Uber Stock Analysis: The Road to Resilience

In the next chapter of urban mobility, Uber is just getting started. Guided by the transformative leadership of its CEO Dara Khosrowshahi, Uber has been able to move beyond its controversial and chaotic past and reinvent itself into a more resilient company on the heels of the Covid-19 crisis.

Uber has become synonymous with modern urban transportation - a true "verb" for mobility. They have ambitious plans yet face an uncertain future with pivotal questions that leadership will need to get right to be able to control their own destiny and reward shareholders.

In this Uber stock analysis analysis, I unravel the story of a company disrupting the global transportation industry and a stock making a compelling case for its place in the portfolios of forward-thinking investors.

I use my framework for evaluating technology related stocks to analyze Uber (NYSE: UBER) in context of the six characteristics I use to identify potential Multibagger stocks:

1. Riding a megatrend

2. Market opportunity

3. Better mouse trap

4. Optionality

5. Reasonable valuation and strong fundamentals

6. Strong and visionary leadership

Uber stock analysis: Riding a megatrend that has arrived

• Three trends—Mobility-as-a-Service (MaaS), autonomous driving, and electrification—signal a transformative phase for Uber's business.

• MaaS aligns with a shift away from private car ownership, enhancing Uber's relevance in urban transportation.

• The development of autonomous driving presents both a significant growth opportunity and set of challenges in go to market, technology, and regulation, requiring Uber to outmaneuver potential competitors and partners.

• Uber is shifting to electric vehicles to lower its operating expenses, adhere to emissions standards, appeal to eco-friendly customers, and maintain its relevance in the evolving transportation sector.

As a mobility-based technology platform Uber is riding three megatrend tailwinds, Mobility-as-a-Service, autonomous vehicles, and electrification.

Mobility-as-a-service

The traditional model of individual car ownership is becoming less sustainable due to growing populations in urban areas, increasing costs of owning a car, greater remote work, environmental concerns, and more government regulation. Consumers are turning away from car ownership in favor of more efficient, eco-friendly, and convenient options. McKinsey estimates that by 2035, the share of passenger miles traveled (PMT) in private cars will drop by about 15 percentage points.

Instead, many consumers are adopting Mobility-as-a-Service (MaaS) to meet their transportation needs. MaaS integrates various transportation modes into a single, accessible service. It can include a range of services such as car-sharing, ride-hailing, micromobility (e-bikes, e-scooters), public transportation, and in the future autonomous roboshuttles, all of which can be accessed through a single technology platform such as Uber’s.

In the future, most city dwellers may never own a car at all.

Autonomous driving

Uber’s future profitability improvements, and an important part of my long-term investing thesis, rests on the promise of autonomous driving (AD). We are at an important inflection point in the adoption of AD as the industry pivots from testing and validating the technology to launching and commercializing it. Alphabet’s Waymo, GM Cruise, and China’s AutoX, have all launched autonomous ride-hailing services, within certain scenarios and conditions, in select cities. And we can never count out Tesla’s Full-Self-Driving software given Elon Musk’s sheer will. Many other automakers are working towards achieving Level 4 autonomy, where vehicles can drive themselves under certain conditions, over the next few years.

The future of AD is bright but certain elements of the tech stack are missing and some adoption blockers persist. Compact and affordable sensors; advances in Artificial Intelligence (AI) to be able to consistently handle unexpected encounters and conditions; ubiquitous high-speed, low-latency and reliable wireless networks (5G, 6G); and more robust cybersecurity solutions are all necessary for AD to become suitable and safe for all driving conditions and scenarios.

Support from regulators will be essential to overcome AD safety concerns, and while most reasonable regulators understand that AD can save lives, what happens when the number of fatal accidents involving autonomous vehicles rise as the technology gets used more? Will regulators around the world persist to help create and implement the global standards that are necessary for creating a trusted and safe ecosystem?

The business model still has question marks. How will operators and manufacturers make money? Car sales, access frequency, usage time, and/or miles consumed? Who will own the unprecedented levels of data generated by autonomous vehicles? How will this crucial data be shared and consumed? How will insurance work? All answerable questions, yet further experimentation and iteration is necessary before all members of the value chain can build sustainable businesses and mainstream adoption can occur.

Uber will need to balance the opportunities and threats that AD present to its business model. If Uber executes a successful go to market strategy, AD will improve ride and delivery unit economics immensely, improve safety and enhance the customer experience. However, the rise of AD brings new competition to Uber, such as Waymo, Cruise and Tesla that own their propriety technology. There is growing evidence that Uber is building the right strategy, through strategic partnerships, to ride the AV wave to growth and improved profitability. More on this later.

Electrification

The electrification movement underway, set in motion to reduce greenhouse gas emissions, is transforming the transportation industry and driving demand for ridesharing. In the US, transportation generates approximately 28 percent of total greenhouse gas emissions, with these emissions largely coming from the burning of fossil fuels to run cars, trucks, ships, planes, and trains (Source: https://www.forbes.com/sites/bernardmarr/2022/01/20/the-3-biggest-future-trends-in-transportation-and-mobility/?sh=194734ba3783).

The solution, electric vehicles (EVs), are becoming more popular and reaching a tipping point in adoption. Back in 2017, just one in every 70 cars sold was an EV. Five years later (end of 2022), one in every seven passenger cars bought globally in 2022 was an EV (See report by the International Energy Agency). EVs are forecasted to remain on this growth trajectory. Morningstar projects EVs will account for 40% of global auto sales from their current estimated share of 12%. Growing consumer demand, stricter national emissions targets, greater urban populations, improvements in charging infrastructure, and the declining cost of the lithium-ion batteries that power EVs, are all conspiring to drive mass adoption of EVs.

