[FREE] UBER Investment Thesis Statement
A New Position In Our Portfolio
This week we are introducing a new format: Investment Thesis Statements. We believe this new approach will allow us to deliver more concise content while maintaining the depth of analysis you've come to expect from Schwar Capital.
Overview:
The recent market overreaction to concerns about autonomous vehicles (AVs) has created an asymmetric investment opportunity in Uber Technologies, Inc. UBER 0.00%↑, offering substantial upside potential with limited downside risk. Our thesis is built around the following three points:
Uber is set to maintain strong growth and transition into becoming a FCF machine
The threat of AV competition is extremely overstated leaving an attractive buying opportunity
Strengthening moat and capital return support downside protection
Overall, our analysis suggests that Uber's current valuation does not fully reflect its strong fundamentals and future potential, offering a favourable entry point.
Business Description:
Uber Technologies, Inc. (UBER) operates a global technology platform connecting consumers with a variety of on-demand transportation and delivery services. The company's business is primarily divided into three segments: Mobility, Delivery, and Freight.
Mobility (52% of Gross Bookings): This segment encompasses Uber's ride-hailing services. Uber generates revenue by taking a percentage of the fare from each ride. The company's strong network effects and scale allow it to maintain a high take rate while continuing to attract both riders and drivers. In Q3 2024, Mobility generated revenue of $6.4 billion, growing 26% year-over-year with a revenue margin of 30.5%.
Delivery (44% of Gross Bookings): This segment includes Uber's food and grocery delivery services. Uber earns revenue by charging a service fee to restaurants and a delivery fee to consumers. The company has been improving profitability in this segment through increased order volumes and operational efficiencies. Delivery reported revenue of $3.5 billion in Q3 2024, an 18% year-over-year increase, with a revenue margin of 18.6%.
Freight (4% of Gross Bookings): This segment focuses on logistics services. In Q3 2024, Freight generated $1.3 billion in revenue, growing 2% year-over-year.
Uber's business model leverages strong network effects, connecting 161 million Monthly Active Platform Consumers with 7.8 million active drivers and couriers globally. The platform facilitated 2.9 billion trips in Q3 2024, averaging 31 million trips per day. Uber's scale allows it to optimise its marketplace, improving efficiency and profitability across its segments. The company has also been expanding its offerings, with over 25 million Uber One members and a rapidly growing advertising business that achieved 80% year-over-year growth in Q3. Additionally, Uber is strategically positioning itself in the evolving autonomous vehicle market through partnerships with 14 AV companies, ensuring it remains at the forefront of transportation technology.
Investment Thesis:
1. Uber set to maintain strong growth and transition into becoming a FCF machine:
Uber is demonstrating impressive growth across its key metrics while simultaneously improving profitability. The company's gross bookings grew 16% year-over-year to $41.0 billion in Q3 2024, with Mobility gross bookings up 17% and Delivery gross bookings up 16%. Revenue overall increased 20% year-over-year to $11.2 billion.
Importantly, Uber is rapidly transitioning into a free cash flow powerhouse. In Q3 2024, the company generated:
Income from operations of $1.1 billion, up $667 million year-over-year
Adjusted EBITDA of $1.7 billion, up 55% year-over-year
Free cash flow of $2.1 billion, up 133% year-over-year
This impressive cash generation is underpinned by:
Increasing multi-product usage: Monthly Active Platform Consumers (MAPCs) grew 13% year-over-year to 161 million
Uber One membership growth: Over 25 million members globally
Expansion into new verticals: Advertising revenue grew 80% year-over-year, now on a $1 billion+ annual run rate.
With management committed to optimising the business and expanding margins as top-line continues to grow at 20%+ year-over-year, Uber is well-positioned to generate substantial free cash flow in the coming years. The company's transition to a cash-generating powerhouse positions it for sustained growth and shareholder returns, including the initiation of share buybacks and potential debt reduction, as discussed further below.
2. Threat of AV competition is extremely overstated leaving an attractive buying opportunity:
We believe that the current threat of AV competition is extremely overstated. The evolution of the AV market is set to unfold over the next decade or two, making concerns about Uber's potential disruption premature. In fact, Uber's strategic positioning in this evolving landscape presents a compelling opportunity for long-term investors.
As the AV market develops, Uber is likely to strengthen its dominant position for several reasons:
Network effects: Uber's vast user base of 161 million monthly active platform consumers provides an unparalleled advantage. This network will continue to grow and become more entrenched, making it increasingly valuable to AV suppliers.
Data advantage: With approximately 31 million trips per day, Uber possesses an enormous trove of data on travel patterns, user preferences, and demand fluctuations. This data is invaluable for optimising AV deployment and routing.
Operational expertise: Uber's years of experience in managing a complex marketplace of riders and drivers positions it well to integrate and optimise AV fleets seamlessly.
From an economic standpoint, AV companies are more likely to partner with Uber rather than build their own demand networks:
Cost efficiency: Developing a user base comparable to Uber's would require billions in marketing spend and take years to achieve.
Immediate monetisation: By partnering with Uber, AV companies can instantly tap into a massive, established market for their vehicles.
Fleet optimisation: Uber's ability to balance supply and demand across various services (ridesharing, food delivery, etc.) allows for higher utilisation of AV fleets, improving the economics for AV suppliers.
