In light of Uber Technologies’ recent filings around its Friday IPO, we’ve updated our views on the company’s competitive position and financial prospects, which we initially published in July 2018. After reviewing the additional metrics and disclosures in the filing, we have even greater confidence in our narrow economic moat rating and $110 billion valuation estimate for Uber.
Despite Uber’s market leadership and high penetration in ride-sharing, it appears that its growth in that space is decelerating faster than we initially anticipated, and the same may be true for its peers, such as Lyft (LYFT). On the upside, Uber has grabbed market share in food delivery much more quickly than we expected, and we think strong growth potential for that service remains. We now estimate a $650 billion total addressable market for Uber by 2022, which may grow to over $1 trillion in 10 years, up from our July 2018 estimate of $630 billion. We continue to expect the company to become profitable and generate excess returns on invested capital on the back of moat sources such as network effects and intangible assets associated with user data. While CEO Dara Khosrowshahi has righted the ship after Travis Kalanick’s departure, we maintain our very high fair value uncertainty rating as Uber continues to face various regulatory and legal matters.
Uber aims to take you anywhere and bring you anything, anytime
Uber is a technology provider that matches riders with drivers, hungry people with restaurants and food delivery service providers, and shippers with carriers. Founded in 2009, Uber has become the largest on-demand ride-sharing provider outside of China. Since 2016, the company has completed over 10 billion trips in 63 countries. In 2018 alone, trips representing 26 billion miles were initiated on Uber. At the end of 2018, Uber had 91 million users who used the firm’s ride-sharing or food delivery services at least once a month. Uber refers to those users as monthly active platform consumers.
We believe Uber has a 30% share and will be the leader in our estimated $411 billion total addressable ride-sharing market, excluding China, by 2023. It faces stiff competition from players such as Lyft (mainly in the United States) and Didi, in which the firm does have a 20% holding after the sale of its operations in China to Didi in 2016. While Uber no longer operates in China, it does compete with Didi in other regions around the world. The firm also has a 27.5%) stake in Grab, another former competitor in Southeast Asia. Globally, the market remains fragmented, and Uber competes with many local ride-sharing platforms and taxis.
While Uber’s network effect moat source has helped generate more riders, drivers, and requests, the company has also gone the acquisition route. The latest one was the $3.1 billion (funded by cash and convertible notes) acquisition of one of the Middle East’s largest ride-sharing providers, Careem, which has been providing such a service for more than seven years. Uber expects this acquisition to close at the beginning of 2020, after which we think it will drive further growth in the firm’s ride-sharing market share, gross bookings, and net revenue. Based on various estimates of Careem’s net revenue, we estimate Uber’s purchase of the firm was equivalent to around 10 times trailing net revenue.
In the long run, like other ride-sharing firms, Uber is investing to replace some or most drivers with autonomous vehicles. Those investments are taking place in the firm’s advanced technology group. While we expect further toward fully autonomous vehicles may help increase Uber’s take rate, it will probably keep drivers even in autonomous vehicles over the long run for safety reasons. The advanced technology group has received investments from various parties, including Toyota, which bodes well for both as the two may more quickly and smoothly commercialize autonomous vehicle technology and cars.
Uber has a narrow moat as riders and drivers continue to hop on
In our view, Uber’s core business, the ride-sharing platform, benefits from network effects and valuable intangible assets in the form of user data. We think these sustainable competitive advantages will help Uber to become profitable and generate excess returns on invested capital. For this reason, we assign Uber a narrow moat rating.
Uber’s network effects benefit drivers and riders, creating a continuous virtuous cycle. Drivers and riders make up the supply and demand in ride-sharing, respectively. As a first mover in this market, where requests for rides from anywhere could be made in real time via a simple-to-use mobile app, Uber began to attract riders mainly via word-of-mouth. Growth in demand and further word-of-mouth marketing attracted more drivers, increasing the supply of Uber vehicles. In turn, as the number of drivers increased, the timeliness and reliability of the service improved, which drove the number of users or riders higher, which in turn attracted more drivers, all of which indicates a network effect. Uber was able to accelerate this network effect by focusing on smaller areas, such as San Francisco, before expanding into more cities. A comparable tech leader that profits from network effects is Facebook, which started at Harvard before expanding to all colleges and then opened up globally.
Growth in demand is driven not only by more users, but also likely by more rides or trips per user. Globally, Uber’s monthly active platform consumers and number of trips support this and our network effect assumption. During the last three years, total monthly active platform consumers and trips, along with trips per monthly active platform consumer, have been growing.
Uber and its peers cannot avoid the laws, old and new
Uber faces many regulatory hurdles that we think it can either overcome or has the flexibility to adapt to via price and take rate adjustments while maintaining its market-leading position. However, legal and regulatory pressure will probably persist.
In many states in the U.S., the firm and its competitors are forced to conduct more in-depth background checks on their drivers. Plus, the safety of the individually owned vehicles become more important, and many states now require vehicle inspections and driver training. In addition, various insurance coverage not only for the drivers and riders, but also for third parties are required. While some of these requirements increase the costs associated with each ride, they may also help Uber or its rivals maintain their drivers and riders, thereby ultimately lowering sales and marketing costs. In other countries, Uber faces more stiff regulations, such as the requirement for each driver to be professionally licensed. In some countries, standards and requirements imposed on transport services are also likely to apply to Uber.
Uber also faces pressure to pay a minimum amount per trip to its contracted drivers, which we think could create a barrier to entry for smaller players, as the more established companies like Uber, with their large rider and driver networks, can pass the additional cost on to riders.
We assign Uber a fair value estimate equating to $58 per share
We have updated our valuation model for Uber in light of additional details provided in the company’s most recent financial filing, but we maintain our $110 billion market capitalization estimate. Based on the estimated fully diluted share count, a $110 billion market cap should equate to a fair value estimate of $58 per share upon Uber’s IPO. Our fair value estimate represents enterprise value/net sales multiples of 8, 6, and 5 in 2019, 2020, and 2021, respectively.
Our valuation is about 23% above the valuation implied by the midpoint of Uber’s initial estimated IPO price range of $44-$50 per share. We think Uber is likely to begin generating adjusted EBITDA in 2022. Within our 10-year discounted cash flow model, we assume the firm will turn its current operating loss to operating income in 2024, while expanding operating margin to over 20% by 2028.