Uber has embraced electrification, pledging to become a zero-emission mobility platform by 2040, with mid term goals of transitioning hundreds of thousands of drivers to EVs by 2025 and operating as a zero-emission platform in the US, Canada, and major global cities by 2030.

Uber is moving towards electrification for several reasons. By transitioning to electric vehicles, Uber can reduce operating costs, comply with emissions regulations, attract environmentally conscious customers, and ensure long-term viability in a changing transportation landscape. Their move aligns with society’s broader goals of reducing air pollution and carbon emissions.

Uber stock analysis: Market opportunity

• Uber has revolutionized the transportation industry, particularly in ridesharing, disrupting traditional taxi services with its convenience and affordability. This disruption led to significant revenue growth, from $400M in 2014 to $31.8B in 2022. Uber's technology has been expanded to delivery, freight, and multimodal transportation.

• With an estimated Service Addressable Market of $2.5 trillion across rides, delivery, and freight, Uber is positioned to capture a larger market share as it capitalizes on changing consumer behaviors and adapts to intense competition.

• Uber is focused on growing the ridesharing market by making their service more accessible to the masses, expanding its delivery services into adjacent areas, and growing its share in the digital freight brokerage market.

Uber has been a disruptive force in the transportation industry. It mainstreamed the ridesharing market and displaced the traditional taxi incumbents by offering a much more convenient, affordable, and accessible alternative to customers who were highly dissatisfied with the status quo. And boy, did Uber ride this disruption to the bank. It grew its annual revenue from $400M in 2014 at a CAGR of 63% to $31.8B in 2022. Now that’s disruption. And, Uber has brought their disruptive nature and innovations (real time market maker, dynamic and surge pricing, sharing economy, and accountability mechanisms) to delivery, freight, and multimodal transportation with the potential to power premium revenue growth well into the future.

Uber has a massive service addressable market (SAM) that I’ve estimated more conservatively than Uber itself to be approximately $2.5 trillion. It is made up of three markets on their own, each in what appear to be the early innings based on share penetration – rides, delivery, and freight.

Rides

This is the core business of Uber, where it connects drivers and riders through its app for transportation services. Uber and analysts have used various methods to calculate the ride-sharing Total Addressable Market (TAM), each method receiving criticism for either overestimating or underestimating the market size. In their earliest days, Uber dramatically undersized the ride sharing TAM by basing their estimates on the size of the “cab and car services” market, which was approximately $4B.

It turns out ordering a ride with the press of a button on your phone expanded the market well beyond the size of the taxi industry at the time due to ride sharing’s convenience, accessibility, and lower price. Uber expanded their TAM by removing friction in a market so that more customers could access transportation services. Just as countless other tech companies have been able to use disruptive technology to bring down the costs of their products and services, I expect Uber will be able to do more of this over time by onboarding autonomous driving onto its network. In five to ten years, autonomous driving should be an instigator in making Uber’s mobility offering more affordable and accessible.

At the opposite end, Uber was criticized for overestimating its Service Addressable Market (SAM) during its IPO at $3T, which assumed all total passenger vehicle miles travelled (on trips less than 30miles), were available for Uber to capture. It’s not realistic to assume all those miles will transition from privately owned vehicles to ridesharing or other Uber mobility option. We just discovered from McKinsey’s study that a still sizable 29% of total miles travelled in the world in 2035 will remain driven by private vehicles, this after a 16% pt reduction from current volume. So, yes, in time less miles travelled will be done in a person’s own vehicle, but Uber was too optimistic that all passenger vehicle miles were servable by Uber.

So, what is the most reasonable way to estimate the ride sharing SAM? With so much of the Uber investing thesis dependant on sustained premium revenue growth, we must understand how much more market there is for Uber to realistically go after.

While far from perfect, my estimate uses McKinsey’s mobility shift projections discussed earlier and what that means for Uber’s SAM. McKinsey forecasts that by 2035 16% pts of miles travelled today via private cars will shift to methods in scope of Uber’s acquirable section of the total addressable market in the following manner – 3% to micromobility, 2% to ride hailing and taxi, and 7% to new forms of transportation, such as robotaxis. Adjusting mobility share to just the aspects of the market Uber could conceivably capture (i.e., I assume they won’t replace public transportation or walking), here is what the market opportunity will look like for Uber in 2035:

Using the total passenger vehicle miles travelled in 2019 (per Uber’s 2019 S-1) as an imperfect, yet conservative estimate for 2035 (because it does not account for population growth and likely increases in miles travelled), in the countries Uber operates in, we can estimate the total miles travelled that will be addressable by Uber in 2035 to be 2.4T:

Finally, if we use Uber’s S-1 revenue per mile estimate ($0.64) we can come up with a projected 2035 SAM that feels like a reasonable and compelling estimate of $1.5T.

While $1.5T is lower than Uber’s own 2019 S-1 SAM estimates ($3T) it is higher than the current market size as measured by Statista (below), indicating that as Uber can bring down the fees and removes more friction (through autonomous driving and other market efficiencies) the market grows considerably beyond what Wall Street analysts are likely pricing into their models today. Later, we'll examine whether Uber can decrease fees and reduce market friction, thereby making their services more accessible and unlocking more SAM.

