After Earnings, Is Uber Stock a Buy, a Sell, or Fairly Valued?

Uber Technologies UBER released its first-quarter earnings report on May 8. Here’s Morningstar’s take on Uber’s earnings and the outlook for its stock.

Key Morningstar Metrics for Uber

• Fair Value Estimate: $80.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Uber’s Q1 Earnings

• Gross bookings were up 20% year over year, driven by strength in Mobility. While some return-to-office uptick seems to have receded, we think the firm’s bookings growth remains healthy.
• The street appeared to focus on profitability, with Uber seeing a $654 million loss in the quarter. We’d delineate between the firm’s core operations, which remained profitable (and is what we focus on), and one-time legal settlements and equity investment losses, the primary contributor to the profitability miss.
• We think the new partnership with Instacart is interesting, as it lets the company access Instacart users who have not previously used Uber Eats.
• We think the network effect around Uber’s business is getting stronger, based on year-over-year growth in users, order frequency, trips, and average revenue per user

Fair Value Estimate for Uber Stock

With its 3-star rating, we believe Uber’s stock is fairly valued compared with our long-term fair value estimate of $80 per share, which represents an enterprise value of 3.9 times our 2024 revenue estimate. We project that Uber’s revenue will grow 14% annually on average over the next five years.

We expect revenue to grow faster than portions of Uber’s cost of revenue—including hosting, transaction processing, and insurance costs—which will result in gross margin expansion. With its network effect, we think Uber should also be able to increase revenue more quickly than selling, general, and administrative costs (especially in the sales and marketing lines) while spending relatively less on operations and support.

Read more about Uber’s fair value estimate.

Economic Moat Rating

In our view, Uber’s core business—its ride-hailing platform—benefits from network effects and valuable intangible assets in the form of user data. We think these maintainable competitive advantages will help Uber become profitable and generate excess returns on invested capital. For this reason, we assign the company a narrow moat.

Uber’s network effects benefit drivers and riders, creating a continuous virtuous cycle. As a first mover in this market, Uber began to attract riders mainly via word of mouth. Growth in demand and further word-of-mouth marketing drew in drivers, increasing Uber’s supply of vehicles. As the number of drivers has increased, the timeliness and reliability of the service has improved, attracting additional users, which in turn attracts more drivers, all of which indicates a network effect. Uber was able to accelerate this network effect by focusing on smaller areas like San Francisco before expanding into more cities.

Read more about Uber’s economic moat.

Financial Strength

At the end of 2023, Uber had nearly $5 billion of cash and $9.5 billion of debt on its balance sheet. The firm burned $445 million in cash from operations in 2021 but generated $642 million in 2022 and $3.6 billion in 2023. Capital expenditures averaged less than $250 million during those years.

We expect the firm to continue to generate positive cash from operations in 2024 and beyond. By 2033, we estimate Uber’s cash from operations could exceed $20 billion, outpacing top-line growth due to operating leverage. We also expect the company to remain free-cash-flow-positive beyond 2023, averaging free cash flow to equity/revenue of nearly 10% through 2028. As revenue growth moderates while margin expansion continues, the firm may issue dividends. Uber will also likely use any excess cash for further acquisitions.

Read more about Uber’s financial strength.

Risk and Uncertainty

Uber faces intense competition in the United States from Lyft LYFT, which has gained market share. It remains possible that Lyft out-innovates Uber to emerge as a winner-take-all (or most) ride-hailing provider. There are also concerns about whether Uber’s network effect can remain an economic moat source if the firm is forced to incur additional costs by municipal, state, and/or federal regulations. For example, the company may be forced to conduct more thorough background checks on all driver applicants. Such a concern is also an ESG risk related to human capital, as insufficient background checks may put riders at risk and lessen the quality of the firm’s services. At the same time, gathering more driver and rider data may increase the firm’s ESG risks around data privacy and security.

Read more about Uber’s risk and uncertainty.

UBER Bulls Say

• Uber’s position in the autonomous vehicle race could equalize gross and net revenue should it no longer need to pay drivers.
• Pressure to pay a minimum amount per trip to contracted drivers could create a barrier to entry for smaller players, helping Uber in the long run.
• Uber’s aggregation of multimodal offerings will drive in-app stickiness, making it a one-stop shop for all transport needs.

UBER Bears Say

• The development of autonomous vehicles, especially Alphabet’s GOOGL Waymo, could eliminate the need for all existing ride-share platforms, driving Uber and Lyft out of business.
• Ride-hailing is still a relatively new industry, which leaves plenty of room for increasing regulations that could hurt Uber.
• Uber’s public perception has suffered in recent years because of data breaches and reports about a bad culture of sexual misconduct and internal racial discrimination issues.

This article was compiled by Krutang Desai.