In era of cheap money, the Fed’s monetary policy has allowed investors to speculate and/or take on more debt. Actually, the low interest environment invites for imprudent decisions. As a result, a bunch of money-losing companies that are cash incinerators have insane valuations. One of them is Uber Technologies (UBER) that has become a poster child for overinflated startups, as explained in the next paragraphs.
The Slowing Revenue Growth And The Scalability Problems
Revenue in 2018 and 2019 were $11.3 billion and $14.1 billion, respectively, so revenue year-over-year growth was 25%. However, all revenues are not created equal and all revenue growth is not created equal either, so we deepened into the company’s reports and want to point out the following:
1) Revenue growth in “Rides,” the core business, continues to slow down. As shown here and here, Revenue from “Rides” in 2019 were $10.6 billion vs. $9.3 billion in 2018. Therefore, when it comes to Rides, revenue YoY growth of 95% in 2017 declined to 37% in 2018 and 14% in 2019.
Meanwhile, “Other Than Rides” businesses grew from $2 billion to $3.5 billion in 2019, or about 80% growth YoY, which allowed Uber to present, somewhat overall revenue growth rate of 25% in 2019. But the “Other Than Rides” (Eats and Freight) are low margin businesses.
Given also that all the newer “Other than Rides” businesses have much lower profit potential than “Rides,” the relatively faster growth of these low margin “Other Than Rides” businesses is contributing to the deteriorating overall profit picture.
2) Gross profit margin remained stable at almost 50%, both in 2018 and 2019.
3) Total expenses (excluding costs of revenue and D&A) in 2018 and 2019 were $8.2 billion and $15.1 billion, respectively. Therefore, total expenses were approximately 108% of the total revenue in 2019, significantly up from 73% of the total revenue in 2018. To say it differently, on a YoY basis, total revenue in 2019 grew 25% and total expenses grew by 85%, so total expenses grew YoY much faster than revenue.
4) Despite the fact that gross profit margin remained decent at almost 50% in 2019, operating profit margin was negative 61% in 2019, so it went significantly up from negative 27% in 2018. The reason is that total expenses went significantly up YoY, as shown above.
These facts indicate that Uber has an inability to control its expenses and has been unable so far to scale up its operations. We believe that the reasons for Uber’s scalability problems stem from its corporate structure along with industry-wide difficulties and growing competition, as presented below.
Losses, Negative Adjusted EBITDA And Stock-Based Compensation
In Q4 2019, Uber recorded another operating loss of ($1) billion, slightly down from the operating loss of ($1.1) billion in Q4 2018. But it reported an epic operating loss of ($8.5) billion in 2019, significantly up from the operating loss of ($3) billion in 2018.
Also, the loss of ($8.5) billion includes stock-based compensation expense of $4.6 billion. Therefore, it’s noteworthy that even if the stock-based compensation expense had been zero, Uber would have recorded an annual operating loss of ($3.9) billion.
The stock-based compensation expense will remain high and will most likely exceed $1 billion in 2020 given that Uber stated in the latest CC that:
Finally, we expect stock-based compensation of $300 million to $350 million in Q1 2020.”
Adj. EBITDA loss in 2019 was ($2.7) billion, up from adj. EBITDA loss of ($1.8) billion in 2018. Also, in Q4 2019, quarterly adj. EBITDA loss went deeper into negative territory reaching ($615) million, about 5% more than ($585) million in Q3 2019 and down from ($817) in Q4 2019. On that front, Uber touted in the CC that:
If you look at our Rides business Q4 to Q4, our Rides business grew ANR about $700 million, a little bit below $700 million in terms of revenue. And over the same period with a $700 million increase in ANR, they delivered a $550 million increase in EBITDA. So that’s an 80% flow through of incremental EBITDA from revenue growth to EBITDA growth.”
However, this was not the case with all the other segments that remain a major drag on Uber’s business.
Specifically, in Q4 2019, the Eats business grew GAAP revenue YoY by $297 million, and over the same period, the Eats business delivered $183 million additional adj. EBITDA losses. This was the case with the other segments such as Freight, Other Bets and ATG where revenue went up hand in hand with the adj. EBITDA losses. And this was the case in Q3 2019 too. Revenue for Eats, Freight, Other Bets and ATG went up on a YoY basis but adj. EBITDA losses went deeper into negative territory for all these segments.
In the latest CC, Uber estimated that it could turn into positive adj. EBITDA in Q4 2020. But it’s not wise to downplay these key parameters:
1) The guidance is just guidance and many things can go wrong until then.
2) CEO’s forecast for positive adj. EBITDA in Q4 2020 could be another inaccurate forecast. And we say this because in January 2018 the CEO Dara Khosrowshahi told Uber executives that he wanted the company to nearly break even by the end of the year and to be profitable in 2019, as a public company. His forecasts proved to be wrong, which meant a few billion dollars, and Uber recorded massive losses both in 2018 and in 2019.