With revenue of $14B from its mobility segment in 2022, which includes its flagship ridesharing service and other offerings such as micro mobility, Uber captured approximately 14% of the global ridesharing market in 2022. However, this may be an understatement, as the global market estimate of $96.9B in 2022 includes countries where Uber does not operate.

While Uber appears to have neutralized US competition (Uber held 72% of the US market share for ride-hailing platforms in 2022), it faces tough competition in some non-North American markets it competes in. Its local competitors have a better understanding of local needs, behaviors, and preferences. Uber appears to have learned from its past mistakes of trying to fight too many local rivals in too many markets as evidenced by its high profile exits over the years from Russia, China, and most of Southeast Asia. While selling out of those markets was a difficult decision, they are in a better position to compete in prioritized markets with focus and the full weight of their considerable resources.

Uber’s upside lies in capturing more of the miles that people currently drive in their own cars but will switch to ridesharing and related services in the future. For that growing SAM, Uber is still in very, very early innings:

“Today, Uber accounts for less than 1% of all miles driven globally. Just a small percentage of people in countries where Uber is available have ever used our services. And we are still barely scratching the surface when it comes to huge industries like food and logistics, and how the future of urban mobility will reshape cities for the better.” - Dara Khosrowshahi, Uber CEO

Delivery

Over the last couple of years Uber has followed through on its CEO’s ambitions to expand the delivery opportunity for the company beyond its core Uber Eats business:

“We think there’s a huge market — anything that you want from your local business or your local market, sent to your home inside of 30 minutes. That’s an enormous business and you’re seeing signs now — very early signs — of a huge market ahead of us.” – Dara Khosrowshahi, Uber CEO, 2020

Uber has since added several new, adjacent markets to the range of products that qualify for its delivery services, including groceries, alcohol, pharmaceuticals, pet supplies, convenience items, and others. While I couldn’t find estimates for most of these new markets, some are likely to fall within the $920 billion Statista estimate of the 2023 grocery and meal delivery worldwide market (below). Although Uber is not present in every market that Statista’s estimates cover, it appears to be a fair approximation based on Uber’s own SAM estimate for delivery being $795 billion in its 2019 S-1 filing. Uber's 2019 estimate relied on the global spending on restaurant food from delivery, takeout and drive-through in 2017, without accounting for the adjacent markets that Uber now serves.

At $10.9 billion revenue in 2022, Uber’s delivery business is only 1.4% of the overall market. Lots of upside, and I’m bullish on Uber’s ability to capture more share. Over the last five years (2018-2022), Uber grew its delivery business at an astonishing 70% CAGR. While the Covid pandemic lockdown contributed significantly to this growth, Uber has a secret weapon over its very formidable competitors in delivery that could compound over several years into a major advantage. The Uber Rides business is a super efficient customer acquisition channel for Uber Eats. It gets more new customers from Uber Rides than alternative customer acquisition channels Google, Meta, and Instagram combined. This means major marketing expenditure savings as Uber does not need to invest as heavily as its competitors to grow demand for Uber Eats.

Despite the customer acquisition advantage, delivery is way more competitive for Uber than its Rides business. This is particularly true in the US where DoorDash dominates the online food delivery market with a 65% share as compared to Uber’s 23% (as of February 2023, Statista). There may be some unaccounted future enterprise value growth if Uber can convert its structural advantage into share gains.

The other notable adjacent market Uber has expanded into is package delivery, estimated by IBIS to be a $163 billion US market in 2022 (Source: https://www.ibisworld.com/industry-statistics/market-size/couriers-local-delivery-services-united-states/). Connect, Uber's package delivery service, has certain constraints that make it less competitive than the conventional couriers in some parts of the market. Uber is only competitive with FedEx and UPS for small, low-value, and urgent items that need to be delivered locally; not the larger, higher-value, and less time-sensitive packages that need to be shipped nationally or internationally. Uber is also offering stand-alone fulfillment services (separate from the Uber marketplace) that are used by local merchants and giants such as Walmart. I can imagine during periods of high demand, how Uber’s ability to seamlessly add capacity can be quite compelling for merchants. Relative to the other delivery sectors, package delivery is small and unlikely to contribute significantly to Uber’s future growth. However, it can increase the utilization and efficiency of its fleet, offering additional economic benefits to its drivers.

Freight

Uber Freight is a brokerage service that connects shippers and carriers in the freight industry. In 2021, the global freight brokerage market was valued at $48.1 billion, and it is expected to grow to $90.7 billion by 2031, with a CAGR of 6.3% between 2022 and 2031. At $6.4 billion in revenue for Uber Freight in 2021, they have captured 13% share. What’s promising for Uber is that more of the freight brokerage market is expected to move to digital to mitigate the current inefficiencies in the system that leave truckers driving too many empty miles. The global digital freight brokerage market is expected to grow at a CAGR of 31.3% between 2020-2027, outpacing the growth of the total market.

Uber stock analysis: Better mouse trap

• Uber has so perfectly solved the mobility problem that they’ve joined the exclusive club of top companies whose brands have become verbs.

• Uber has built the world’s largest mobility platform with over 130 million monthly active users and 6.5 million drivers, enabling them to capture their share of the outsized value they’ve created for the entire mobility ecosystem.

• Uber has built a highly durable and defensible moat on the back of its multimodal offering, treasure trove of user data, and membership program. It will be very difficult for competitors to replicate their network and sets Uber up for potential of “winner take all” dynamics.

