Kudos to Uber Technologies (UBER -2.94%). Last quarter's top line of $8.8 billion was 29% better than the year-ago comparison and slightly above expectations. The operating loss of $0.08 per share is also a marked improvement on its loss in the first quarter of 2022, matching or beating most analyst estimates as well. Guidance for the quarter now underway implies growth on the order of 15%. The ride-hailing outfit continues to expand its reach.
The most exciting aspect of the company's first fiscal quarter, however, isn't being touted. Uber continues to grow its top line without spending a fortune to do so. Indeed, its relative costs continue to come down as it grows its business -- and operating income is in the immediate future.
Uber is at a fiscal tipping point
It's a tired cliche, to be sure, but usually true nonetheless -- you have to spend money to make money.
That's certainly been a tenet of the bullish arguments supporting Uber since its 2019 public offering, anyway. The company was bleeding big money then and continued to do so. And not just accounting losses. More actual cash was going out the door than coming in. Then, the COVID-19 pandemic made its fiscal matters even more complicated.
The wind-down of the pandemic coinciding with the wind-up of its business, however, reveals something encouraging about Uber. That is, its ever-growing size has allowed it to dial back its relative costs. The company came within 3% of an operating breakeven last quarter, extending a long (if uneven) streak of progress toward profitability. At its current rate, it's conceivable the company could swing to a net operating profit this year.
Data source: Uber Technologies. Chart by author.
Analysts agree with that outlook. Wall Street is still modeling a per-share loss of $0.10 this full year but projecting a profit of $0.66 per share for fiscal 2024. More earnings growth is in the cards beyond that point.
Data source: Thomson Reuters. Chart by author. EBIT = earnings before interest and taxes.
The trick? There isn't one. This path from start-up to solvency is the same basic one nearly all businesses follow, even if at different paces. Scale is everything. Fixed costs like advertising, rent, and administrative expenses are, well, fixed and don't change as a company grows. Eventually, there's enough size in place to not only cover a company's variable costs (like driver compensation, in this case) but all of its fixed costs as well.
That said, Uber is getting a handle on its single-biggest variable cost too. That's the aforementioned driver compensation expense; you'll see it categorized as "cost of revenue" on the company's income statement. It rolled in at 59.6% of last quarter's revenue, falling again from the peak of 63.8% in the second quarter of 2022.
Data source: Uber Technologies. Chart by author.
Some other costs have inched higher since then, but not by much. Mostly though, expenses as a percentage of revenue are dwindling. In this same vein, operating cash flow is similarly impressive, and Uber's free cash flow reached a record of $549 million last quarter. Look for these metrics to continue improving as well.
This was always the plan, of course -- reaching a fiscal critical mass so regular injections of fresh funding are no longer needed. We're almost there if we're not there already.
And in case you're wondering, yes, a lack of Uber-like scale is rival Lyft's (LYFT -3.35%) chief challenge. It's spending more and more -- not less and less -- as it gets bigger. Its marketing and administrative costs skyrocketed last year. They had to. It's competing with Uber for consumers' attention as well as for drivers. Because Uber is nearly 10 times as big as Lyft in terms of revenue, it's got 10 times as many financial resources to devote to things like advertising and administration.
If you can stomach the volatility...
Don't misread the message. Uber still has much to figure out. It remains in the red on a net basis, with interest expenses and taxes poised to eat away at any profitability it may achieve in the near future.
Stocks reflect their underlying companies' trajectories and plausible futures at least as much as they reflect their present, though, and in Uber's case, the future is compelling. Adding more revenue from here should have a positive impact on its bottom line, continuing the profit growth trend that's been in place since 2021.
It's still not the right fit for everyone's portfolio. With shares trading well below their high in 2021, however, there's certainly a bullish case to be made to aggressive investors who can handle the volatility that's all but certain from this storied stock.