3) Even if the best-case scenario materializes and Uber reports positive adj. EBITDA in Q4 2020, positive adj. EBITDA isn’t GAAP profitability. Adj. EBITDA is a very long way from generating profits because adj. EBITDA excludes billions of expenses other than interest, taxes, depreciation and amortization. For instance, it excludes Uber’s $4.6 billion in stock-based employee compensation.
4) Uber has admitted that adj. EBITDA in 2020 will remain deep in negative territory, as quoted below (emphasis added):
For 2020 adjusted EBITDA, we expect a loss of $1.45 billion to $1.25 billion. Further, we expect Q1 EBITDA loss to be similar to Q4 2019 levels with similar investment levels in Eats. Beyond Q1, we are expecting a meaningful improvement in profitability throughout the year including in Uber Eats.”
The Mounting Debt Is Expensive And Could Become More Expensive
Downplaying or ignoring a company’s mounting debt has never been a wise choice in the stock markets. It’s an axiom that the growing debt will bite. And when the company has an unproven business model that generates massive losses and burns cash with no end in sight, we consider that downplaying the company’s mounting debt is a recipe for disaster.
That said, S&P recently gave Uber’s debt offering CCC+ ratings, while Moody’s rated it one notch higher at B3, both of which are only notches away from being designated imminent default risks, which will definitely weigh on the next debt placements and their interest rates.
Specifically, Uber has $11.3 billion in cash and cash equivalents and $5.7 billion in debt, so its net debt is negative (cash and cash equivalents exceed debt) at $5.6 billion in December 2019.
In early January 2020, Uber closed the Careem deal for $3.1 billion. To finance the deal, Uber offered junk bonds worth $1.2 billion last September. And they were junk bonds because these bonds were given credit ratings in a CCC range after the company’s IPO in May 2019. Additionally, in early January 2020, Uber issued $1.7 billion of convertible notes to help fund the deal and we guess that the remaining amount of $200 million was paid from the company’s cash. Therefore, proforma the Careem deal, Uber’s net debt declined and ended up being negative about $3.7 billion in early January 2020.
Meanwhile, from a cash flow standpoint, Uber remains a cash incinerator. The cash burned by Uber’s operations and investment activities worsened, going from $2.2 billion in 2018 to $5.1 billion in 2019. Operating cash flow was negative at about ($1.8) billion in Q4 2019. Furthermore, it’s noteworthy that “net cash used in operations” (ex. capex) went from ($878 million) in Q3 2019 to ($1.799 billion) in Q4 2019. In other words, strictly on an operating basis, the cash burn doubled in the most recent quarter. And if we include the cash from investing activities, Uber burned about $2.5 billion in Q4 2019 alone.
That said, Careem isn’t profitable and also burns cash (more about it in the next paragraphs), so Careem’s cash burn will weigh on Uber’s quarterly cash burn both in Q1 and in Q2 2020. Therefore, based on a quarterly cash burn rate between $2 billion and $2.5 billion, we project that Uber’s net debt will become positive (debt will exceed cash and cash equivalents) by the end of Q2 2020, the latest.
Moreover, we project that Uber’s cash burn will continue in the second half of 2020. Based on our conservative projections that include Careem’s cash burn, Uber’s quarterly cash burn will be at least $2 billion in Q3 and Q4 2020, so Uber’s net debt will keep rising in the second half of 2020. Therefore, proforma the Careem deal, we project that Uber’s positive net debt (debt exceeds cash and cash equivalents) could reach or exceed $4 billion by the end of 2020.
After all, we forecast that Uber will announce another debt offering in the next weeks or months. And if it doesn’t announce a debt offering, it will announce a large equity offering (dilution). Or it could announce both a debt offering and an equity offering in the next weeks or months in order to fund its liquidity needs by the end of 2020.
And we want to point out that our debt and cash burn projections by the end of 2020 don’t take into account the Cornershop deal. Specifically, Uber announced the acquisition of a majority stake in Cornershop for an undisclosed amount. Last year, Walmart (WMT) wanted to acquire Cornershop for $225 million, but Mexican regulators blocked the deal. Uber didn’t disclose its purchase price but we guess that Uber hasn’t paid less than $250 million. This transaction is expected to close in Q2 2020 subject to regulatory approval, which will increase Uber’s net debt further by the end of Q2 2020.
Moreover, Uber’s debt is expensive with interest rates ranging from 6.1% to 8.1%, as illustrated below:First, the high interest rates indicate that the lenders don’t have confidence in Uber’s business model, financial stability and survivability due to the massive losses and the high cash burn while the GAAP profitability and the free CF remain unknown.
