In writing this article, I wish to continue the cycle of articles on investment opportunities in the Internet & Media sectors. In my previous article, I analyzed Netflix (NFLX). In this post, I want to highlight Uber (UBER). The stock rose after the Q4 earnings release, but fell recently after Investor Day. The current market price looks attractive. Let’s start with the review of the 4th quarter results. At the beginning, we will look at the overall performance of the business. Next, we’ll move on to an overview of the segments. After that, we move on to business forecasting and valuation.
Overview of 4th quarter results
Uber released positive quarterly results. Bookings were $25.9 billion (+51% year-on-year, 1% below expectations). Revenue was $5.8 billion (+82% year-on-year and 8% above expectations). The number of active users of the application (MAPC) is 118 M (+27% over one year, in line with expectations). Adjusted EBITDA was $86 million (1.5% margin).
Uber Eats posted its first positive EBITDA. Bookings were $13.4 billion (+34% year-on-year, 1% lower than expected). Revenue was $2.4 billion (+79% year-on-year, 9% above expectations). The participation rate was 18%. Adjusted EBITDA was $25 million (1% margin).
The company is actively developing the grocery and alcohol offer, whose reservations have increased by 10% QoQ. According to data from Bloomberg Intelligence, Uber’s share of the global delivery market is 16%. Without a doubt, reaching a positive EBITDA margin milestone for the segment seems like a good sign. Although the food and alcohol delivery sub-segment is still loss-making on EBITDA, the company will be able to fund it with a positive EBITDA from the restaurant food delivery sub-segment.
Despite Omicron’s generalization, the mobility segment performed well. Management expects it to reach pre-pandemic levels in 2022. Bookings were $11.34 billion (+67% YoY, in line with expectations). Revenue was $2.27 billion (+55% year-on-year, 6% below expectations). Adjusted EBITDA was $575 million (25.2% margin, worse than expected $622 million). The participation rate was 20% (expected consensus 21.5%).
Despite Omicron’s generalization, bookings are down 21% from December to January, just 10% above the normal seasonal trend. The decline in travel was even smaller – just 15% month-over-month. The company continues to increase the supply of drivers by offering a high participation rate. In the 4th quarter, the company added 325,000 drivers and couriers, bringing their number to 4.4 million, the maximum number since the second quarter of 2020. Before the pandemic, it was 5 million. According to data from Bloomberg Intelligence, Uber’s share of the global mobility market is 33%.
I believe that the company’s leading position will enable it to further strengthen the company’s position in the industry. The network effect creates a certain flywheel for business development. The more drivers the company has, the shorter the waiting time for a passenger. The shorter the waiting time, the greater the passenger demand for the company’s services. And this leads to a greater influx of drivers, as downtime without an order is reduced. On top of that, there is potential for business growth through Uber One membership.
Uber Freight closed the deal to buy Transplace for $2.25 billion in the fourth quarter, which has one of the largest managed logistics networks in the world. In the 1st quarter, the management expects a turnover of Transplace of 600 million dollars. Given the global logistics challenges, the acquisition of Transplace and its integration with Uber Freight looks very promising. Despite the segment outlook, I still take a cautious approach to forecasting this segment’s performance, as I want to see how the business will fit into the business.
DiDi’s (NYSE:DIDI) Falling stock prices continue to put pressure on the valuation of Uber’s stakes in other companies. Shares of other companies are valued at around $12.5 billion at the end of the fourth quarter. The revaluation of Grab and Aurora had a positive effect, while the revaluation of DiDi had a negative impact, whose valuation fell by $1.3 billion. The partial sale of a stake in Yandex.Taxi also generated a positive cash inflow. The overall effect of these revaluations on net income was +$1.4 billion. In my view, the upside potential for Uber shares may also be due to the revaluation of investments in other companies.
The revision of the forecasts
Forecasts for 1Q. Reservations are expected at 25-26 billion dollars (+28-33% over one year). Adjusted EBITDA is expected to be between $100 million and $130 million. The company expects EBITDA margins to continue to improve in 2022. In the Uber Ride segment, management expects an EBITDA margin increase of 10% in absolute terms, in the Uber Eats segment of 5%. In the Uber Freight segment, management expects an initial positive EBITDA margin.
Evaluation and Final Thoughts
Despite the positive quarterly results, investors were disappointed with the long-term EBITDA forecast that management gave on Investor Day. Management expects EBITDA of $5 billion in 2024, compared to the consensus forecast of around $5.8 billion. I don’t see any significant negative in the forecast. I believe that management approached the forecast with caution.
I believe that the current market price does not assume the advertising monetization prospects of the MAPC (118 million). Advertising activity ended the year with a revenue rate of $225 million ($141 million in actual revenue), higher than the $100 million previously forecast. This could add around $4.5 billion to the company’s valuation (~7% of current market cap).
Let’s move on to my review. To determine the target price, I use the DCF model. Below is my booking forecast by business segments.
I expect the Uber Ride segment to return to its 2019 level in 2022. I expect the segment’s bookings to reach $120 billion by 2029. That’s a CAGR of 16%. For Uber Eats, I expect bookings to grow from $51.6 billion to $144 billion by the end of 2029 (14% CAGR). For Uber Freight, I expect bookings to hit $7.4 billion. This segment may give an advantage to my estimate because I have not yet fully integrated the possible synergy of the purchase of Transplace into my model.
I expect total revenue to reach $57 billion by the end of 2029 (16% CAGR). In terms of segments, I expect revenue growth with a CAGR of 18% for the Uber Rides segment, 14% for the Uber Eats segment and 17% for the Uber Freight segment. Regarding the adjusted EBITDA margin, I expect the indicator to be at the level of 24% in the terminal period. In my DCF model, I use a WACC of 9.4% (risk-free rate of 2.5%) and a terminal growth rate of 3%.
To determine the final target price, it is necessary to add the value of the company’s shares in other companies to the DCF valuation. I use a 20% discount on the valuation of non-public companies. As a result, my DCF model gives me a price target of $49. That’s up 39% at the time of this writing. So, the shares look very attractive to buy at current levels, so I plan to open a long position in the company’s shares in the next few days.