Why We Invested in Uber Technologies, Inc.

Why we invested in Uber Technologies, Inc. | Domain Money Advisors | Investment Memo | 12/9/2021

Introduction

Uber Technologies, Inc (“Uber”) is a technology provider that operates three marketplaces to match: riders with drivers (Mobility), people with food (Delivery) and shippers with carriers (Freight).  Uber, headquartered in San Francisco, California, operates the largest on-demand ridesharing marketplace in the world (outside of China), and has a presence in 85 countries, according to the latest annual report. In Q3 2021, 109 million customers used the firm’s ridesharing or food delivery service at least once in a month, servicing $23B in gross bookings, a record for the company. 

Uber was founded in 2009, and after raising over $25.2 billion dollars of venture funding over 31 separate fundraising rounds, the company went public on May 10, 2019 at a price of $45 per share. Driven by the Covid-19 pandemic, Uber shares fell to a low of $14.82 on March 18th, 2020 and subsequently rose to an all time high of $63.18 on February 10th, 2021.  The stock currently trades below the IPO price at about $38 per share, with a market cap of $73.76B.

Current State of the Business

As expected, Covid-19 lockdowns negatively impacted Uber Mobility's bookings as travel came to a halt. Gross bookings fell to $3B in Q2 2020, down from its peak of $13.5B recorded just prior to the outbreak in its Q4 2019 earnings report.  As lockdowns lessened, gross bookings rebounded from their lows in Q2 2020, and in just over a year, recovered to $9.9B as of Q3 2021.

The story for Uber’s delivery business is very different – the pandemic accelerated the segment’s growth.  At the start of the Covid-19 crisis nearly two years ago, gross bookings for Uber delivery were $3.1B. Business surged over that span of time. As of the third quarter 2021, bookings reached $12.8B, up 46% YoY. Uber’s delivery business now exceeds Uber’s mobility business in gross bookings.  The Covid-19 pandemic led consumers to order more food from home and Uber Delivery was well positioned as a beneficiary of this trend.

Uber’s average monthly active users hit a peak in Q4 2019 at 111 million and has since recovered to almost the same number (109 million) as of Q3 2021.

Financials

Over the course of its 11 year history, Uber struggled with profitability, having never booked a quarterly operating profit as a public company. While the core business of connecting supply and demand via technology has stable gross margins around 50%, the business has spent significantly on growing and defending market share.  Therefore, operating margins have been and continue to be negative.  Uber has maintained its focus on growth and continues to invest heavily in its business.  As of Q3 2021, Uber’s revenue was $4.8B with a gross profit of $2.4B and operating income of -$572M. 

It is worth noting at this point that while operating income has been negative, it has trended more positively over the last three quarters as Uber has posted significant revenue growth. In our view, the concern many investors have with Uber is around unit economics. After their large sales and marketing efforts, can the core business be profitable? While the answer to this question has been no in the past,  we have reason to believe that this will change in the future as the business continues to scale.

Opportunity

As we survey the landscape, we believe that there are few businesses with a larger total addressable market than Uber. Uber moves people, food and cargo from point A to point B.  Additionally, Uber has a track record of demonstrating that technology can improve all of these marketplaces through efficiencies, as compared to the analog predecessors before Uber was founded. 

In their S-1 filing in 2019, Uber defined their mobility opportunity (Current Serviceable Addressable Market [SAM]) by calculating the dollar value of passenger vehicle trips < 30 miles in the 57 countries they operated in at the time. The total opportunity size was $2.5T. 

Uber calculated the serviceable addressable market of their delivery business to be equal to $795B, the amount of money people spent on home-delivery, takeaway and drive-through food worldwide, as of 2017.

Additionally, Uber calculated that businesses spent $700B on trucking in the United States in 2017, a total they believed represented the serviceable addressable market of their Uber Freight Offerings.  

Adding all of the serviceable addressable market sizes from their S-1 filing leads to an aggregate addressable opportunity measuring about $4T per year.