Second, proforma the recent Careem deal in early January 2020, Uber’s net debt has gone up significantly, as explained above. Given also that Uber will continue to burn cash in the next quarters and the leverage will keep rising, it’s safe to assume that the next loans will have higher interest rates than the existing ones. Actually, due to the deterioration of the financial situation of the company and the cash burn, we will not be surprised if the interest rates for the new loans exceed 10%. And high interest rates translate into high interest expenses that will be another major drag on Uber’s way to GAAP profitability in the next years.
Careem Is Unprofitable And The Negative Impact On Uber’s Debt
Uber has not provided details about Careem but it’s easy to find articles saying that Careem is an unprofitable company, as shown here and here. Actually, Careem’s CEO admitted it and stated in 2018 when he was asked about Careem’s profitability (emphasis added):
It’s nowhere on the horizon, we are not actively thinking of it, we are not actively planning for it. But we are at a scale already where bankers think we should consider it, so once in a while they approach us and say, “‘Hey what are you guys thinking?” We take these meetings, but we are not actively pursuing it, we just take the meetings because they want to meet us and we listen to them.”
As noted above, Uber paid $3.1 billion and closed the deal in January 2020. Also, as linked above, S&P gave Uber’s debt offering CCC+ rating while Moody’s rated it one notch higher at B3 last September when Uber made a debt placement to fund the Careem deal. Both ratings are only notches away from being designated imminent default risks.
And it has passed unnoticed so far but Uber’s liquidity could take another hit in the next months because the holders of the Careem convertible notes have the right to redeem the convertible notes of $1.7 billion (issued in January 2020) effective April 2020, as shown below (emphasis added):
As of June 30, 2019 , we had total outstanding indebtedness of $4.6 billion aggregate principal amount. In addition, we have agreed to issue up to approximately $1.7 billion of the Careem Convertible Notes to Careem stockholders, a majority of which will be issued upon the closing of our acquisition of Careem. The Careem Convertible Notes do not bear interest and will mature 90 days after their respective dates of issuance. We may be required to use a substantial portion of our cash flows from operations to pay interest and principal on our indebtedness. Such payments will reduce the funds available to us for working capital, capital expenditures, and other corporate purposes and limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans, and other investments, which may in turn limit our ability to implement our business strategy, heighten our vulnerability to downturns in our business, the industry, or in the general economy, limit our flexibility in planning for, or reacting to, changes in our business and the industry, and prevent us from taking advantage of business opportunities as they arise. For example, the Careem Convertible Notes are convertible into shares of our common stock at the election of each note holder at a price of $55.00 per share. Some or all of the holders of the Careem Convertible Notes may not elect to convert their notes prior to their maturity, in which case we will be required to repay such notes in cash. We cannot assure you that our business will generate sufficient cash flow from operations or that future financing will be available to us in amounts sufficient to enable us to make required and timely payments on our indebtedness, or to fund our operations. To date, we have used a substantial amount of cash for operating activities, and we cannot assure you when we will begin to generate cash from operating activities in amounts sufficient to cover our debt service obligations.”
Additional Risks And Major Headwinds
Aside from the aforementioned fundamental issues, investors also have to keep in mind the following risks and major headwinds:
1) No economic moat, fierce competition, low barriers to entry and the Amazon case: We have been telling our subscribers to our research “Value Investor’s Stock Club” that Uber’s business (Rides, Eats, Freight) has low barriers to entry and Uber has no economic moat, which are two out of many major headwinds for Uber’s survivability. In other words, we believe that Uber does not have any ability to maintain competitive advantages over its peers in order to protect its market share from competing firms and generate profits at the end of the day. We believe that the customers for Rides (its core business) and Freight choose Uber primarily because of its lower prices compared to the peers, so there is no customer loyalty.
And Uber admits it saying that (emphasis added):
On a global basis, we have multiple competitors in every single city.”
and (emphasis added):
The personal mobility, meal delivery, and logistics industries are highly competitive, with well-established and low-cost alternatives that have been available for decades, low barriers to entry, low switching costs, and well-capitalized competitors in nearly every major geographic region. If we are unable to compete effectively in these industries, our business and financial prospects would be adversely impacted.”
