One of the most widely debated stocks is Uber Technologies (UBER -0.57%). Bulls think it is the leading company in two fast-growing industries (ride-sharing and food delivery) that is set for a huge boost in profitability over the coming years, while bears think the gig economy is structurally unprofitable with huge regulatory risks.
In 2023, so far it looks like the bulls are getting proven right. Uber just posted strong first-quarter earnings, sending shares of its stock soaring close to 50% year to date. Has the mobility platform gotten its mojo back with the pandemic behind it, or are the bears right about this company? Let's take a look.
Q1 earnings: Growth and improving profitability
In the first three months of 2023, Uber posted strong growth across the board for its mobility (ride-sharing) and food delivery business lines. Mobility net bookings -- defined as total customer spend across the segment -- grew 43% year over year in constant currency terms to $15 billion, while the delivery segment grew bookings 12% year over year to $15 billion.
Food delivery is growing slower right now because of the huge catalyst it got during the COVID-19 pandemic but has grown at an impressive rate over the past five years. In Q1 2019, Uber's delivery bookings were only $3 billion, meaning the segment has grown customer spending fivefold in less than five years.
Profitability is also starting to look better. In Q1 2023, Uber's operating loss was $262 million, or a margin of negative 3%. Over the last 12 months, it has an operating margin of negative 6%. These might not get you excited as an investor, but it should be noted that the company was routinely posting negative 50% operating margins just a few years ago. Over the next few years, as long as revenue continues to grow faster than operating expenses, Uber's operating margin will likely be above 10%.
UBER Operating Margin (TTM) data by YCharts
Even though Uber has made good progress on the profitability front, it still has a negative operating margin despite generating $12 billion in gross profit over the last 12 months. This means it has over $12 billion in operating expenses, the majority of which goes to its 32,000 employees. So layoffs might not be out of the realm of possibility.
In April, competitor Lyft laid off around 25% of its employees. Since drivers aren't included in these corporate employee numbers, I doubt Uber would see any effect on customer demand if it leaned up its cost structure.
Can advertising unlock food delivery profits?
One interesting profitability driver for Uber could be its nascent advertising segment in food delivery. This allows restaurants of all sizes to promote themselves to Uber Eats customers, which can be highly valuable, especially in large urban areas with hundreds of options for diners.
While it hasn't disclosed the revenue generation from this advertising segment, the company told investors it had 345,000 active merchants on its advertising platform already, which is a fantastic number and shows the rapid adoption the service is getting from restaurants.
Food delivery is a notoriously low-margin business. For example, even with $15 billion in bookings just this quarter, Uber's food delivery segment only generated $288 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which excludes corporate expenses and non-cash charges.
At a large enough scale, advertising could help drive true profit generation for Uber's food delivery segment even if the rest of the segment loses money. In fact, this could be a smart long-term strategy that allows Uber Eats to charge lower fees to customers compared to competing food delivery platforms like DoorDash.
What about the valuation?
Since Uber doesn't generate a profit, it is tough to value the stock. But let's do some estimates to see whether the stock could be cheap a few years from now.
First, let's be conservative and assume Uber can grow its revenue by 10% annually for the next three years. That would lead it to have approximately $42.6 billion in revenue three years from now. Assuming the operating margin can progress to 10% over that time frame, Uber will be generating $4.3 billion in annual operating income in three years.
Today, Uber's market capitalization is $76 billion, giving the stock a forward earnings multiple of 18 based on these projections. While not a crazy high earnings multiple, this is right around the market average and would likely mean a stock that has barely gone up over the next few years, especially once you add in some share dilution.
So what does this mean? If you own Uber or are thinking of buying shares, you need to believe the company can grow its revenue faster than 10% a year or increase its operating margin to well over 10% in the next three years. Because if it doesn't, the stock probably doesn't return much for shareholders in the next few years, meaning you should put your money elsewhere.
