Uber Technologies Inc. (NYSE: UBER) has started to show up high on our models, mostly on fundamental scores yet but if the quantitative data on the stock continues to improve, we at Purnha believe the stock will be ideally positioned to lead the ‘post lockdown’ stock rally, whenever that happens. Thus the time to take a closer look and do in-depth research is now.
The Sell-side tends to look at sectors in silos, which makes little sense for investors looking to grow their portfolios on an absolute basis and as you analyze all sectors, you see a clear advantage that Uber andeven Lyft Inc. (Nasdaq: LYFT) to some extent enjoy over other businesses that have been hard hit by the pandemic, i.e. airlines, cruise lines, retail REITs, etc.
Most investors would agree that the next rally leader, i.e. the first one to come back as economy ‘normalizes’, will have a few traits,
- Sustained growth through the lockdown
- Clear and established growth catalysts for the future
- Improved industry dynamics
- Ability to generate profitability and cash flows, better than other similar growth profile industries
Things similar to those seen in the Cloud-based business models or subscription-based revenue models, coming out of the last downturn after the financial crises of 2008-2010.
We believe, Uber has all these traits. The company is holding up relatively well compared to other transport and travel-related businesses, even though the Rides segment that constituted 73% of the total revenue last year has seen demand collapsed.
Businesses, other than Rides, are shining through. All-important operating metrics like Take Rate are improving during the downturn. The company is purging non-essential assets and doubling down on winners while improving operating expense productivity.
Leaders hold up well during the downturns
|Uber Technologies Inc.|
|Monthly Active Platform Consumers||51%||34%||22%||4%|
|Adjusted Net Revenue||127%||43%||25%||18%|
There is no denying that Rides business, the biggest part of the pie, will stay weak during the lockdown, but there is enough to suggest that when people will eventually step out, the first service to benefit will be ride-hailing and when they do, revenues and profitability for Uber Rides business will benefit disproportionately.
In April, Rides business was down 80%, a collapse similar to other travel and commute related businesses, but as cities started to open up in May, Uber was the first to see the benefit, double-digit percentage improvement weekly in many U.S. cities and back to 70% of pre-crisis gross bookings levels in Hong Kong.
|Uber Technologies Inc.|
|Rides Take Rate||20%||22%||21%||23%|
Amid all the negative news related to the Rides business, two important positive developments are getting somewhat overshadowed.
- Multiple year high seen in the Take Rates, which will lead to more revenue for Uber when the bookings come back
- Synergies with other Uber businesses are shining through, e.g. 40% of drivers active with Rides were cross-dispatched to Eats in April, and this will allow the company to cross-subsidize across segments, thus better competitive positioning during the upswing.
Leaders build upon growth catalysts for the next upturn
Uber’s Rides business though well covered by the Street is overshadowing other future growth catalysts for the company as well as the stock, namely
- Uber Eats
- SaaS-based revenue model
Uber Eats will soon start to drive the Uber story
|Uber Technologies Inc.|
|Eats Take Rate||12.1%||9.6%||9.5%||11.3%|
|Eats Revenue Growth||109.1%||82.2%||52.8%|
Uber Eats business, almost 25% of the total revenue, is doing exceptionally well, with gross bookings (ex. India) crossing $25 billion on annual basis and up 89% in April, adjusted net revenue up 124% over last year, revenue up 53%, and Take Rate improving to 11.3%, multi-year high.
More importantly, the business grew the company’s ecosystem, with an increase in new restaurants and customer signing ups on the platform, which may lead to new derivative revenue sources down the road, e.g. advertising on top of the search functionalities, etc.
Grocery and convenience
Grocery delivery business is another business that has all the right ingredients to become a major growth catalyst for the company. Macro industry fundamentals are extremely favorable and the company seems to be making all the right moves.
Triple-digits gross bookings growth and more than 30% increase in active storefronts suggest the segment will be a major revenue source for the company soon. Acquisitions of Cornershop and Postmates, combined with a six-fold increase, over last year, in the online grocery sales in the U.S. will position the stock among the fastest-growing businesses, coming out of the lockdown.
Eventually, all these combined services can allow the company to launch Amazon Prime like the subscription model, which can act as a great tool to acquire new customers and retain them.
Leaders improve upon profitability, coming out of the downturn
Historically, ride-hailing businesses globally have spent the cash at a rate rarely seen in history, thanks to aggressive competition among service providers to bring customers and drivers on their networks.
With all ride-hailing players focused on preserving their balance sheets, if not focused on outright profitability, the discount era seems over. Industry-wide, there is a significant decline in promotions and couponing.
Here again, Uber may lead the industry towards profitability. Excluding depreciation & amortization, Non-GAAP cost of revenue was down to 46% last quarter and sales and marketing expenses that constitutes 30% of the total operating expenses also decreased to 26% of revenue last quarter from 36% of revenue during the same quarter last year.
In the meantime, the company has close to $9 billion of cash on the balance sheet, enough to sustain spending related to growth initiatives.
DISCLOSURE: This is purely an academic exercise for our internal use and we are NOT recommending buying or selling based on these projections.