and below (emphasis added):
Our platform provides offerings in the personal mobility, meal delivery, and logistics industries. We compete on a global basis, and the markets in which we compete are highly fragmented. We face significant competition in each of the personal mobility, meal delivery, and logistics industries globally from existing, well-established, and low-cost alternatives, and in the future we expect to face competition from new market entrants given the low barriers to entry that characterize these industries. In addition, within each of these markets, the cost to switch between products is low. Consumers have a propensity to shift to the lowest-cost or highest-quality provider; Drivers have a propensity to shift to the platform with the highest earnings potential; restaurants have a propensity to shift to the delivery platform that offers the lowest service fee for their meals and provides the highest volume of orders; and shippers and carriers have a propensity to shift to the platform with the best price and most convenient service for hauling shipments. We face competition in each of our offerings, including:
Personal Mobility: Our Personal Mobility offering competes with personal vehicle ownership and usage, which accounts for the majority of passenger miles in the markets that we serve, and traditional transportation services, including taxicab companies and taxi-hailing services, livery services, and public transportation, which typically provides the lowest-cost transportation option in many cities. In Ridesharing, we compete with companies, including certain of our minority-owned affiliates, for Drivers and riders, including Lyft, OLA, Careem, Didi, Bolt (formerly Taxify), and our Yandex.Taxi joint venture. Our New Mobility products compete for riders in the bike and scooter space, including Motivate (an affiliate of Lyft), Lime, Bird, and Skip. We also compete with original equipment manufacturers (“OEMs”) and other technology companies in the development of autonomous vehicle technologies and the deployment of autonomous vehicles, including Waymo, Cruise Automation, Tesla, Apple, Zoox, Aptiv, May Mobility, Pronto.ai, Aurora, and Nuro, whose offerings may prove more effective than our autonomous vehicle technologies. Waymo has already introduced a commercialized ridehailing fleet of autonomous vehicles, and it is possible that our other competitors could introduce autonomous vehicle offerings earlier than we will.
Uber Eats: Our Uber Eats offering competes with numerous companies in the meal delivery space in various regions for Drivers, consumers, and restaurants, including GrubHub, DoorDash, Deliveroo, Swiggy, Postmates, Zomato, Delivery Hero, Just Eat, Takeaway.com, and Amazon. Our Uber Eats offering also competes with restaurants, meal kit delivery services, grocery delivery services, and traditional grocers.
Uber Freight : Our Uber Freight offering competes with global and North American freight brokers such as C.H. Robinson, Total Quality Logistics, XPO Logistics, Convoy, Echo Global Logistics, Coyote, Transfix, DHL, and NEXT Trucking, among others.
As quoted above, Uber admits that “Consumers have a propensity to shift to the lowest-cost provider” and “shippers and carriers have a propensity to shift to the platform with the best price and most convenient service for hauling shipments,” which means that there is no customer loyalty and the customers for Rides and Freight could choose another company if Uber raises its prices.
Additionally, when it comes to Eats, there’s no customer loyalty either. Specifically, in the first quarter of 2019, 46 percent of people who ordered through Eats in the US also ordered from one or more of its competitors, according to new data from Second Measure, a company that analyzes billions of dollars in anonymized credit and debit card transactions. Also, nearly 25% of Eats’ customers used DoorDash, while 20% of Eats’ customers tried Grubhub (NYSE:GRUB) and 12% of Eats customers opted for Postmates.
And we believe that this trend will be worsening as US customers will continue to use multiple food-delivery services. As such, we see considerable execution risks as Uber attempts to improve its position in the challenging food-delivery sector where the margins are undoubtedly very low.
This is why Grubhub’s CEO has cited “promiscuous customers” as hindrance to his company’s growth. This also is why Amazon (AMZN) Restaurants announced last June that it was shutting its doors for good. The fact that Amazon Restaurants closed its food delivery business is another indication about the problematic food-delivery model and sends a strong message that must not be downplayed, in our opinion.
2) Prices for Rides will remain lower for longer: As shown above, there’s no customer loyalty in Uber’s business, so Uber acknowledges that it will most likely continue to offer lower fares and service fees in the next quarters, as quoted below (emphasis added):
To remain competitive in certain markets, we have in the past lowered, and may continue to lower, fares or service fees, and we have in the past offered, and may continue to offer, significant Driver incentives and consumer discounts and promotions, which may adversely affect our financial performance: To remain competitive in certain markets and generate network scale and liquidity, we have in the past lowered, and expect in the future to continue to lower, fares or service fees, and we have offered and expect to continue to offer significant Driver incentives and consumer discounts and promotions. At times, in certain geographic markets, we have offered, and expect to continue to offer, Driver incentives that cause the total amount of the fare that a Driver retains, combined with the Driver incentives a Driver receives from us, to increase, at times meeting or exceeding the amount of Gross Bookings we generate for a given Trip. In certain geographic markets and regions, we do not have a leading category position, which may result in us choosing to further increase the amount of Driver incentives and consumer discounts and promotions that we offer in those geographic markets and regions. We cannot assure you that offering such Driver incentives and consumer discounts and promotions will be successful. Driver incentives, consumer discounts, promotions, and reductions in fares and our service fee have negatively affected, and will continue to negatively affect, our financial performance. Additionally, we rely on a pricing model to calculate consumer fares and Driver earnings, and we may in the future modify our pricing model and strategies. We cannot assure you that our pricing model or strategies will be successful in attracting consumers and Drivers.”
