash flows. Uber is guiding to be free cash flow positive by the end of 2022. It looks like an achievable goal.)
I feel somewhat conflicted about this memo. I don’t like it when a company takes cues from the market on what to do. On one side the company is owned by shareholders, so the management is hired by shareholders, so it should listen to them.
But-
Uber has roughly 2 billion shares outstanding. 35 million Uber shares change hands daily. A simple calculation would show that the Uber shareholder base turns over every 57 trading days. The reality is that maybe 20-40% of shares are owned by long-term shareholders (like us) and the rest of the volume comes from short-term renters who have never opened the company’s annual report and treat the stock as a four-letter trading vehicle.
Uber’s management works for this silent minority that does not vote every day on the stock market with their buys and sells. Those who trade Uber’s shares three times a day, the ones who sent Uber’s stock down, don’t know how to spell EBITDA or care about Uber’s free cash flows.
In Dara’s defense, I think he was reacting not just to the lower stock price but also to the meeting with shareholders he’d had the previous week (with the silent minority). Also, he was right with his message, which applies not only to Uber but to a lot of tech companies. The environment has changed.
Vitaliy Katsenelson, CFA is CEO of IMA – a value investing firm in Denver.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
