Sometimes a company is so dominant that its brand becomes associated with the product itself. Do you ask for a Kleenex (part of Kimberly-Clark) or facial tissue when you have a runny nose? The same question applies to mobility company Uber Technologies (UBER 2.64%). Do you "take an Uber" when you go somewhere or do you "rideshare?"
These are the hard-hitting questions that bring an investor to try and understand how this dominant business has struggled as a stock, going nowhere since its IPO in 2019. But don't be too quick to overlook Uber; here are two big reasons why it could still be an eventual winner.
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Uber's profit problem
First, it's crucial to understand why the stock might be underperforming. The company makes money through its smartphone platform, the Uber app, where customers can call for a ride or have food delivered. Approved drivers work as independent contractors to fulfill rides and deliveries, and Uber pays them while taking part of the fare as revenue.
Uber's most significant problem so far is its inability to actually make money. As the chart shows, both net income (bottom-line profit) and free cash flow have been negative since the company went public in 2019.
UBER Free Cash Flow data by YCharts
Uber reported $11.6 billion in revenue through the first nine months of 2021 and has spent $6.2 billion on "cost of revenue," of which paying drivers is the biggest part. This cost will probably grow as revenue grows because Uber drivers can only make so many trips in a typical day. In other words, the company will need more drivers to grow substantially.
So how might Uber turn profitable? It could depend on developing other business segments like food delivery to help profit margins and using revenue growth to spread out non-driver expenses like sales and marketing.
1. Network effects through dominant ride-sharing
According to Statista, the company has an estimated 69% of the ridesharing market in the U.S. and 37% of the global market. Fellow ridesharing company Lyft is Uber's primary competitor, and having such a wide lead on the market can make it hard for competitors to gain traction.
Uber's strong brand also makes it easier for it to expand its business into new services, which it's done for package and food deliveries. A market-leading brand is more likely to be trusted by customers, and it helps sustain the business. Uber needs a surplus of drivers available in all areas because nobody likes waiting, and doing so won't help customer retention.
There's more competition in food delivery, where Uber has a 24% market share. It must deal with market leader DoorDash as well as companies like Grubhub. It's an advantage for Uber to offer multiple, driver-powered services because it's easier for drivers to make money. Remember, Uber's not just competing for customers, but also for drivers.
Uber lets drivers take ride-hailing requests and food deliveries at the same time to help keep them busy. Uber's ecosystem needs everyone to win; happy drivers will work on its platform, and the resulting low wait times for services keep customers happy. It's a classic example of network effects.
2. Improving financials
Uber got a tough break with the pandemic; its ridesharing business was severely impacted during lockdowns in 2020 when people were hardly traveling. Not only is Uber still a young company in growth mode, but it's spent most of 2021 recovering from this "doomsday" scenario. The company reported an all-time high for gross platform bookings (customer trips and deliveries) in October 2021, which shows strong customer demand in recent months.
The financials behind Uber's secondary businesses are also improving -- although still in the red -- as they grow larger. EBITDA (earnings before interest, taxes, depreciation, and amortization) for Uber's food delivery business came out to a loss of $12 million in Q3 2021 compared to a loss of $183 million in the year-ago period. Losses in Uber's freight business also shrank to $35 million from $73 million the prior year.
You can see Uber's EBITDA and operating cash flow rebounding in this chart; this trend needs to continue in future quarters. Once all three of Uber's businesses generate positive EBITDA, I think that would potentially establish its path to positive net income.
UBER EBITDA (TTM) data by YCharts
Investors might be a little anxious about Uber's lack of profits despite having been a public company for several years now. However, I think the pandemic set Uber back. Its financials are rebounding as its bookings return to high levels, and while future earnings will need to confirm this trend, it seems like Uber's on its way to making money across all of its business segments.
The stock may get a boost in sentiment once it crosses that threshold. According to Precedence Research, the global ridesharing market may be worth $344 billion by 2030, illustrating that there could be a lot of long-term growth still to come. Uber's financials make it look like a flawed business model, but its excellent brand quality could eventually make it an outstanding stock.