3) Expenses will go up and losses will continue: As noted above, total expenses in 2019 (excluding cost of revenue and D&A) grew YoY much faster than the revenue and were about 108% of the revenue in 2019.
Importantly, Uber expects its operating expenses to increase significantly in the foreseeable future while also continuing to incur losses, as quoted below (emphasis added):
We have incurred significant losses since inception, including in the United States and other major markets. We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability. We anticipate that we will continue to incur losses in the near term as a result of expected substantial increases in our operating expenses, as we continue to invest in order to: Increase the number of Drivers, consumers, restaurants, shippers, and carriers using our platform through incentives, discounts, and promotions; expand within existing or into new markets; increase our research and development expenses; invest in ATG and Other Technology Programs; expand marketing channels and operations; hire additional employees; and add new products and offerings to our platform.”
4) Employment laws in the core markets and “the contagion risk”: California and New York lawmakers are aiming to pass employment laws that would redefine the standards by which a worker is considered an employee. California’s AB5 already is out while the new employment laws in New York is a matter of months, as shown here.
The thing is that California and New York are two of the five most important markets for Uber’s Rides. Therefore, this change could spell costly headaches for Lyft (NASDAQ:LYFT) and Uber down the road. Actually, the costs for Uber and Lyft could be substantial. A Barclays analysis from June said that reclassifying California drivers as employees could cost Uber $500 million per year and Lyft $290 million per year. And this is for California alone. If we add New York to the mix, the additional cost for Uber could reach $1 billion per year.
Actually, Uber admits that if the drivers are classified as employees, its business will be negatively affected, as quoted below (emphasis added):
Our business would be adversely affected if Drivers were classified as employees instead of independent contractors: The independent contractor status of Drivers is currently being challenged in courts and by government agencies in the United States and abroad. We are involved in numerous legal proceedings globally, including putative class and collective class action lawsuits, demands for arbitration, charges and claims before administrative agencies, and investigations or audits by labor, social security, and tax authorities that claim that Drivers should be treated as our employees (or as workers or quasi-employees where those statuses exist), rather than as independent contractors.”
Last but not least, there is the “contagion risk” of AB5, which could spread to other states. For instance, in addition to New York, New Jersey also recently weighed its own version of a gig-worker bill while Illinois could soon do the same. These developments could have onerous consequences both for Uber and Lyft.
5) Legal challenges in London, another core market: Uber faces serious challenges in London and its legal battle for its London license will begin on July 6. The thing is that London is not just another market for Rides. London is one of the five core markets for Rides, as quoted below (emphasis added), so a negative outcome will weigh on Uber’s top and bottom line (emphasis added):
We generate a significant percentage of our Gross Bookings from trips in large metropolitan areas and trips to and from airports. If our operations in large metropolitan areas or ability to provide trips to and from airports are negatively affected, our financial results and future prospects would be adversely impacted. In 2018, we derived 24% of our Ridesharing Gross Bookings from five metropolitan areas—Los Angeles, New York City, and the San Francisco Bay Area in the United States; London in the United Kingdom; and São Paulo in Brazil. ”
6) High CapEx for Advanced Technologies Group (ATG) will continue: Uber projects that it will require additional capital to build the ATG business and capex will be significant given also that Uber is not a tech company, and therefore it does not have experience with robotics and artificial intelligence experience. Actually, from a tech standpoint, it’s behind its competitors regarding autonomous vehicle technologies, as quoted below (emphasis added):
For example, we believe that autonomous vehicles will be an important part of our offerings over the long term, and in 2018, we incurred $457 million of research and development expenses for our ATG and Other Technology Programs initiatives. We expect to increase our investments in these new initiatives in the near term. ”
and below (emphasis added):
If we fail to develop and successfully commercialize autonomous vehicle technologies or fail to develop such technologies before our competitors, or if such technologies fail to perform as expected, are inferior to those of our competitors, or are perceived as less safe than those of our competitors or non-autonomous vehicles, our financial performance and prospects would be adversely impacted. We have invested, and we expect to continue to invest, substantial amounts in autonomous vehicle technologies. As discussed elsewhere in this Quarterly Report on Form 10-Q, we believe that autonomous vehicle technologies may have the ability to meaningfully impact the industries in which we compete. While we believe that autonomous vehicles present substantial opportunities, the development of such technology is expensive and time consuming and may not be successful. Several other companies, including Waymo, Cruise Automation, Tesla, Apple, Zoox, Aptiv, May Mobility, Pronto.ai, Aurora, and Nuro, are also developing autonomous vehicle technologies, either alone or through collaborations with car manufacturers, and we expect that they will use such technology to further compete with us in the personal mobility, meal delivery, or logistics industries. We expect certain competitors to commercialize autonomous vehicle technologies at scale before we do. In the event that our competitors bring autonomous vehicles to market before we do, or their technology is or is perceived to be superior to ours, they may be able to leverage such technology to compete more effectively with us, which would adversely impact our financial performance and our prospects. For example, use of autonomous vehicles could substantially reduce the cost of providing ridesharing, meal delivery, or logistics services, which could allow competitors to offer such services at a substantially lower price as compared to the price available to consumers on our platform. If a significant number of consumers choose to use our competitors’ offerings over ours, our financial performance and prospects would be adversely impacted.”