Uber's partnership approach is already bearing fruit. The company has expanded its multi-year strategic partnership with Waymo to bring autonomous ride-hailing to Austin and Atlanta exclusively through Uber. This demonstrates how even leading AV companies recognise the value of Uber's platform.
Overall, Uber should compound its advantages year over year as the AV transition unfolds. During this time, Uber will continue to generate substantial free cash flow from its current operations and is likely to attract more partnerships, further solidifying its position as the go-to platform for mobility services, whether human-driven or autonomous. The adoption of AVs will also not be uniform across all countries and cities. Many regions will continue to rely on traditional ride-hailing services for years to come, allowing Uber to maintain its dominant position in these markets. Finally, Uber's expansion into food delivery, freight, and advertising provides additional growth avenues that are less susceptible to AV disruption in the near term.
These factors position Uber to thrive in the future AV-dominated transportation landscape, underscoring that the recent decline in its stock price appears to be an overreaction.
3. Strengthening moat and capital return support downside protection:
Uber's moat continues to strengthen through several key factors. Firstly, network effects play a crucial role in Uber's business model and competitive advantage. As Uber's platform grows, it becomes increasingly valuable to both riders and drivers. More users attract more drivers, leading to better service and further user growth. As more riders use Uber, it creates greater demand for rides, which attracts more drivers to the platform. For drivers, a larger pool of riders means more potential earnings and less idle time between ride requests. Conversely, as more drivers join, riders benefit from shorter wait times, more reliable service, and potentially better pricing due to increased competition among drivers. These network effects grow stronger in each local area as both driver and rider bases expand, making Uber's service more reliable and available across its 10,000+ city operations.
Uber's platform ecosystem, or super-app strategy, integrates ride-hailing, food delivery, and other services, increasing user engagement and cross-selling opportunities. A key component of this strategy is Uber One, Uber's subscription service, which offers users access to benefits across the platform, including discounted rides, priority support, and free delivery on Uber Eats. By integrating various services into a single platform, Uber is creating a comprehensive ecosystem of interconnected offerings. This not only strengthens its competitive position by increasing user retention and satisfaction but also provides additional revenue streams through Uber One subscriptions, advertising, and more frequent usage of services.
Share buyback initiation is another key factor supporting Uber's value proposition. Management has announced plans to begin aggressive share buybacks in 2025, signalling confidence in the company's future cash flow generation. In Q3 2024 alone, Uber repurchased $375 million of common stock under its February 2024 authorisation. The company's strong free cash flow generation of $2.1 billion in Q3 2024, supports its ability to return capital to shareholders. These factors collectively strengthen Uber's competitive position and provide downside protection for investors, even as the company navigates potential disruptions in the transportation industry.
Simple Valuation:
Analysts are projecting that FCF will grow at around 25% over the next few years. With this in mind and assigning it to the bull case scenario, below is a range of back-of-the-napkin intrinsic value estimates based on a 10% discount rate and a 5-year timeframe.
Bull: 25% FCF Growth Rate, 20 P/FCF - $107 Per Share
Base: 20% FCF Growth Rate, 18 P/FCF - $78.5 Per Share
Bear: 15% FCF Growth Rate, 16 P/FCF - $56.5 Per Share
Conclusions:
Overall, Uber presents a highly asymmetric investment opportunity. The company has demonstrated its ability to scale profitably, with record-breaking free cash flow generation and sustained top-line growth across its Mobility and Delivery segments.
Concerns about the potential disruption from autonomous vehicles (AVs) seem exaggerated. Nassim Taleb’s concept of the "planning fallacy" — which suggests that projects often take longer and cost more than initially expected due to overlooked complexities — is highly relevant to the AV market. The widespread adoption of AVs will likely be delayed as a result of technological, regulatory, and infrastructural challenges that have yet to be fully addressed. Given these factors, fears of immediate disruption from AVs appear premature. Moreover, Uber is well-positioned to play a crucial role in this transition. By leveraging its scale, the company is poised to solidify its position as a key demand aggregator for both traditional and AV-based transportation services.
With a price target of $90 per share, representing approximately 50% upside to fair value, Uber’s current valuation does not fully capture the strength of its fundamentals. As a result, we are LONG Uber and have initiated a position in our portfolio. For our latest buy and sell announcements, join the chat:
Risks:
Potential disruption from autonomous vehicle technology, though likely overstated in the near term.
Regulatory challenges in key markets could significantly impact Uber's operations and profitability.
Increased competition in core segments from both established players and new entrants.
Execution risk in new verticals and international expansion efforts.
Macroeconomic headwinds like inflation and rising interest rates affecting consumer spending.
Need to keep stock-based compensation under control as the company scales.
Ongoing legal and regulatory scrutiny regarding driver classification and labour practices.
If you liked this new format, let us know and we will continue to make more posts like this in the future. We hope you still got the same value but in a condensed format.
For full disclosure, we do/not have a position. To see our full portfolio, see our most recent update here:
Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. While we believe the information to be reliable, we cannot guarantee its accuracy. The opinions expressed are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions.
Clear thesis! It is reasonably valued with 25% projected FCF growth in the next 5 years.
Love this asymmetric format, great points!