Uber dropped its 2023 report in February of this year, and it garnered major attention. Since the start of 2023, the stock had rallied 200% to reach an all time high of $82.14 ($170B m-cap) by Feb 2024. It currently trades at $67.93 ($141B m-cap). The big takeaway – Uber is profitable and is investing into the next big disruption in the global transport industry.

No surprises, this story is about Uber. Today just like you get a Xerox copy, and Paytm your friend, you call yourself an Uber for your office or out of it. Uber has definitely become synonymous with cabs and almost there with all forms of transport including Bikes and Autos in India. In few countries, you can also plan your trip using public transport like trains.

What started in 2009 when founders Garett Camp and Travis Kalanick struggled to find a cab in Paris, and later prompted them to start UberCab back home in SF, is now a global and profitable company publicly valued at around $150 billion.

For the first time in its 15 years, Uber reported a full profitable year in 2023 with $1.1 billion in operational profits. Its net income stood at $1.9 billion ( including interest expenses, gains from its investments in Aurora, Didi in China and Grab in SEA, and taxes).

A little bit of history…

Uber went public in 2019, a good 10 years after its launch. It had accumulated losses of $32.8 billion by the end of 2022. Never having tasted profits, all of this was financed by the $25.2 billion it had raised as it set its sights to take on the nearly trillion dollar global transportation industry including ride-hailing, food delivery while it is still just getting started with freight.

Uber has a long history of fundraising including equity and debt. The latest was a $500M debt raise right in the middle of Covid to take advantage of the low interest rates and meet its existing obligations. The current long-term debt in the company stands at $9.5B to be repaid until 2030. 

But by the end of 2019 it had only $16 billion in accumulated losses. But the pandemic was brutal for Uber as its deficits jumped to $32.8 billion by 2022 including a $6.8 billion downward revaluation of its investments in Aurora, Didi, Grab and Zomato. 

Yes, remember UberEats in India was sold to Zomato in 2019? Uber got a 10% stake in Zomato worth $209 million at the time. Uber sold its entire stake in August 2022 for $390 million, when Zomato was trading at ₹50 apiece. Zomato has risen almost 300% since then.

But since mid-2022, things have turned around massively.

Coming Back

While the operational profit of $1.1B is impressive, the real strength of the operational efficiency of the ride-hailing to food delivery business lies in its Adjusted EBITDA. 

For the case of Uber, similar to how startups in India report it, Adjusted EBITDA is largely SBC-Stock based compensation (ESOPs, RSUs to employees) and asset depreciation costs added back into the operational profitability. Asset depreciation costs are justified since they are largely constant and are not impacted by the operational efficiency of a company, however SBC is a highly debated issue by long-term investors as it is a key factor of employee costs.

In 2023, Uber did $138 billion in Gross bookings, of which it collected $37.3 billion in revenue, resulting in –

Free cash flow from operations of $3.6 billion , and

Adjusted EBITDA of $4 billion

To put the numbers in context, in 2022, Uber did $115B in bookings and $31.9B in revenue with an operational loss of $1.8B, while having an Adjusted EBITDA of $1.7B and FCF from Ops of $642M.

Uber hits an inflection point

With Dara Khosrowshahi running a tight ship and maintaining Op. expenses stagnant, a $5.4 billion (17%) jump in revenue from 2022 to 2023 turned the year around with a $2.9B jump in profits. In essence a little over 50% of the incremental revenue found its way straight to the bottom line. Hence, Uber enjoyed a 50% incremental operating margin on revenue. The gross margin for Uber stands at nearly 40% for both years and here we can see the fixed cost leverage of Uber play out as the incremental margin will only increase with revenue and converge towards the gross margin.

The current operating margin stands at 3%, but that is because Uber has just reached its inflection point (as Dara Khosrowshahi rightly said) financially where it has collected enough revenue to cover its overhead operating expenses like compensation, sales, marketing etc. that do not scale with revenue. Any revenue over this will directly impact its operating margin and profit since the costs will only slightly vary. Uber does not need to enter any hiring frenzy, and its marketing costs will continue to be better optimized and targeted at emerging geographies.