and below (emphasis added):
We will require additional capital to support the growth of our business, and this capital might not be available on reasonable terms or at all. To continue to effectively compete, we will require additional funds to support the growth of our business and allow us to invest in new products, offerings, and markets. In particular, our dockless e-bike and e-scooter products and autonomous vehicle development efforts are capital and operations intensive. While we closed the investment in ATG from the ATG Investors for an aggregate of $1.0 billion, we will likely require additional capital to expand these products or continue these development efforts. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders may suffer significant dilution, and any new equity securities we issue may have rights, preferences, and privileges superior to those of existing stockholders. Certain of our existing debt instruments contain, and any debt financing we secure in the future could contain, restrictive covenants relating to our ability to incur additional indebtedness and other financial and operational matters that make it more difficult for us to obtain additional capital with which to pursue business opportunities.”
For background, we are at Level 2 for commercial purposes. An example of a level 3 autonomous car is the Audi A8 but the system, called Traffic Jam Pilot, has yet to be approved for sale by regulators. Tesla’s Autopilot falls somewhere between Levels 2 and 3 and Cadillac Super Cruise operates at Level 2. No commercially available level 4 vehicles exist in the market. To remove the driver, we will need to be at Level 4 or Level 5, according to these articles here and here.
Therefore, we forecast that Uber’s autonomous vehicles will not be ready in the next five years (to say the least) while the high ATG-related capex will put immense pressure on Uber’s total capex in the next years.
On top of this, has anybody thought the amount of capital needed annually to maintain a fleet of Autonomous Vehicles in every city in which Uber operates?
7) Strong dollar in 2020: It has passed unnoticed so far but there’s no question that the recent strength of the dollar will make a dent in the American multinational companies this year, as always. The strong dollar has been stronger over the last weeks closing at 0.92309 with Euro last week, which will definitely impact negatively the earnings of the US-based multinational firms effective Q1 2020, including Uber. Uber has operations across 63 countries and admits the negative impact, as quoted below:
We are exposed to fluctuations in currency exchange rates. Because we conduct a significant and growing portion of our business in currencies other than the U.S. dollar but report our consolidated financial results in U.S. dollars, we face exposure to fluctuations in currency exchange rates.”
Actually, we see momentum in the dollar and several reports believe the dollar could rise further, reaching 0.95-0.98 with Euro in the next few months.
Lyft’s Report And Implications For Uber
Lyft recently announced its Q4 2019. And obviously, Lyft’s report and outlook have implications about Uber’s business model, outlook and profitability, if ever. Specifically:
1) Lyft’s slowdown regarding the revenue growth YoY in 2020: In 2020, Lyft expects that revenue will be in the range of $4.575 billion to $4.65 billion with revenue YoY growth being between 27% to 29%. The slowdown is obvious given that Lyft’s revenue growth YoY in 2019 was 68%.
Also, Lyft’s revenue growth YoY in 2020 of approximately 28% is not something to cheer about. And it’s getting even more disappointing when we consider the fact that Lyft is charging lower prices than taxis in the U.S. and Canada. In other words, Lyft’s growth potential is limited in the foreseeable future in spite of its pricing advantage vs. the traditional taxis and Uber.
To us, Lyft’s significant slowdown in 2020 is a strong indication that Rides’ revenue YoY growth will face serious difficulties in the U.S. and Canada, at least. As noted above, Rides already has experienced a significant slowdown since 2017 and we project that this slowdown will continue with Rides’ revenue YoY growth being less than 15% (excluding the revenue from Careem) in 2020.
On that front, unlike Lyft, Uber has not provided its revenue guidance for 2020, which is not a positive sign while many investors could consider it to be a red flag.
