Uber Technologies (NYSE: UBER) wants to be positioned as a “platform” company so we’ll grant them their wish and evaluate them from that perspective. As an aside they filed their prospectus as “a prepackaged software” company. The deal will certainly get done as investors are keen to own the clear market leader in this space – no matter what they call themselves.

In management’s view the Uber we know is just an “example of how the Uber platform connects drivers with riders to enable personal mobility.” In that same spirit Uber Eats just a way for “food providers to connect with eaters.” Uber Freight is aiming at the “brokerage” segment of the logistics business which addresses the needs of smaller trucking and shipping companies.

Despite the examples there is basically no useful information in their roadshow or prospectus to build a real investment case. With a gigantic wave of the hands management goes from “we’re going to lose even more money this year to our long-term model will generate 25% EBITDA.”

The 25% EBITDA target is based on achieving 20% “adjusted net revenue” and a 40% “platform contribution margin.” It’s hard to know if either of these is reasonable because past results have been extremely variable. ANR for 2018 was 39% but in Q4 2018 it was 12%. Contribution margin was as high as 18% in 2018 but ended the year at minus 3%.

One key assertion around profitability is that “competition will ease.” We have seen consolidation in the market with Uber’s proposed acquisition of Careem in the Middle East for $3B and their minority investments in China’s Didi and Russia’s Yandex. But even in “mature” markets like NYC there are new entrants springing up offering combinations of lower fares and higher driver payouts.

Market Opportunity & Competition

Even without being a “platform play” Uber describes their “serviceable market opportunity” in personal mobility to be $2.5T. According to management Uber Eats adds another $795B and Uber Freight $72B. The reason Uber Freight is so low is that they only serve the small “brokerage” segment of the $3.8T global trucking industry.

Uber has been battling competition for years. In part as a response to this intensive competition Uber has taken minority interests in some international markets – notably Didi in China.

Reducing the cost of competition will be a key challenge for the company. Their customers are price-sensitive and it is easy to compare prices. For example many consumers will check the price between Lyft and Uber before the book. In some cases search results even show pricing for multiple services – including smaller local providers who may undercut the larger brands in those markets.

Like airlines Uber will try and encourage customers to be more loyal with various programs. Most of us have favorite airlines – in some cases because most of our “points are there” and sometimes for service quality. But when confronted with a major price difference it hard not to chose the cheaper one.

Also many drivers work both Lyft and Uber. Some have told us that it’s impossible not to do both if you plan on getting a lot of trips. They acknowledge that the key to making money is the monthly bonus which is based on the total number of rides so they might have a preferred platform in any given month.

Regulatory environments will weigh on Uber in some markets. This will have some impact on their ability to compete in some cases – especially with existing taxi services in big markets like NYC and London. Management has noted that there is another ~$500B of opportunity in some developed markets where regulators have taken an unfavorable stance vis a vis Uber.

Uber’s new “Jump” bike offering looks pretty cool and may be a better solution than standard docked bikes and unwieldy scooters. The electric assist also addresses a frequent commuter concern about not wanting to arrive to work beading with sweat. We know from the Lyft roadshow that rides on these might be more profitable and help stabilize their contribution margin. We’d love to see more detailed numbers. This is probably also too small a business to “move the needle” in terms of core platform revenue.

While Uber has a dominant position in many large markets it’s harder to get at how they perform in individual cities. It seems that a national provider like Lyft and in some cases a small indigenous company can mount an effective campaign in a local market and gain share away from Uber. This dynamic makes it possible for market share and margins to differ greatly by geography.

The choice of “platform company” means that Uber may get even more attention from industry heavyweights like Google and Amazon. Neither of those companies wants to be in the ride-hailing business but when you start talking about being a platform things get real. We’re in the early stages of this market for sure so there’s enough room for everyone right now – but has things grow we expect the rivalry to remain.

