Would-Be Uber Investors: Here's Why (and Why Not) to Buy

Believe the hype: The way we get around is changing, and fast. Transportation is already a multitrillion-dollar-a-year global industry, and world population migration patterns mean it will keep getting bigger in the decades to come. New types of businesses are entering the fray every year to keep up with demand and keep traffic in check.

That's where Uber Technologies (UBER -0.07%) comes in. The ride-hailing, ride-sharing, delivery service, and transportation network is already huge. As of June 4 -- not long after its initial public offering on May 10 -- the company carries a market cap of $68 billion and completes about 14 million trips every day. But its size and what it actually does can be deceptive, and one needs to understand that before deciding if the company is a good investment.

Why Uber is a buy

According to Research and Markets, the global ride-sharing industry was worth $61 billion in 2018. The research firm expects that value to swell to $218 billion by the year 2025, notching a 20%-a-year growth rate. Looking further into the future, chip maker Intel put out a report saying autonomous vehicles (AVs) will create a $7 trillion transport economy by the middle of this century.

Both of those time frames are far enough in the future that it's safer to call these estimates science fiction. Maybe ride-sharing and AVs are disruptive enough that they will achieve the projected growth, maybe they won't. But it is safe to say that this 10-year-old company is growing fast in the near term. One need only look at its first-quarter 2019 top line figures.

Data source: Uber Technologies. YOY = year over year. 

Uber is growing at a brisk pace as it expands ride-sharing and ride-hailing around the globe and adds related services like food delivery, freight, business transport, public transit, and bike sharing. Future revenue streams are in the works through AV investment and partnerships. It even has an aerial ride-sharing service slated to launch in 2023. Far-fetched? Maybe at the moment. But a more mobile future is really what investors are betting on, and Uber is delivering great top-line results. All indications are that the movement will keep expanding. 

Image source: Getty Images.

Why Uber isn't a buy

But here's the ugly: Despite Uber's size and age, it is still basically a start-up. A hallmark of many start-ups is their propensity to lose money, and Uber is no exception. What's worse is that management has said the losses will continue for the foreseeable future. Revenue is not increasing nearly as fast as gross bookings and number of trips (implying a very high cost to acquire new business).

Then there's the fact that gross profit margin (the cost to deliver a service to customers) is falling. This is the opposite of what one expects to see from a company that is growing and trying to reach a sustainable scale. That's because Uber isn't focused on profit right now.

Data source: Uber Technologies. YOY = year over year. P.p. = percentage point. EBITDA = earnings before interest, tax, depreciation, and amortization. 

Then there's the fact that Uber's gross profit margin was not particularly impressive in the first place. Many high-growth technology companies these days boast fat margins and run at a loss anyway as they invest for further growth. Not so at Uber. With a nearly 46% gross profit margin, Uber is better than, say, an auto manufacturer -- like Ford at 15.9% gross margin in Q1 2019 or General Motors at 18.9%. But another recent San Francisco-based IPO, Fastly, is a fraction of Uber's size with $45.6 million in sales in the first quarter, and it boasted a gross margin of 56.7%. Many technology outfits boast even higher margins.

And that's what would-be owners need to be aware of: Uber is simply a different kind of business, a huge company playing in a sandbox that is not well-developed yet. The services offered are great, but the financials just aren't there yet to support it in a sustainable fashion.

The good news is Uber isn't without means, but that's diminishing. There was $5.75 billion in available cash at the end of the first quarter, but that may need replenishing soon as there was $6.41 billion available a year earlier. Will Uber finance itself with debt? That would further sink the company into the red. Or will it be equity? That dilutes ownership for current shareholders.

Taking a long-term look

The bottom line is that potential investors should think hard over this one. Uber could be a massive enterprise someday. But the current numbers suggest that this is a stock for the really long term.

I would recommend buying in a little bit at a time, using the inevitable dips in the stock as an opportunity to add to the position. Virtuous patience will be required. If a long pathway fraught with uncertainty, setbacks, and cash-bleeding operations doesn't sound like something you're interested in following to reach a prosperous end, Uber stock probably isn't for you.