2) Lyft’s adj. EBITDA loss margin will remain unchanged in 2020: Lyft estimates that adj. EBITDA loss to be about $143 million and $470 million in Q1 2020 and 2020, respectively, which translates into adj. EBITDA loss margin from 10% to 14%. For comparative purposes, Lyft’s adj. EBITDA loss margin for Q4 2019 was 12.9%, so it’s clear that Lyft will face serious difficulty expanding its margins in 2020. Therefore, we believe that Uber’s Rides will face the same difficulty expanding its margins in 2020 in North America.
3) Lyft’s adj. EBITDA will remain negative by Q4 2021: Lyft hopes to report positive adj. EBITDA in Q4 2021. In other words, Lyft will need at least two years to increase its margins and become adj. EBITDA positive. This raises serious questions regarding Uber’s hope to report positive adj. EBITDA in Q4 2020 considering that Uber’s mix includes segments (i.e. Eats, Freight, Other Bets, ATG) that either have negative adj. EBITDA or very low margins that can’t be expanded overnight amid fierce competition or both.
And again, positive adj. EBITDA is far from profits at the bottom line. Even if Lyft reports positive adj. EBITDA in Q4 2021, it does not mean the ridesharing business model is proven and profitable.
Relative Valuation Analysis
The relative valuation analysis is a valuable investment criteria because it presents “the big picture,” which is the valuation for companies from the same sector with similar business models. But before presenting it, we need to point out what kind of company Uber is.
Uber is an e-commerce company from the consumer goods sector that enables providers of ridesharing services, Eats meal preparation services and Eats meal delivery services, to transact for ridesharing services and for meal preparation and delivery services. In addition, Uber provides freight transportation services to shippers within the freight industry and leases vehicles to third parties that may use the vehicles to provide ridesharing or Eats services through the platforms.
In other words, Uber’s revenue are the take rates from Rides, Eats and Freight. Given that Uber’s revenue are the take rate from the Rides, Eats and Freight segments, Uber is a typical marketplace from the consumer goods sector. It’s overly simplistic to think that Uber is a tech company just because it uses the term “Technologies” next to its name. Additionally, an application does not make Uber a technology company given also that all the marketplaces have applications nowadays.
That said, here’s a list with other e-commerce retailers from the consumer goods sector that either have a marketplace or are pure online retailers or both. Also, we present the EV-to-revenue ratio because Uber is unprofitable with negative adjusted EBITDA and therefore, other key metrics (i.e. EV-to-adj. EBITDA etc.) are meaningless.
Numbers speak volumes. As illustrated above, the profitable e-commerce companies with positive operating CF and free CF such as SFIX, PETS, RVLV, ANGI, EBAY trade from 1.6 times to 3.2 times their revenue. GRUB is not profitable but it still generates free CF and its leverage is below 1 times.
In contrast, the unprofitable companies that burn cash such as W, JMIA, WTRH trade from 0.5 to 1.3 times their revenue. And this is quite fair. The profitable companies deserve a higher metric than the unprofitable cash incinerators.
Based on this relative valuation analysis, Uber’s enterprise value should currently be about 1 times the annual revenue to be in line with all the other money-losing e-commerce companies that are cash incinerators. In other words, Uber’s stock should currently be below $20 per share.
And when Uber proves that its unproven business model works and can generate GAAP profits along with positive operating CF and free CF, it will deserve to trade three times its revenue or higher.
There’s no question that this valuation also applies to unprofitable, cash-burning Lyft and Lyft’s Enterprise Value should currently be below 1.5 times the annual revenue to be in line with all the other money-losing e-commerce companies from the consumer goods sector that are cash incinerators. And when Lyft proves that its business model works and generates GAAP profitability coupled with positive operating CF and free CF, it will deserve to trade three times its revenue or higher. But this article focuses on Uber, so we will not make a deeper analysis on Lyft now.
Additionally, we will extend our relative valuation analysis by comparing Uber to Lyft. That said, we believe that Uber is massively overvalued compared to Lyft and Uber’s EV-to-revenue ratio should be much lower than Lyft’s EV-to-revenue ratio because of these reasons:
1) All revenue growth is not created equal: Uber’s revenue YoY growth has been coming over the last couple of years primarily from low-margin, money-losing businesses that lack economies of scale such as Eats and Freight. And we project that this is not going to change in the next years.
2) Regulatory headwinds and growing competition internationally: Lyft operates only in North America. But Uber’s core business (Rides) exist in 63 countries, which has created the following major problems.
First, new competitors in ride-hailing keep coming into Rides’ international markets. From Wheely in Russia to Taxify (now Bolt) in Estonia, entrepreneurs across the continent have tried to stop Uber in its tracks.
