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Equity Capital Markets

Uber Technologies  / Equity Capital Markets

<div class="content-highlight"><h2>We still value the company at $110 billion, or $58 per share, as Uber Eats is outperforming our expectations.</h2></div><hr><h2>
<a href="https://www.smartkarma.com/entities/430" target="_blank" data-smartkarma-citation="entities:430:1">Uber Technologies (0084207D US)</a>' Moat Sources Remain Intact and Are Driving Growth In Other Segments</h2><p>In light of Uber's S-1 filings and upcoming IPO, we've updated our views on its competitive position and financial prospects, which we initially discussed in our July 2018 report Uber May Pick Up Investors, Along With Riders, in Its IPO. After reviewing the additional metrics and disclosures in the S-1, we have even greater confidence in our narrow moat rating and $110 billion valuation estimate for Uber.</p><p>Despite Uber's market leadership and high penetration in ride-sharing, it appears that its growth in that space is decelerating faster than we initially anticipated, and the same may be true for its peers, such as <a href="https://www.smartkarma.com/entities/24423" target="_blank" data-smartkarma-citation="entities:24423:1">Lyft Inc (LYFT US)</a>. On the upside, while Uber has grabbed market share in food delivery much more quickly than we expected, we think strong growth potential for that service remains. We now estimate a $650 billion total addressable market for Uber by 2022, which may grow to over $1 trillion in 10 years, up from our July 2018 estimate of $630 billion. We continue to view Uber as a narrow-moat firm and expect the company to become profitable and generate excess returns on invested capital on the back of moat sources such as network effects and intangible assets associated with user data.</p><p>We have adjusted our initial model but still maintain our fair value estimate of $110 billion in market cap, or $58 per share based on our estimate of the firm's fully diluted share count. We now model slower gross bookings and revenue growth throughout the next 10 years, offset by improved operating leverage over the same period. While the surge in the firm's food delivery and freight brokerage businesses has been pleasantly surprising, we expect growth in these businesses to only partially offset the lower growth that we are now assuming for ride-sharing. We now expect Uber's total net revenue to grow at a 19% 10-year CAGR to over $64 billion by 2028. Also, we now expect Uber to become sustainably profitable (excluding divestitures and gains on investments like Didi) by 2024, two years later than we had initially anticipated. However, given how effectively Uber is using its scalable platform for other services, we expect further operating margin expansion after 2024. Finally, while CEO Dara Khosrowshahi has righted the ship after Travis Kalanick's departure, we maintain our very high fair value uncertainty rating as Uber continues to face various regulatory and legal matters.</p><hr><h2>Key Takeaways</h2><ul>
<li>We maintain our narrow moat rating for Uber Technologies. Uber's core business, the ride-sharing platform, continues to display moaty characteristics, such as network effects and valuable intangible assets in the form of user data. These sustainable competitive advantages could position the firm to become profitable and generate excess returns on invested capital.</li>
<li>We remain confident in Uber's strong network effect, thanks to its growth in users, trips completed, and rides requested per user. Details provided in the S-1 support our earlier expectations and give us confidence in our narrow moat rating.</li>
<li>We expect Uber to maintain its 25%-30% share of the ride-sharing market through 2023 as it continues to benefit from its first-mover advantage, network effect and data moat sources, and various strategic acquisitions. However, we foresee modestly faster growth at Lyft, the number-two player in the U.S., which went public in March</li>
<li>We have increased our estimate of Uber's total addressable market to include the aggregate of the global taxi, ride-share, bike-share, scooter-share, and food delivery industries, along with the U.S. and European markets for freight brokerage and the share we believe ride-share companies can take from global public transport. Our revised addressable market is now $650 billion by 2022 (up from the $630 billion we projected in our July 2018 report) and $740 billion by 2023, a 21% five-year compound annual growth rate.</li>
<li>Based on the S-1, Uber Eats is outperforming our expectations, as it may be benefiting more from cross-selling to its large ride-sharing user base than we initially assumed. In addition, Uber has continued to aggressively invest in and price its service to attract more restaurants and expand the food delivery business. While Uber Eats' take rate declined slightly during second half 2018, gross bookings and net revenue have more than doubled during the same period.</li>
<li>Our fair value estimate for Uber Technologies remains $110 billion, or $58 per share, approximately 23% higher than the midpoint of the firm's IPO price range of $44 to $50, which implies an $83 billion-$95 billion market cap.</li>
<li>We also see about 20% upside in Uber's closest U.S.-based ride-sharing competitor, Lyft, as we think the market is similarly underestimating the market growth potential for ride-sharing and that narrow-moat Lyft has gained market share in the U.S. We like the strategies of both Uber and Lyft and would recommend shares of both names if Uber were to trade within its IPO range of $44-$50 and if Lyft continued trading at a 20% or more discount to its $72 fair value estimate.</li>
</ul>

