Uber: A Robust Platform Ripe For Future AcquisitionIntroduction and Thesis
Uber (NYSE: UBER) is a large cap, ride-share company that operates in over 63 countries serving over 110 million users. The company is most commonly known for its ride-share and food delivery services. UBER’s on-demand technology platform could eventually be used for the commercialization of autonomous vehicles. Their tech system includes the ability to track a driver in real time as well as an integrated payments experience (10+ payment options). With UBER’s well-known name, extensive worldwide reach, leading technology, and growth potential the company can serve as an attractive acquisition for leading tech companies
Platform Potential
UBER has attempted to develop its own autonomous vehicle. The company, however faced various obstacles in R & D and sold its research division to Aurora (an autonomous vehicle tech company). UBER’s impressive platform could serve as an invaluable asset to the top autonomous vehicle players. Although Alphabet Inc. (NYSE: GOOG) has abandoned it’s autonomous vehicle production, it has already invested $250 million into Uber and a total of 1.1 billion in the promotion of self-driving vehicles. GOOG’s acquisition history includes approximately 232 companies. The company is a strong supporter of autonomous vehicles and an acquisition of UBER is a strong possibility.
The first generation of autonomous vehicles will undoubtedly need close monitoring and testing when first released. All trips will not be autonomous capable and a ride-share platform will be needed in order to fulfill rides that will need a driver. Uber announced they will provide up to 50,000 fully electric Tesla vehicles available for drivers to rent by 2023. Conversion of inventory to electric power combined with their 110 million user base creates an attractive buying opportunity for leading tech company Tesla Inc. (NYSE: TESLA).
JOBY Aviation (NYSE: JOBY) has already purchased UBER’s air taxi service Uber Elevate. Leading autonomous vehicle companies will need a platform in promotion of products and expansion. In the past, Uber has leveraged its platform assets (drivers and consumer users) to find new sources of value for its platform and the stakeholders who are part of it. Eventually, I believe it’s platform will be of unmatched value and leading tech companies will consider acquiring the company as a whole.
Buy Out Benefits and Risks
There are benefits to shareholders when a company is bought out. When the company is bought, it can cause an increase in the share price. The acquiring company can offer a premium price to entice the target company to sell. Once the announcement is made, there can be an increase of traders to purchase at the offered price which can increase the stock's value. You may also keep in mind the price of the stock may fluctuate based on rumors regarding the progress of the buyout or any difficulties within the deal process. This encourages volatility and higher risk. Acquiring companies also have the option to rescind their offer, shareholders may not support the deal, or securities regulators may not allow the deal. In general, during a buy out the stock price of the target company tends to spike and shareholders can benefit from this transaction.
Growth and Future Outlook
UBER faced a decline in sales during the pandemic shelter-in-place orders. Mobility was reduced resulting in plummeting sales for rideshare companies. UBER has however, made a healthy recovery and has maintained steady growth. Sales have been gradually recovering since April 2020. The company’s revenue for the quarter ending December 31, 2021 was 5.778B, a 82.56% increase YoY. Adjusted EBITDA for Q4 2021 was $74.7 million. In Q1 2022 revenue grew 136% YoY to $6.9 billion. Q1 2022 Adjusted EBITDA was $168 million, a $527 million increase YoY. Despite pandemic restraints, they have managed to grow to over 10,000 cities in roughly 72 countries by the end of 2021. The company has also expanded its business model by including delivery services (Uber Eats), and matching carriers to shippers (Uber Freight). They have also diversified their mobility business by expanding into car rentals, incorporating healthcare related travel and adding other modes of transport like taxis, tuk rentals, and motorcycles. Their platform, technology, and large consumer base provide strong future growth potential.
Valuation
The company is currently not profitable with an EPS of -0.28. Although the company is losing revenue it is still valued at over 50 billion dollars. Losses were attributed to a 5.6 billion headwind related to the company's equity investments. These included losses related to Uber's sell off to Grab, Aurora, and Didi. Despite these losses UBER has managed to almost double revenue YoY. Revenue growth was driven by their delivery service, freight service, and expansion of ride sharing services. Share price is currently considered undervalued.
Risks
The company has been facing driver shortages which can affect revenue and company efficiency. Drivers are a key part of UBER’s business model and reported high gas prices has made it difficult for drivers to maintain a living. This however, illuminates the autonomous vehicle potential in increasing growth and efficiency for ride-sharing companies.
UBER has strong competition, Lyft being one of its main competitors. Lyft does carry the potential to out-innovate UBER. However, I believe UBER’s established reputation along with extensive worldwide reach cannot compare to Lyft. UBER operates worldwide while Lyft only operates in the US and Canada. If Lyft were to outrank UBER, it may take a very long time.
Summary
Uber's diversification, operational efficiencies, and expanded business model has allowed for significant growth and increased revenue. Although currently not profitable I believe UBER has high growth potential in the coming years. Tech companies will need platforms in order to successfully integrate autonomous vehicles and rideshare company acquisitions could be a very strong possibility. For these reasons I rate UBER a buy.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. I am not a financial advisor and this is for educational purposes only.