• With a strong innovation track record, Uber's current innovation and R&D strategy focuses on modest, incremental advancements like Uber Teens and Uber Reserve, rather than the ambitious projects of the past such as autonomous and flying cars. As the company grows its revenue and profitability, I’d like to see them make bigger and bolder bets.

Uber was founded in 2009 by Garrett Camp and Travis Kalanick, who came up with the idea of requesting a ride from a smartphone app after they had trouble finding a taxi in Paris. Uber launched its first service in San Francisco in 2010, offering black-car rides that were cheaper than taxis. Thus began Uber’s founding legacy, reinventing the transportation industry by making it easier, cheaper, and more convenient for people and goods to get around. Uber pounced on the rise of smartphones and the desire for on-demand work to create a transactional platform that matches drivers and riders with a set price based on local conditions and surge pricing. They are the pioneer of the world’s best and largest mobility platform.

This distinction of Uber being a platform is important. Platform owners can capture more than their fair share of the outsized value they create, rewarding their shareholders with above average market returns. In the preeminent book on the subject, "Business of Platforms", the authors analyzed the stock returns of platform companies versus a control sample of non-platform companies and found that platform companies outperformed the control sample over a 20-year period with 14% annualized returns versus 8%. This is quite promising for Uber shareholders that are willing to be patient.

Upon achieving scale in the ridesharing market, Uber extended its platform into food and package delivery, freight, micromobility (i.e., electric bikes and scooters), and even urban aviation. Uber has its sights on becoming a super app for transportation and daily commerce needs, or as they term it “an operating system for daily life”. To achieve this lofty ambition and unleash the full economic opportunity of its platform business, Uber will need to nurture its strong network effects, make their services more accessible, and continue to stack the barriers to entry. These achievements will only happen if Uber can continue its innovation streak with a continued willingness to invest in innovation even if means sacrificing in the short term.

Strong network effects

With over 130 million monthly active users and 6.5 million active drivers, Uber has built the largest network of drivers and consumers on a single mobility on demand platform. Uber's success in building a strong network serves as a world-class example of how winning over the “hard side of the network” can lead to winning over the entire network. Paramount to the sustained success of a network, the hard side is made up of a minority of users that create disproportionate value. Participants on the hard side do the heavy lifting of the network, contributing way more to the network than any other group.

The hard side of the mobility-on-demand networks are the drivers. If you can win over more drivers, prices will drop, and more riders would be attracted to your network. More riders mean more drivers because they can earn more, sparking the magical self-reinforcing growth flywheel. Uber applied its creativity and aggressiveness to every play in the growth toolkit, including financial incentives and adding features to optimize the app experience for drivers. According to Andrew Chen, former driver growth lead at Uber and author of the book The Cold Start Problem, the most impactful tactic Uber used to win over the hard side was targeted bonuses. Appealing to drivers’ primary motivation of making more money, Uber targeted bonuses at competing network’s most valuable drivers (MVD). MVD’s were known for being active on multiple ride-sharing networks and so Uber went about identifying these multihoming drivers using a combination of sophisticated data science methods and plain old guerilla warfare, and then offered them multiple financial incentives. It wasn’t good enough for these top drivers to be on Uber’s network, they had to be off competitive networks, and so the incentives were structured in a way that it would be less profitable to drive for other networks.

Now that Uber has 75% of the US ridesharing marketing and Lyft only has 25%, they’ve switched to more organic methods for growing, engaging and retaining drivers. Uber’s investments in operational improvements and innovation in the Uber Driver app are starting to compound, contributing to happier and more committed drivers on Uber’s network. Less reliance on the financial incentives they had historically used with drivers are also improving unit economics with Uber achieving record-high Mobility margins in Q3 of 2023.

The pay off from this new approach is in the numbers. In 2022, off a base of 4 million, Uber was able to add 1 million new drivers. In Q3 2023, active drivers on Uber were up 32% YoY and driver engagement (or monthly supply hours per active driver) was up 5% YoY. The driver side of the network is strengthening.

An anecdotal example of the strength of Uber’s network is their ability to attract one of the largest merchants in the delivery market onto their network – Domino’s Pizza. Domino’s had long been against working with third-party order and delivery aggregators like Uber, but recently they announced a global agreement with Uber which allows Uber Eats users to order Domino's directly on the platform. Domino's has realized that exposure to Uber's strong network effect and its more than 130 million monthly users is just too large a market for them to miss out on.

Barrier to entry

For a platform company like Uber, key to their continued dominance and growth is the defensibility of their moat, which comes down to how easy or how hard it is for competitors to replicate their network. While it is quite easy for both customers and drivers to switch to Lyft or other competing platforms, Uber has three primary assets that give it the most defensible moat in the industry.

1. Multimodal offering: Uber has built out a robust set of offerings that make it a one-stop shop for all transportation needs. The fact that consumers can go to Uber for rides; carpooling; taxi; car rental; micromobility; food, grocery, alcohol, pharmacy, and package delivery; public transportation and other services, creates a level of in-app stickiness that its competitors with more narrow offerings cannot achieve. By offering consumers the right choice at the right time, Uber is building strong reliance and loyalty across its 130 million monthly active users.

2. User data: Uber gathers extensive data about both users and drivers. Uber has developed a clearer picture of its users' tendencies, such as where they travel to and from, what they get delivered, and their consumption patterns. This vast collection of data enables Uber to enhance its algorithms and balance supply and demand for improved outcomes for both users and drivers. Additionally, Uber can deliver highly personalized offers at the optimal time, resulting in greater user lock in.