The Amazon Compare

Although they seem to shy away from saying it directly, Uber want’s to be compared to Amazon who had a “history of losing money” as they built their platform. The folks at DataTrek Research thoroughly debunked this from a financial perspective. Here is just the first point of their excellent Amazon versus Uber analysis:

“#1: It is a myth that Amazon has posted consistent steep losses as it built its business over the last +20 years, and when it did the company used much more debt than equity to fund its growth:

  • The company has only posted one billion dollar net income loss, and that was in 2000 at -$1.4 billion. Since 2003 there have been two small losses in     2012 (-$39 million) and 2014 (-$241 million).
  • Yes, early on in its development Amazon did show aggregate net income losses of $3.0 billion from 1995 to 2002. Over that period, however, cash flow from operations was only -$134 million.
  • To plug the gap between cash flow and its operating needs/incremental CapEx, Amazon issued $2.0 billion of debt over that timeframe, but just $409 million of equity.” [BTW the folks at DataTrek do an awesome job with their daily research product – you can try it with DataTrek Free Trial.]

We’d add that Amazon *became* a platform by *dominating specific niche markets* rather than being one out of the gate. Amazon Web Services (AWS) was a key piece of this strategy and it rolled out later. Perhaps Netflix (NFLX) is a better example but they “only” have a $163B market capitalization. In order to get a 10x return from the IPO investors need to expect that UBER can get close to a $1T market capitalization.

Autonomous Vehicles

There’s a consensus that AVs are going to take longer than most expected to become practical. Uber’s commentary reflects the reality that the growth in AV trips will be slow and be used as a part of a “hybrid” strategy that management describes here (emphasis mine):

“In a hybrid autonomous world, which we expect to exist for the next few decades and require even more human drivers than there are today, we think that the most important part of the value chain is the ridesharing network, which can dispatch either an autonomous or non-autonomous vehicle to the consumer based on route conditions.”

While the AV gets loads of attention from the press and investors they are a long way off. We’re reminded of the comical competition held a few years ago in South Korea where they had some rain which caused all the cars to completely lose their ability to move because of all the reflections coming off the road. Of course we see steady advances but they are still solving the easy use cases – it’s the “difficult use cases” that will take a very long time to work out.

The economics of an AV do look favorable relative to having to pay drivers. So if Uber can demonstrate improving contribution margin that can be sustained, investors may begin to plausibly factor in the very long-term benefits of AVs into the model.

Numbers & Comparables

Gross bookings last year came in at $50B. Core Platform Adjusted Net Revenue (ANR) was $10B is the revenue generated based on their “take rate” which varies depending on the service and geography. The company estimated revenue for Q1 at about $3.1B which is up 20% YoY. It’s up less than 5% from Q4 2018.

The company focuses on “contribution margin” as a measure of profitability. Last year this figure varied from 18% to (3%) during 2018. Their Adjusted EBITDA loss for 2018 was $1.8B and it’s expected to be larger in 2019 as the company continues to “invest” in their business.

Here is how CFO, Nelson Chai, talks about the long-term model for the business:

“We anticipate a take rate for our core platform of 20 percent. Going forward, we expect competitive pressures in ridesharing and food delivery to ease over time around the world. We believe this, along with cost leverage, can enable us to drive our core platform contribution margin to approximately 40 percent of core platform ANR.

We manage our business to adjusted EBITDA. Over the long term we are targeting an adjusted EBITDA margin of 25 percent of ANR. We believe we can achieve this target by increasing our core platform contribution margin, achieving profitability in our other-bet segment, and leveraging our operating expenses across the board.”

Just as a sanity check we ran some comparable company metrics to see how this EBITDA target lines up with what other companies have been able to do. The numbers vary considerably but it makes the case that 25% EBITDA margins achievable.

The Uber IPO is unlikely to be judged based on valuation. It’s a “big story with a big opportunity and great management” so it’s where you can place a long-term bet and sit back and see how it plays out.

Still we did a PFV just to see where things come out. The thing is we gave them the 25% EBITDA margin although we cannot believe it, let alone justify it with a model. Further we allowed for a 25x multiple which would be reasonable if growth can remain in the 10%-20% range with consistently expanding margins – annual earnings growth would be 25%+.

Investors who can “take it on faith” that Uber can get to their long-term model will find the shares attractive at the IPO price.


Leave a Reply