Uber Stock: Risks and Lack of Profits Don’t Justify Valuation

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As economies around the world recover from the pandemic, Uber Technologies Inc. (NYSE: UBER) has seen strong rebound patterns in revenue and bookings. Unfortunately, Uber is a very unprofitable company with a terrible loss record.

The longevity of losses, as well as the size of Uber’s cumulative deficit, weighs more heavily at this point than, say, booking recovery patterns. Additionally, Uber faces significant investment risks due to the company’s operating industry. This can only lead to one conclusion: Uber is a value trap.

Diversified business model with an incredible amount of losses

Uber started out in the ride-sharing market, but the company’s business model has changed significantly over the past few years. Uber’s business portfolio is divided into three sections: Mobility, Delivery and Freight.

Uber benefited from strong recovery trends in its Mobility division. Uber’s mobility business consists primarily of revenue from rides booked through the Uber app from point A to point B. Uber’s second category, delivery, covers the delivery of needed supplies to doorsteps of consumers, such as food. After the first cases of Covid-19 hit the global economy in 1Q-20, the mobility industry, in particular, saw a strong recovery in gross bookings. The delivery segment benefited from the outbreak as more food delivery orders were placed during this period.

Gross bookings for weekly delivery and Uber mobility

Weekly delivery and gross mobility bookings (Uber Technologies)

Uber’s gross bookings represent the total dollar value collected from customers across all segments, including taxes, tolls and fees. A surge in gross bookings began in 2Q-20 at the start of the pandemic, and total gross bookings jumped 159% to $26.5 billion in 1Q-22. Gross bookings increased by 35% per year in 1Q-22. Delivery activity currently accounts for 53% of total gross bookings, with Mobility activity accounting for 41%. The rest is for freight services.

Uber gross bookings

Gross bookings (Uber Technologies)

Only adjusted profits

While recovery trends appear to be positive on the surface, Uber’s main problem is that the company can only achieve profitability on an adjusted basis. Many new businesses face this problem for obvious reasons: they are not yet established.

However, Uber has been in operation for over a decade and profits are still elusive. Uber started operations in 2009 and went public in 2019. You would think that a company like this would be able to turn a profit now, especially now that the Covid-19 pandemic is over and operational conditions have returned to normal.

Unfortunately, Uber is not one of them. The company’s latest earnings demonstrate once again that it is unable to generate true profitability. Uber’s adjusted EBITDA in the first quarter was $168 million. Due to “other expenses”, actual net income was negative $5.9 billion.

Introducing Uber Financials

Financial Overview (Uber Technologies)

Other costs include investment profits and losses from Uber’s investment division, which seeks stakes in companies relevant to Uber’s operating businesses. Uber reported a $5.6 billion investment loss attributable to equity investments in its “other costs” in the first quarter. Uber has invested in companies such as DiDi Global (DIDI), China’s first mass transit startup; Zomato, which bought Uber’s food delivery business in India in 2020; and ride-sharing giant Grab (GRAB), which provides transportation and delivery services in Southeast Asia.

Uber’s investment and operating risks are positively correlated

Uber’s equity portfolio has the potential for huge returns, but also high losses, as we recently learned. Besides the prospect of massive losses, there is another problem with Uber’s investments.

Uber’s investments are mostly focused on the same industry in which it operates. In other words, if the operating company suffers a downturn, such as a recession, the value of Uber’s equity investments will almost certainly have to be reduced as well. If Uber’s core businesses, mobility and delivery, experience macroeconomic challenges, this link between inventory risk and operational risk could become a major issue.

Uber investments

Investments (Uber Technologies)

The previously reported $5.6 billion losses were caused by significant declines in DiDi and Grab stocks in the first quarter. If prices continue to fall, Uber will be forced to reduce the value of its capital position.

Uber investments and fair value measurement

Investments and fair value measurement (Uber Technologies)

The concentrated nature of Uber’s investment portfolio, along with operational underperformance, led to a loss of $5.9 billion in 1Q-22, pushing the company’s overall deficit to $29.6 billion. dollars. In Uber’s existence, shareholders have suffered about $30 billion in losses, which is, to put it mildly, dismal and not exactly a fantastic sales pitch to entice investors to buy the stock.

Uber - Interest and Equity

Interest and equity (Uber Technologies)

The price is too high

Based on this year’s revenue, Uber’s P/S ratio is 2.0x, while its P/B ratio is 4.9x. The two multiples indicate a huge overvaluation because the company is not profitable and probably won’t be for a long time. Lyft (LYFT) has a P/S ratio of 1.8x and a P/B ratio of 5.5x, and it’s also a company I wouldn’t consider buying.

Uber stock valuation metrics

Evaluation measures (Yahoo finance)

Why Uber might see a higher share price

Uber has been in business for over a decade and still remains very unprofitable. This may or may not change in the future. If so, investors might be thrilled to own a piece of one of the most inventive companies in the world. A rebound in stock valuations could boost Uber’s earnings. That said, I think Uber will remain unprofitable for at least two more years.

My conclusion

Uber is a value trap, given its history of huge losses. Investors will need to recoup $30 billion in losses over the life of the company before they get a dime on their investment.

In addition, equity and operating risks are strongly associated, as DiDi Global and Grab would be expected to experience comparable problems if Uber’s Mobility and Delivery division were to experience revenue impediments in due to a recession.