3. Uber One: By offering subscribers exclusive benefits and savings across rides and food delivery, the company’s membership product Uber One (available for $9.99) incentivizes users to consolidate their transportation and dining needs with Uber, while making it more challenging for competitors to replicate. Creating a comparable, multifaceted program would require a more diverse range of services that competitors simply cannot offer today and would require significant investment at this stage to build. The risk of competitors such as Lyft and DoorDash partnering to offer a similar, cross rides and delivery subscription, are likely too complex that a merger would be more likely.

Uber One is available across 18 countries and has 15 million members, up from 12 million members in 2022. It’s still early days for the membership program. There is lots of runway to expand into new markets and to innovate on the offering to make it even more compelling for users. The economic payoff for Uber and its shareholders is significant if Uber can continue to grow the program. Just like how Prime members outspend non-Prime members on Amazon, Uber One subscribers spend more. Uber One subscribers spend four times more on Uber than non-members.

Innovation

For Uber to sustain its premium revenue growth its crucial the company sustains what has been a good track record of innovation. Uber expanded its services beyond its first act of ridesharing to include offerings such as Uber Eats and grocery.

More recently the company has innovated and invested in a portfolio of new bets that are generally aimed at expanding its addressable market, including Uber Teens, Uber Reserve and various hailable products (Uber Taxi, Uber Moto, etc.), low-cost products (UberX share, high-capacity vehicles), and two or three-wheeler vehicles in emerging markets. Uber has demonstrated they are able to turn these innovation related investments into business growth, as the portfolio of new bets are now doing $8B in gross bookings (12% of mobility gross bookings) and represents 30% of new customer acquisition (Source: Fireside Chat with Goldman Sachs, September 7th, 2023). The disproportionately higher customer acquisition performance of its new bets is quite encouraging in terms of Uber’s innovation muscle adding significant value to the company.

After getting its R&D spend under control in 2020 by selling off its moonshot bets such as its self-driving car business and its flying car unit Uber Elevate, Uber is back to responsibly growing its R&D investment level. Uber’s R&D expenses for the twelve months ending September 30, 2023 were $3.127B, a 19.85% increase year-over-year.

Uber’s portfolio of innovation and R&D investment clearly favors hitting singles and doubles (e.g., Uber Teens, Uber Reserve), and not the grand slam, headline grabbing investments they had been making pre-2020, such as autonomous and flying cars. There are trade-offs in the R&D portfolio allocation decisions Uber has made, and for now I’m ok with that as an investor. As the company grows its revenue and becomes more profitable, I would like to see management become more ambitious with its bets.

With its recent investments in R&D, acquisitions (e.g., the alcohol delivery service Drizly) and equity positions in partner companies (e.g., Joby Aviation, scooter and bike sharing company Lime, delivery platform GoPuff), Uber is committed to investing in innovation even at the expense of missing Wall Street’s short-term expectations. A great sign for investors looking for premium growth, generational companies.

“And we will not shy away from making short-term financial sacrifices where we see clear long-term benefits.” - Dara Khosrowshahi, Uber CEO, S-1 Filing

Uber stock analysis: Optionality

• Uber's partnership with companies like Waymo and Aurora for autonomous driving technology is a key growth area and critical to the long-term Uber investing thesis. By integrating autonomous vehicles into its service, Uber aims to reduce costs, expand gross margins, and make its service accessible for more people. It will take some time for it to play out completely, but I don’t think the full impact of autonomous driving on its business is totally baked into Uber’s current stock price and therefore may offer investors some upside.

• Uber could explore adjacent markets such as home and pet services, leveraging its technology platform and large network, although I wouldn’t expect these moves to be needle movers for such a large company. Uber has recently started exploring the larger travel booking market, but more time is needed to fully evaluate its potential impact.

• Uber's advertising business, launched in 2022, is rapidly growing with a significant advertiser base already forming. Inspired by other marketplace advertising models like Amazon's, advertising shows promise as a substantial revenue stream for the company. However, its emerging advertising business is already a well-recognized aspect of the Uber investing thesis.

Uber has turned a lot of heads because of how quickly it was able to scale its second act business, Uber Eats, after building its original idea of ride sharing into a behemoth. While the category growth was driven by the Covid pandemic, Uber still had to execute in an insanely competitive space. Prior to Covid, Uber Eats was a paltry 10% of its revenue. Post Covid, Uber’s business was split nearly evenly between mobility and delivery.

Uber’s execution prowess will be necessary to realize the attractive optionality Uber has in front of it, including partnering with autonomous driving companies, expanding its platform to additional verticals, and advertising.

Autonomous driving

Uber is partnering with several companies that are developing Autonomous Driving (AD), such as Waymo, Aurora, Motional, and Nuro. These partnerships allow Uber to add different types of Autonomous Vehicles (AVs), such as self-driving cars, trucks, delivery vehicles and drones to its supply side for autonomous rides and delivery. They are currently up and running with autonomous ride pilots in Las Vegas, and sidewalk robots and AVs that are delivering foods in Fairfax, Miami, Los Angeles, and Mountain View. Uber has also signed a multi-year partnership with Alphabet to bring their autonomous driving technology Waymo Driver to the Uber platform, beginning in Phoenix.