Second, Rides has faced multiple regulatory headwinds around the world. These regulatory headwinds are not only in its core markets (i.e. California, New York, London) but they also are in several other countries. And we believe that the company has underestimated the local conditions that would ultimately prevent it from replicating its business model in the U.S. For instance, Uber was recently banned in Colombia while in Germany, Uber had another legal blow a few weeks ago. Specifically, a regional court in Frankfurt banned the company from sending ride-hailing requests to rental car companies via its app with the court finding multiple competition violations. The ruling, over Uber’s dispatching process, follows a legal challenge brought by a German taxi association. Additionally, Rides has been banned in Hungary and Bulgaria, and some services have been banned in cities across France, Italy, Finland, and The Netherlands.
Third, these international regulatory headwinds create “a high contagion risk” to additional countries that could follow suit.
3) Cash burn: Uber has been burning a vast amount of money every quarter compared to Lyft. And we project that this is not going to change in the foreseeable future due to a handful of reasons. For instance, high capex is required for the ATG segment in the next years while Eats, Freight and Other Bets have low margins and lack economies of scale, so they will continue to burn a significant amount of cash.
4) Mounting debt: Uber has a significant amount of debt while Lyft is debt free. As also explained in the previous paragraphs, Uber’s debt will be mounting up at an alarming pace in the foreseeable future due to the continued cash burn, which translates into higher and higher interest expenses that will keep preventing the company from reaching GAAP profitability.
Last but not least, WTRH, another company with a marketplace from the food delivery sector, has plunged over the last months, which is another strong indication of the fierce competition and the thin margins in the food delivery sector. WTRH was above $10 per share in the first half of 2019 but it has collapsed due to continued losses and cash burn. WTRH’s losses, cash burn and stock performance should concern Uber given that Eats has been expanding lately in the food delivery sector in an effort to offset the significant revenue slowdown in Rides. Due to the massive losses and the continued cash burn, Uber could be the next WTRH.
Operationally speaking, Uber has given us the impression that it throws money at whatever new idea comes along. It doesn’t matter whether the new idea is a low margin business such as city bus tickets in Las Vegas. It doesn’t matter whether the new idea is a low margin business with questionable synergies and fierce competition such as Eats, Freight or courier services for other retail businesses. It doesn’t matter whether the new idea requires high capex and high maintenance costs such as the ATG business or the air taxi service and the self-flying cars, as shown here.
We believe that a key reason for this approach is the fact that organic revenue growth for Uber’s core business (Rides) has significantly slowed since 2017. And things for Rides will get worse in 2020 and later both in North America and internationally, so Uber either buys revenue for the Rides business (i.e. Careem) or it tries to find other businesses to expand even if their sustainable profitability is highly questionable in the foreseeable future (i.e. Eats, ATG, Freight, Other Bets etc.).
For instance, meal delivery is not only a low margin business but also it has long been a crowded field in North America where there’s not enough room for everyone. Actually, Uber faces intense competition in all of its servicing lines along with high risks and key headwinds, including regulatory risks worldwide, as mentioned above. And the major regulatory headwinds both in North America and internationally for Rides have been downplayed so far.
Fundamentally speaking, Uber’s business model lacks scale, burns cash and generates massive losses with no end in sight. And, in our opinion, Uber has not made so far an effective case for its financial viability. Despite its $14.1 billion revenue, it hasn’t demonstrated so far that it can grow into sustainable GAAP profitability in the foreseeable future. This is why Moody’s said that it expected Uber to face another two to three years of operating losses and cash burn.
After all, we believe that Uber should currently trade below $20 per share or approximately 1 times its revenue due to all the aforementioned reasons including the relative valuation analysis above.
And frankly speaking, due to the unproven business model, the continued losses and cash burn with no end in sight, Uber could be another fad that will end up being zero or almost zero.
And we don’t say this only because WTRH has ended up being a penny stock from $12 per share in early 2019. We don’t say this only because AMZN, a proven disruptor, got out of the problematic food-delivery business a few months ago. There’s also the Sidecar case. Sidecar was another US-based transportation company with the same business model like Uber’s. Sidecar was backed by a number of wealthy investors including Union Square Ventures, Avalon Ventures, Lightspeed Venture Partners, Google Ventures, and Sir Richard Branson. Sidecar provided ride-sharing services and business-to-business delivery services. It was founded in 2011 in San Francisco. In February 2015, Sidecar announced a same-day service for local businesses whereby goods, food, and flowers were to be delivered to local consumers using its existing pool of drivers. Sidecar Ride closed in 2015.
All these could be the reasons why Larry Ellison, Oracle’s (ORCL) founder and Chairman recently said that:
UBER’s business model is almost worthless.”
UBER is an app my cat could have written.”
We advise investors to not downplay his words because Larry Ellison is not just another guy. Ellison is worth over $69 billion and is the fifth richest person in the U.S., according to Forbes.
Author: Value Digger
Source: Seeking Alpha: Overhyped Uber Technologies Should Currently Trade Below $20 Due To Many Reasons