Assuming a 17% revenue growth rate (mid to high teens advised by Uber over next 3 years) and a 5% Op. expense growth rate ( increased automation benefits, plus Uber advises a 3% headcount growth), Uber looks on track to reach $80 billion revenue and $14 billion in operating profit by 2028. With a cumulative $40 billion in profits over the next 5 years until 2028. Uber will turn around all of its accumulated losses very quickly. With an earnings multiple of 30x, Uber could be valued nearly $420 billion by 2028 (assuming not a significant impact on overall profit from non-operating sources) [Calculations]

(We found Forbes using absolute net margin growth to conclude that Uber is overvalued, however we feel differently about that. According to the above calculation Uber would reach profits of $14B in 2028 v/s $9.3B predicted by Forbes )

Gross Profit – is the profit after subtracting the direct cost of generating the revenue. For Uber, this includes the trip insurance costs, driver incentives, payment processing fees, and data center and device expenses. In some geographies, Uber is required to treat the end-consumer as its customer, and record the full trip cost as revenue. The driver’s commissions are also recorded as the cost of revenue in such cases. Gross margin is the gross profit as a %age of revenue

Net Margin – is the operational profit as a %age of revenue. Incremental net margin means the incremental profit as a %age of the incremental revenue 

But it’s not all that rosy

Uber has championed the gig economy and the sharing economy. In the US the Uber model is driving your personal car part time to make some income on the side (sharing the idle time of your car), while in India drivers drive commercial (yellow-plate) cars full time as gig workers without full-time employment benefits.

Earlier we wrote about another titan of the sharing economy, Airbnb, and how they had accumulated $6.35 billion in losses by 2021. They had another stellar year with $4.8B in net income and their accumulated deficit is down to $3.4B after a total stock buyback of $3.75B 2022 and 2023. They have turned it around indeed!

Uber has faced resistance in pushing the strong taxi unions around the globe, and still continues to face class action lawsuits and protests from time to time. Uber recently settled a case in Australia for $178 million and it definitely takes a toll on their slim profitability.

All this while it faces some competition from new upstarts inDrive (in 46 countries), Rapido and local companies like Namma Yatri (Bengaluru), Goa Miles, Mana Yatri (Hyderabad) and Yaatri Saathi (Kolkata) in each major city.

Due to stiff competition in some countries, and in a bid to cut its cash burn in the pricing war, Uber sold its China business to Didi (for a 20% stake worth $7B in 2016), SEA business to Grab (for a 27.5% stake in 2018) and took up stake to be part of the growth story there. Uber also acquired Careem in 2020 for $3.1 billion. In essence, competition is a major thorn in the path to profitability, and it makes sense for Uber to either dominate market share massively or sell its business to the major player. Uber commands a 72% market share in the US ride-hailing market while UberEats has a 25% share in the food delivery market.

Not Just That…

The self-driving car opportunity looms big. In 2020, Uber sold its self-driving unit to Aurora for 13.8% stake and has further upped its stake in hopes of introducing self driving trucks for Freight. Further Uber has partnered with Google’s Waymo to pilot autonomous cabs in the US. All these experiments and investments are crucial for Uber to protect against disruption. These expenses do come at the cost of short-term profitability just as Uber poured billions over the last 15 years subsidizing rides and incentivising drivers to change consumer behavior and acquire market share. 

The experiments need to run because they have the potential to transform / disrupt the mobility, delivery and freight businesses itself. To ensure that Uber is not irrelevant when the market is eventually disrupted, it needs to be the pioneer of the autonomous car revolution. It will be costly long-term if it is left behind like Google with AI.

I am sure you have felt the pinch of Uber rides being significantly more expensive now than a few years back and drivers still complaining. It is an art, keeping your current customers happy enough to keep running while also innovating and pouring money into it with the potential of future windfall gains that attracts investors.

Uber has certainly established itself as a global transportation company and demonstrated it has the muscle and discipline to become lifetime profitable. It is faced with the challenge to keep one eye ahead to come out on the right side of technology while also currently steering its ship through the muddy taxi markets around the globe as it hopes to become a trillion dollar behemoth. Just like how it’s cab drivers have to navigate with one eye on the phone and one on the road.

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