Stock Report: Uber Technologies (UBER)

THE HEDGEYE EDGE

Uber would like investors to see it as the next Amazon but other platforms can provide additional insight on the way Uber can evolve and compete in an industry with decelerating growth and scale management challenges. The decelerating growth and profitability challenges may leave investors concerned that Uber’s model is structurally deficient. 

We don’t see Uber’s network as a structurally attractive platform deserving of an exceptional valuation. That said, the company made several “interesting” points in its road show, perhaps shedding some light on the not-so-excellent reception. We provide some responses below.

1. Public vs. Private Valuation: Uber’s IPO valuation is at roughly its last private valuation, which sets up an interesting conundrum.  Uber partly plans to use the capital raised to defeat competitors in what has been a battle for market share.  For the company to derive a capital advantage by being public, private valuations would need to be lower.  However, if private market valuations fall, public valuations are likely to follow.  The market doesn't often embrace lose-lose scenarios on the road to 'success'.
2. Hope That Competition Will Ease: Competition on pricing will likely need to ease for ridesharing companies to turn profitable, let alone hit long-term adjusted profit targets.  But these public companies will presumably be judged on top line growth more than other metrics, limiting the incentive to increase prices at the risk of ceding market share and discouraging customers…or worse letting smaller competitors gain a stronger foothold.
3. Dumping Owned Cars, Second Cars: As growth narratives go, this one is isn't inspiring. Uber and Lyft are not reliable services, even in dense urban environments.  Try getting an Uber when it rains or snows.  The costs of using Uber regularly are not low – it can easily cost hundreds of dollars a month (think $20 per day, for example, and that would be light spending).  When riders get their year-end credit card summary or make a budget, they will typically find driving oneself is cheaper than hiring a chauffeur, UberX or otherwise.  If riders continue, mostly, to drive themselves, then the available market is smaller than some would like investors to think. 
4. War Chest To Compete: Aside from blowing raised cash on price-based competition, it is difficult to answer the question as to why, if the first ~$20 billion didn’t "put out the fires", an additional $8 or $9 billion would.
5. Hundreds of Regional Markets: The local nature of ridesharing markets limit the defensibility of the franchise – maybe Via goes after DC, or Lyft targets share in Texas.  Why isn’t there a national taxi service?  It doesn’t scale all that well.  This is entirely unlike Amazon and Facebook, which have much the same network, pricing, and competition in San Francisco, Chicago, and Boston.  Not so for Uber.
6. Are Teens Giving Up Licenses Because Of Uber? Declines in teen labor force participation and tougher teen licensing requirements (graduated licensing) have likely had the dominant impact on teen licensing trends, with many cohorts actually increasing licensing since 2014 as ridesharing gained.  Uber may want investors to believe teens will grow up to rely on ridesharing, and some no doubt will, but the presentation of teen driving trends as driven by ridesharing seems misleading to us.
7. Autonomy Unlikely To Be Good: While likely outside of many investment horizons, it is also reasonably clear that robotaxis would be disruptive to the current ridesharing model.  It might make the service hugely capital intensive when one of Uber’s investment positives is that it is asset light.  At worst, it could provide an opening for a different sort of network, perhaps organized by OEMs, hardware, or software providers.
8. Platform For Other Bets, Modes: Uber Freight is an oddly late arrival to the ‘Uber of Freight’ model, while e-bikes and e-scooters could instead cannibalize the core ridesharing market.  These are hard to give much value, but the evolution of new businesses would likely be needed for Uber to work as an investment in the long-term. We think Elevate might be underappreciated, for example.
9. Disclosures On Europe Contribution Margin: In the road show, management apparently touted a 40% contribution margin in Europe.  The extreme variability of profitability by region, or even by city, is not a good structural indicator (regional transport).  Would the company have discussed Brazil's contribution margins if the IPO were held last year? Competition disrupted that market.  Profitability in a given region may not prove sustainable, under-penetrated or not.
10. Valuation Is Not Conservative: The price range was largely outside of where high growth, profitable, asset light transportation companies have traded at peak, let alone the valuations at which those select companies currently or typically trade. For the valuation to look reasonable, one has to believe that revenue will grow at something like 15%-20% for the next, say, five years, and that the company will pick up dozens of percentage points of adjusted margin over that period.  For a business that doesn’t have a history of being especially forecastable, and is now showing decelerating growth, the range was rich, and partly just based on a premium to private market transactions.

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