While we think it will take many years  to reach this potential, it demonstrates how much growth potential exists in the core businesses that Uber operates.  Currently, Uber has annualized gross bookings of ~$92B.  This accounts for about 2.3% of the opportunity.  

Another way that we can measure Uber’s opportunity is by considering the number of customers they have who use Uber Mobility and Uber Delivery vs. how many customers they can acquire.

As stated in their recent filing, Uber currently has 109 million monthly active users.  Uber is currently available in 85 countries, with an aggregate population of more than 5B people.  Europe and the USA have an aggregate population of 1.1B and therefore, even focusing the opportunity in this area still leaves Uber a lot of room to grow. 

Our view is that Uber has the ability to grow at its pre-pandemic level of 20% YoY for the next 10 years.  Extrapolating from Uber’s most recent filings, this will lead to gross bookings of about $575B in 2031 vs. $92B today.

Investment Rationale

Clearly, Uber’s core businesses have a lot of runway.  The question that then needs to be answered is whether Uber can be a profitable business at scale.  Our view is that this is possible as their sales and marketing spend, which is Uber’s largest cost outside of running the platform (which has gross margins of 50%), moderates as a percentage of gross bookings over time.  Since Q4 2019, SG&A spending, which includes Sales and Marketing, declined from about 11% of gross bookings to 8% of gross bookings.  We believe that at scale, this spend will approach 5% of gross bookings and Uber will achieve positive adjusted operating income (adjusting for R&D, D&A and Equity Compensation).  As the business continues to grow, Sales and Marketing spending as a percentage of gross bookings will moderate for three reasons:

  1. As the business grows, awareness of the brand will grow in all of the markets they operate, lowering customer acquisition cost.

  2. Cross-selling between Uber apps. This means that Uber will be able to sell Uber Delivery from Uber Mobility and vice-versa.  This will reduce customer acquisition cost over time. 

  3. As the business grows, a fixed amount of sales and marketing spending will naturally become a smaller percentage of gross bookings.

We believe that as revenue continues to grow, Uber will moderate its SG&A spend  (as a percentage of gross bookings)  and reach adjusted operating profitability in 2022.

On a percentage basis we believe that at scale, Uber will have a take rate of about 20% of gross bookings, production costs of 10% of gross bookings and SG&A of 5% of gross bookings. This will leave a 5% adjusted operating margin vs. gross bookings which the business can allocate to different uses. 

Once Uber hits adjusted operating profitability we believe that investors will see that the core business has viable unit economics and the stock will reprice higher.  We then see significant upside in the stock over the next number of years as the company grows into its enormous total addressable market.


Important Disclosures

Accounting and other general information about Uber Technologies presented in this document is sourced from earnings reports (recent SEC filing) from 2019- 2021 as well as their Form S-1 Registration filed in 2019. Price information is sourced from Yahoo Finance. UBER stock is held in accounts managed by Domain Money Advisors, LLC in the Domain Core, Domain Access and Domain Balanced strategies. Domain Money Advisors, LLC is providing this information for informational purposes only. While Domain Money Advisors, LLC believes that the information contained herein is reliable and derived from reliable sources, it makes no representation, warranty or undertaking, stated or implied, as to the accuracy or completeness of the information. Domain Money Advisors, LLC, and its parent company, Domain Money, Inc., expressly disclaims any liability or loss incurred by any person who acts on the information, ideas or strategies discussed. The information contained herein is not, and shall not constitute an offer to sell, a solicitation of an offer to buy or an offer to purchase any securities or cryptocurrency, nor should it be deemed to be an offer, or a solicitation of an offer, to purchase or sell any investment product or service.  Investing comes with inherent risks and you should always invest within your means and risk tolerance.  Past performance is not an indication of future returns and you should always consult a financial advisor prior to making investment decisions. Please see important disclosures at https://domainmoney.com/legal