Uber is more than just a ridesharing company. Strategic moves into logistics and autonomous driving market are key to drive margin expansion in the future.
Uber spends on average $100 million each quarter on R&D to solve fully-autonomous self-driving problems. It also recently rolled out pilot program in logistics, Uber Freight.
For investors in global mobility space, Uber is the company to bet on. Aside from its $70 billion market cap, it also has $10 billion stakes in Didi and Grab. Post-IPO Overview
To venture capitalists like us, any technology IPO is always something that creates a huge excitement. All the time, we support many risk-taking entrepreneurs who look to build disruptive businesses from scratch and pour their blood, sweat, and tears into their companies. Uber ( UBER ) was no exception. Its founder, Travis Kalanick, though no longer the CEO, took that risk and got his reward alongside his early investors and employees.
When we look at the other side, though, to be more precise, the mainstream capital market or late investors, as expected, there will be more skepticism than excitement. Uber raised $8.1 billion in IPO last May with price per share of $41. Uber has been quite volatile post-IPO apparently. Once hitting its highest point to-date at $46.38 per share last month, it has now been trading downside and currently trading lower than its IPO price at $40.40 per share.
We think that Uber is a very fascinating company and one of the few technology companies we feel comfortable to bet on to get an exposure to the modern mobility market. As venture capitalists, we are not worried about volatility since we have a long term investment horizon. We see the capital market merely as a tool to manage our exposure.
We are also not worried about the fact that Uber is and will be losing a lot of money for a long time. In 2017, Uber lost $4 billion, or more than 10 times the amount it lost in the previous year. The following year in 2018, Uber managed to turn profitable, though it was due to a one-time event when Uber divested all of its China operations through a $3.7 billion mix of cash and share-swap deal with Didi , the ridesharing market leader there. In the short term, we believe this sort of fluctuation will happen. In the future, we do think that Uber is more than just a ridesharing company and so far we feel very positive about Uber’s strategic moves into logistics and autonomous driving industries.
Uber generates all of its revenue through two segments, the Core Platform which includes its ridesharing and food delivery business, and Other Bets, which includes its future businesses such as Logistics and Autonomous mobility. It simply generates revenue by taking some amount off the Gross Booking Volume, which represents the total dollar Value of rides booked. (Source: Uber’s Q2 2019 10-Q filing. Uber’s Gross Booking Volume)
For all rides booked, be it for food delivery, and ridesharing, Uber generally generates revenue of around 18% – 21% off the total dollar value of them. Overall, on the Gross Booking Volume, Uber has grown around 2 to 8 times since 2017 across the core platform, which is not an easy feat given its already huge size. As a reminder, if it were not for the China exit , Uber might have hit a $10 billion Gross Booking Volume already in Q4 2017.
What most investors cannot deny is the fact that Uber’s overall execution has been quite solid despite all the issues it had to deal with such as its China and Southeast Asia exits, $10 million lawsuit in a sexual harassment scandal involving one of its employees , which then followed by management shake-ups. This is why execution is not our current concern.
As a matter of fact, if there were any concerns at all about Uber’s current business, it would be how Uber currently retains its drivers through incentives across its markets.
Looking at its adjusted net revenue, we have learned that it has taken Uber 3 times as much capital to incentivize its drivers to grow its top-line core platform revenue by just 16%, which most likely is due to either low-performing ridesharing or the much later food delivery units in one of its geographic markets or worse, due to competitions. On food delivery segment, Uber pretty much has to compete with Grubhub ( GRUB ). At the same time, though, Uber has done well to depress the cost incurred when it comes to driver referrals, where the number has remained quite stable between $32 million to $35 million.
Long-term potential: Autonomous driving and Logistics
With total capital raised of around $20 billion to-date , Uber certainly is not quite free from the pressure to prove that it has a potential ability to be profitable in the future.
Currently, aside from consistently burning around $1.4 billion to $1.9 billion of Free Cash Flows over the last two years, Uber has also grown its operational and adjusted EBITDA losses by more than 2 times and 4 times YoY in Q2 2019.
While Uber has been trying to improve the situation, there really is not an elegant option to fix such issues in the short term. Just recently, we received news that Uber has made some layoffs . In the long term, our view is that once Uber fully integrates autonomous-driving into its business and rolls out the logistics business, it can potentially achieve profitability through few things:
1) fulfilling any excess demand for drivers,
2) adjusting overall human drivers commission to a more sustainable level, and
3) margin expansion in domestic and cross-border logistics. So far, we like the fact that Uber has been working on some of these things. On the logistics front, Uber’s Powerloop allows truckers to spend less time waiting for loads to be ready and more time on the road through its on-demand platform while trying to fulfill the excess demand for truckers through actively stimulating the supply side by providing trailer rentals for truckers to grow their businesses.
One interesting use case for autonomous driving where we can see an instant impact is in ride consistency. An AI-powered self-driving vehicle will always pick the best routes, be predictable on ETAs, and can also work longer hours than human drivers without affecting the driving quality whatsoever. We believe that the application of self-driving in its logistics business segment would be critical as Uber has a better chance in increasing its take rate in a huge, yet fragmented market like logistics. That take rate increase will ultimately create a margin expansion and increase its Revenue/Trip metrics, which in its Q2 report, we have seen how it has decreased by 21% YoY from 2.3 to 1.9.
Managing its upcoming Risk
We also see a few risk factors coming from various angles, starting from the regulatory to technical when it comes to growing its Other Bets’ business. For us, the greatest concern would be more on the technical side, given we do not yet have a more refined idea as to how far Uber’s R&D team actually is from the surface particularly in realizing the self-driving technology at scale. At the moment, Uber has been spending around $100 million each quarter to pursue this ambition. Even looking at this from its competitors’ sides where Waymo ( GOOG ), Tesla ( TSLA ), or Lyft ( LYFT ) currently are, fully autonomous self-driving technology still remains a frontier technology.
As Uber aims to expand more globally, there is the risk of failed expansion as well, which Uber did in Russia, China, and Southeast Asia. However, Uber’s past failure gives us more conviction that its future expansion will be more well-planned after the learning experience. On the other hand, we also think that deeming such past expansions failure would be too harsh. Having sold its business segments in Russia, China, and Southeast Asia for good profits and stakes at fast-growing local market leaders like Didi in China and Grab in Southeast Asia, Uber has now become $994 million richer net of all merger fees and will be receiving any upsides of its $10 billion worth of equity and liquid debt investments in Didi and Grab.
Valuation and Takeaways
We think that placing Uber at the range of $40 to $45 per share today pending the next development in Q3 would mean that Uber is valued fairly, given its current performance, positioning in the network transportation market, and all the opportunities for margin expansion across all of its business segments we have discussed.
Looking at Uber’s P/S ratio of 6.8 today as of Q2 2019 compared to 5.9 same time last year pre-IPO, we feel that the mix of skepticism in the market and the systemic effect of a trade war which depresses most of the stocks in recent weeks could actually provide a buying opportunity. Uber’s top-line revenue, which grew more than twice as much YoY in 2018 and 41% YoY in 2018, indicates that with its $65 billion market cap, Uber still has a lot of room to grow. We believe that Uber’s top-line revenue will be even higher in the future once it is in a better position to increase its take rate. As stated in our thesis, we think that Uber should be a long-term play by any investor looking to get an exposure into the modern logistics market and the more frontier market such as applied autonomous driving. Ultimately, we believe that getting into those two markets are the key to Uber’s future profitability.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.