We still value the company at $110 billion, or $58 per share, as Uber Eats is outperforming our expectations.
Uber Technologies (0084207D US)' Moat Sources Remain Intact and Are Driving Growth In Other SegmentsIn light of Uber's S-1 filings and upcoming IPO, we've updated our views on its competitive position and financial prospects, which we initially discussed in our July 2018 report Uber May Pick Up Investors, Along With Riders, in Its IPO. After reviewing the additional metrics and disclosures in the S-1, we have even greater confidence in our narrow moat rating and $110 billion valuation estimate for Uber.Despite Uber's market leadership and high penetration in ride-sharing, it appears that its growth in that space is decelerating faster than we initially anticipated, and the same may be true for its peers, such as Lyft Inc (LYFT US). On the upside, while Uber has grabbed market share in food delivery much more quickly than we expected, we think strong growth potential for that service remains. We now estimate a $650 billion total addressable market for Uber by 2022, which may grow to over $1 trillion in 10 years, up from our July 2018 estimate of $630 billion. We continue to view Uber as a narrow-moat firm and expect the company to become profitable and generate excess returns on invested capital on the back of moat sources such as network effects and intangible assets associated with user data.We have adjusted our initial model but still maintain our fair value estimate of $110 billion in market cap, or $58 per share based on our estimate of the firm's fully diluted share count. We now model slower gross bookings and revenue growth throughout the next 10 years, offset by improved operating leverage over the same period. While the surge in the firm's food delivery and freight brokerage businesses has been pleasantly surprising, we expect growth in these businesses to only partially offset the lower growth that we are now assuming for ride-sharing. We now expect Uber's total net revenue to grow at a 19% 10-year CAGR to over $64 billion by 2028. Also, we now expect Uber to become sustainably profitable (excluding divestitures and gains on investments like Didi) by 2024, two years later than we had initially anticipated. However, given how effectively Uber is using its scalable platform for other services, we expect further operating margin expansion after 2024. Finally, while CEO Dara Khosrowshahi has righted the ship after Travis Kalanick's departure, we maintain our very high fair value uncertainty rating as Uber continues to face various regulatory and legal matters.Key Takeaways
We maintain our narrow moat rating for Uber Technologies. Uber's core business, the ride-sharing platform, continues to display moaty characteristics, such as network effects and valuable intangible assets in the form of user data. These sustainable competitive advantages could position the firm to become profitable and generate excess returns on invested capital.
We remain confident in Uber's strong network effect, thanks to its growth in users, trips completed, and rides requested per user. Details provided in the S-1 support our earlier expectations and give us confidence in our narrow moat rating.
We expect Uber to maintain its 25%-30% share of the ride-sharing market through 2023 as it continues to benefit from its first-mover advantage, network effect and data moat sources, and various strategic acquisitions. However, we foresee modestly faster growth at Lyft, the number-two player in the U.S., which went public in March
We have increased our estimate of Uber's total addressable market to include the aggregate of the global taxi, ride-share, bike-share, scooter-share, and food delivery industries, along with the U.S. and European markets for freight brokerage and the share we believe ride-share companies can take from global public transport. Our revised addressable market is now $650 billion by 2022 (up from the $630 billion we projected in our July 2018 report) and $740 billion by 2023, a 21% five-year compound annual growth rate.
Based on the S-1, Uber Eats is outperforming our expectations, as it may be benefiting more from cross-selling to its large ride-sharing user base than we initially assumed. In addition, Uber has continued to aggressively invest in and price its service to attract more restaurants and expand the food delivery business. While Uber Eats' take rate declined slightly during second half 2018, gross bookings and net revenue have more than doubled during the same period.
Our fair value estimate for Uber Technologies remains $110 billion, or $58 per share, approximately 23% higher than the midpoint of the firm's IPO price range of $44 to $50, which implies an $83 billion-$95 billion market cap.
We also see about 20% upside in Uber's closest U.S.-based ride-sharing competitor, Lyft, as we think the market is similarly underestimating the market growth potential for ride-sharing and that narrow-moat Lyft has gained market share in the U.S. We like the strategies of both Uber and Lyft and would recommend shares of both names if Uber were to trade within its IPO range of $44-$50 and if Lyft continued trading at a 20% or more discount to its $72 fair value estimate.


Narrow-Moat Uber's IPO Looks Attractive to Us