I am being deliberate listing autonomous driving as the top opportunity for Uber to grow its business. While there is some risk choosing the partnership route over developing its own proprietary autonomous tech, which I will cover in moment, I do believe the long-term potential AVs will have on Uber’s growth is significant. By converting more of its driver supply side network to AD Uber will be able to dramatically lower rider fees to make the service accessible to more people and therefore grow its addressable market. Given the current maturity of the technology it will likely take 10+ years before most of Uber’s demand will be served by autonomous options. But it’s already being used in select cities, and it will only scale from here. After achieving the autonomous milestone, Uber's gross bookings and revenue will align more closely, and profitability will improve due to significant reductions in driver fees, its largest current expense. A portion of these savings will be passed on to customers so Uber can grow volume and revenue.

Wall Street might be underestimating how much self-driving cars could help Uber grow its business. Uber bears speculate that as AD technology gets better and deployed more, providers such as Waymo could make ride-share services like Uber and Lyft totally unnecessary by setting up their own competing ride sharing services.

This bear argument overlooks the potential for mutually beneficial partnerships and the existing strengths of Uber's network. Autonomous driving companies such as Waymo, who are already on record with plans to offer their technology to OEM manufacturers, benefit immensely from partnering with Uber and its well-regarded brand and immense user base who might otherwise be hesitant about AVs.

Moreover, Uber is well-positioned to facilitate the gradual transition to AD. The shift to full autonomy will be a hybrid process, with human-driven and AVs coexisting for a significant period. Further advancements in the tech are necessary to meet the long tail of use cases such as driving in bad weather or in unique local conditions. With the time it will take to scale manufacturing and deployment there is NO way autonomous provides will be able to meet the ride-sharing demand over night. During this transition period Uber's extensive network and experience in ride-sharing place it in an ideal position to manage this transition effectively, ensuring continued service availability and customer satisfaction.

“Ultimately, we think the better solution is for the Waymo’s of the world, Auroras of the world, et cetera, mobilize to work with us so that you have this hybrid transition state, where you can still have this 98% coverage everywhere no matter what weather it is, et cetera, but we have this smart switching layer. Sometimes a human should come pick you up, sometimes a robot should come pick you up. The transition is going to take a while, but it is happening. It's cool. My instinct is that you will see small scale. Continued experiments get bigger over the next 5 years, but it's going to take a good 10 years for it to be a material part of our network or transportation at large. That's a guess.”

– Dara Khosrowshahi, Uber CEO

I also think it’s worth noting that the reason why Uber senior leadership is not touting the full future impact of AD on its business is because the company needs to maintain positive relations with its driver community. Nothing would drive more of a wedge between Uber and its drivers than talking about how they plan to significantly reduce the number of miles on its network driven by humans.

For these reasons I don’t think the full impact of autonomous driving on its business is totally baked into Uber’s current stock price and therefore may offer investors some upside.

Expanding into new verticals

Uber's technology platform, which applies a sophisticated algorithmic approach to efficiently match supply with demand, could be further extended into new verticals. Examples include freelance and gig work, home services (e.g., cleaning, plumbing, electrical work, etc.), car rentals (in a bigger way than current offerings), pet services, and healthcare services. Many of these verticals already have niche players serving them, such as TaskRabbit and Angi in home services.

Of these verticals, home services, pet services and car rentals are the ones most aligned with Uber’s existing supply market. Uber has even launched a mini-pilot program for a TaskRabbit-like service that will let Uber users hire people to complete various household tasks. During the pilot phase of the program, Uber drivers and couriers can choose to participate in assisting customers with minor household tasks such as assembling furniture, doing laundry, and mowing the lawn through the Uber app.

Uber is very well positioned to succeed in these niche markets. They have the relevant assets (large network), an exemplary execution track record for successfully entering new markets (Eats, delivery, freight), and a strong innovation culture. I just don’t believe success in these niche markets are going to move the needle much for an already $112B behemoth (market cap as of November 2023). As a public company Angi is worth $1B and Task Rabbit (owned by Ikea) reported ~$100M in 2020 transactions.

Recently Uber has begun experimenting in a much larger, and intensely competitive, vertical. In late 2022 Uber launched travel functionality in the UK, allowing users to book train, coach, Eurostar, car rental and flights from the app.

Uber's expansion into travel booking represents a natural progression for the company, considering the portion of its user base that already relies on the app for long-distance travel. Every quarter, 6-8% of rides are to other countries and 22-24% are to cities outside the user's hometown. In the last quarter, 700 million trips on the platform were made outside of the users' home market.

While it’s way too early to make any conclusions, according to CEO Khosrowshahi recent remarks Uber's travel booking service is showing promising early results – “60% of consumers who booked a coach or train through Uber are repeat customers, and among those booking flights, there's a 30% repeat rate”. We will have to wait for more data points from the company to be able to assess how impactful travel will be on Uber’s bottom line.

Advertising

Uber is well on its way to building a multibillion-dollar advertising business. In October 2022, Uber officially launched their advertising division and introduced Uber Journey Ads, an engaging way for brands to connect with consumers throughout the entire ride process. Uber offers its brand partners a variety of advertising options on the Uber and Uber Eats apps. At Skift Global in October CEO Khosrowshahi shared that the ad business was already a $650 million run rate for the company. In Q3 2023 Uber’s advertiser base grew over 70% YoY to more than 445,000 businesses of all sizes.

Uber is taking a page out the playbook other marketplace businesses use to grow revenue. Amazon started its advertising business in 2012, surpassing a $30 billion in annual revenue run rate in 2022. In the most recent Q3 2023 results, Amazon reported its ad business delivered more than $12 billion in revenue. Amazon’s online store net sales of $220 billion in 2022 are way bigger than Uber’s $115B 2022 gross bookings. However, Uber’s marketplace business is growing faster than Amazon’s and Uber has a tonne of runway to even come close to Amazon’s advertising revenue to product net sales ratio of ~14%. For comparison, Uber’s advertising revenue represents only 0.6% of total gross bookings on its marketplace.

Advertising will be a big business for Uber. The problem for investors looking for underappreciated assets is that they won’t find it in Uber’s advertising business, as it’s a well-known element of the Uber investing thesis.

Uber stock analysis: Reasonable valuation and strong fundamentals

• Despite a recent slowdown in the freight market, Uber has seen 25% revenue CAGR from 2018 to 2022. Uber’s profitability and strong growth in the Mobility and Delivery segments indicate potential market outperformance, backed by improving unit economics.

• Under CEO Khosrowshahi, Uber has reduced driver incentives and marketing expenses, contributing to its first ever GAAP operating profit in Q2 2023. Further efficiencies, alongside growth in advertising and subscription services, are expected to continue to expand Uber's gross margins.

• Valuing Uber involves considering its disruptive impact, network effects, and potential for long-term growth. While traditional valuation metrics may suggest overpricing, Uber's growing service addressable market, reduced long-term costs, and operational efficiencies present a favorable outlook for sustained profitability.

Uber is a premium growth stock. It grew revenue from 2018 to 2022 at a compound annual growth rate (CAGR) of 25%, even with the pandemic-induced slump Uber suffered. While their Mobility and Delivery segments remain strong growers, Uber’s overall growth has slowed over the last two quarters (Q2 and Q3 2023) due to a challenging freight market cycle.

Premium growers like Uber are an exclusive group of companies. As Mark Mahaney writes in his book Nothing but Net, “only about 2% of the S&P 500 have been able to consistently generate 20%+ revenue growth for 5 years, but these stocks have usually materially outperformed the market”. Counter to this trend, during this five-year period, Uber underperformed the market by 25%+ points. Now that Uber is profitable, with a path to sustainable profitable growth, I expect Uber to outperform the market over an extended period.

Uber’s below market performance as a public company is tied to its historical profitability challenges. Their gross margins (39.4% as of September 30, 2023) are sub-par relative to SaaS companies but unsurprising given the company’s high costs of revenue (62% in 2022) mostly due to their high driver payments and incentives.

Since new CEO Dara Khosrowshahi joined the company Uber has been working hard to improve its unit economics. The company has been reducing its previous reliance on driver incentives, with Morningstar reporting in May 2023 that driver incentives continued to decline (down 42% in the U.S. and Canada).

Thanks to their flywheel of cross-platform customer acquisition (Delivery and Rides serving as acquisition funnels for each other), Uber has been able to bring down its Sales & Marketing expenses.

The payoff of this flywheel has been a lower Sales & Marketing Expense ratio (sales and marketing expense expressed as a percentage of revenue), with Uber’s falling dramatically from 58% in 2019 to 15% in 2022.

These efforts helped Uber report its first-ever GAAP operating profit in Q2 2023, which management doubled down on as their commitment to be profitable in each quarter moving forward.

The company has a few more tricks up its sleave to improve unit economics and expand gross margins in the future. As the advertising business grows, its favorable margins will contribute to Uber’s bottom line. Growth in subscription customers will increase top line as subs spend more than non-subs. Uber’s unit economics will also benefit as its customer acquisition costs decrease with more subscriptions. Plus, as autonomous vehicles drive more Uber miles, cost of revenue will naturally decline, and margins will expand. I do not expect SaaS level margins from Uber, but I’m optimistic about the levers Uber has available to expand its gross margins over time.

Valuation

Valuing technology stocks is both an art and a science. Tech investors must be part futurist and part financial analyst. How do you quantify the potential of one of the biggest disruptors to the transportation industry in the last half century that has just became profitable, but now faces potential upheaval with the rise of autonomous driving? Traditional valuation metrics do not account for the disruptive nature of Uber’s technology, its network effects, and the potential for exponential growth.

Traditional measures would quickly disqualify Uber's stock as overpriced. It is a company with minimal earnings and a sky-high P/E multiple. However, there is a history with companies such as Netflix and Amazon who forewent profits in the short term so they could invest in growth and reward long-term shareholders with sustainable growth. Netflix's initial heavy investment in marketing for geographic expansion decreased once they established a strong presence in new markets. Long-term investors in Amazon benefited from the company's transformation in the 2010s, as its shift from a low-margin e-commerce business to a high-profit model with AWS and advertising significantly increased profitability.

The best perspective I’ve found for valuing potential generational companies is the approach Mark Mahaney outlines in his book Nothing but Net. Mahaney suggests three key questions to help us separate the future profit machines from the bad businesses. Let us ask these questions of Uber.

1. Can the company sustain premium revenue for a lengthy period?

Yes. Uber is actively expanding its service addressable market (SAM) with line of sight into future initiatives that will further grow its SAM. It has a management team with a proven track-record of successfully expanding into new markets and use cases successfully. Its growing membership program will provide more revenue visibility and expand revenue per user.

2. Are the company’s current earnings being depressed by major investments that will subside or be subsumed when it achieves scale?

Yes. As discussed earlier, driver incentives and sales and marketing are the two largest expenses that are on the path to subsiding. As Uber entered new markets, driver incentives were crucial to winning over the hard side of their network. As Uber gains share and wins over drivers in each market, and the market tips in their favor, they do not need to invest as much in incentives. This has been proven out in the US and Canadian markets where Uber has gained dominance and therefore has been able to wean drivers off incentives. Because of the traction with Uber’s membership program and their cross-platform customer acquisition flywheel I am confident Uber will be able to continue to invest less in marketing, relative to revenue.

3. Is there reason to believe the company’s long-term operating margins can be healthier than current levels?

Yes. In the last couple of years Uber has displayed a level of financial discipline that demonstrates an ability to continue driving operational efficiency. The company has undertaken measures to reduce costs, which include staff reductions and enhancing operational efficiencies in their main ridesharing and delivery segments. As the company continues to scale it will be able to find more operational efficiencies through route optimization and doubling up orders. Investors will need to be patient as the step change in their margin profile will come from the adoption of autonomous driving onto its network and further application of AI across its operations and technology stack.

Uber stock analysis: Strong and visionary leadership

• Since assuming Uber's CEO role in 2017, Dara Khosrowshahi has significantly shifted the company's trajectory and image, addressing major scandals and challenges as he began his tenure with his diplomatic and empathetic approach.

• Under Khosrowshahi's leadership, Uber achieved profitability, a stark turnaround from previous substantial losses, through tough decisions like layoffs, market exits, and technology divestitures.

• Investors seeking assurance in Uber’s leadership’s ability to drive growth through innovation and ensure financial stability can rest easy with Khosrowshahi at the helm.

Since taking over as CEO of Uber in 2017, Dara Khosrowshahi leadership style has marked a significant shift in the company's trajectory and public image. Khosrowshahi took over a hyper-growth company that despite transforming the worldwide transportation industry was plagued by chaos and controversy. The list of challenges Khosrowshahi faced when assuming leadership would scare off most candidates. The company faced a massive #DeleteUber movement that caused more than 200,000 passengers to delete the app, a series of sexual harassment, discrimination charges, regulatory evasion and corporate espionage scandals, a toxic and aggressive corporate culture that reflected the personality of former CEO Travis Kalanick, huge losses ($4.5 billion in 2017), and a dysfunctional board of directors.

Dara went right to work applying his measured, diplomatic, and empathetic leadership style to manage the crisis the company was in, while inspiring trust and loyalty amongst the diverse set of Uber stakeholders. He started his turnaround at Uber by listening to the employees, drivers, customers, and regulators. He reshaped Uber’s culture, values, and mission, and settled some of the major lawsuits and disputes that Uber faced. He secured a $9.3 billion investment deal from Softbank, which gave Uber more capital and stability. He also smoothed things over with regulators, apologizing to London authorities and actively working to resolve the issues London politicians had raised with his predecessor to no avail. ​

One of the most notable achievements under his leadership was turning Uber profitable. This was a significant turnaround from the company's history of eye-popping losses. Dara achieved this by making some very tough decisions, including layoffs, pulling out of very large markets, and selling off certain strategic technologies.

Khosrowshahi's vision for the company extends beyond mere profitability. He envisages Uber as “an operating system for everyday life in a city,” aiming to connect all available vehicles and drivers for local transportation needs. He is supporting this ambitious goal by investing heavily in machine learning and artificial intelligence. While he is often discounted for not being technical, nor a “product person”, Uber has not lost a step in its innovation quotient since Dara took over.

Dara has brought in seasoned leadership, along with retaining some long tenured leaders in the company, from the best companies in the world – Google, Microsoft, Pepsi and Merril Lynch.

The best way I know to get some insight on the quality of leadership at a company is to go to the source. What are the employees saying about the leader? Here are reviews of Uber and CEO Dara Khosrowshahi provided by employees on Glassdoor.

I’m a little disappointed by the scores as compared to other companies I follow. However, I did see some driver submitted reviews so its not an easy comparable.

Without oversimplifying, leadership’s mandate is to create value. That’s how shareholders benefit from leadership decisions and actions. Leaders raise the value of an enterprise, which eventually accrues to shareholders in the form of the stock price rising.

In the technology sector, especially for companies such as Uber that are still in the early stages of their growth, significant profits can be unrealistic. Balancing the need to invest for market share capture, while spending responsibly and inline with revenue forecast is the sweet spot for outstanding leaders of high growth technology companies.

While it appears that Dara is achieving the right balance between growth and profitability, by more technical measures Uber is not quite there yet. Let’s use the “Rule of 40” to double click. The Rule of 40 demands that a company’s growth rate when added to its free cash flow rate should equal 40% or higher:

YoY Annual Revenue% + EBITDA (earnings before interest, taxes, deprecation, and amortization) as a percentage of revenue = 40% or more

Using data from Uber’s most recent quarter (Q3 2023) we can see they fall below this benchmark:

14% (YoY revenue growth) + 11% (EBITDA as % of revenue) = 25%

I’m optimistic Uber is on track to pass the 40% rule benchmark. The macro for freight is bound to improve and EBITDA continues to grow. In Q3 2023, Uber’s EBITDA grew 112% YoY.

Source: Q3 2023 Earnings

Dara Khosrowshahi leadership has been a beacon of transformation and forward-thinking strategy. His tenure has not only navigated Uber through turbulent times but has also set the stage for innovative growth and financial stability. This leadership trajectory, marked by tough, yet necessary decisions and a clear vision for the future, is promising for investors seeking confidence in the company's direction.

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Before making investment decisions please do your own research and/or seek the advice of a professional adviser. This is not a stock recommendation, it's just an analysis of Uber's stock.