Only in the Best Case Scenario Is Uber Stock Not Overvalued

Advertisement

Uber (NYSE:UBER) stock and Lyft (NASDAQ:LYFT) stock will only rise over the long-term if the companies learn the most important lesson of the internet streaming wars. Owning Uber stock (or Lyft for that matter) won’t seem so precarious if they do.

uber stock

Source: Shutterstock

The lesson is that companies don’t have to be the first mover, but launching meaningfully after the first mover, amid a great deal of competition, is usually a recipe for mediocrity, at best.

Of course, Netflix (NASDAQ:NFLX) was the first mover in the streaming wars, circa 2009. Amazon (NASDAQ:AMZN) followed in 2011 with its Prime Video.

Between then and 2018, other streaming platforms launched, including Hulu, Sling, Roku (NASDAQ:ROKU), CBS (NYSE:CBS) All Access, and HBO Now.

Uber Stock and Competition

In this crowded market, with a firmly established top dog (Netflix), even the strongest of companies don’t look poised to make much of a dent.

Alphabet’s (NASDAQ: GOOG,NASDAQ:GOOGL) YouTube Premium is so unpopular that the company plans to make its original content available at no charge. I’ve written that the subscription streaming services of Apple (NASDAQ:AAPL) and Disney (NYSE:DIS) aren’t going to be strong enough to move the needle for either stock.

Some investors apparently agree with me. Over the last three months, as both companies prepare to launch their streaming services at the end of this year, Apple stock is up only 3.5% and Disney stock has risen 15%. So investors aren’t exactly euphoric about the prospects of the iconic companies’ streaming services.

By launching services that employ self-driving vehicles, Uber has a great chance to become profitable enough for its stock to rise meaningfully over the next several years.

But multiple other companies are working on using self-driving vehicles to offer services. Alphabet’s Waymo, General Motors (NYSE:GM), Ford  (NYSE:F), and China’s Baidu (NASDAQ:BIDU) come to mind.

Ride Hailing Won’t Cut It

If Uber allows one or more companies to get a huge head start in providing self-driving services on their own, the ride-hailing companies will have a tough time. It’s also important to remember that, unlike Apple and Disney, the current core businesses of Uber and Lyft are not tremendously profitable. As a result, if they only can capture a very small share of the self-driving market, both stocks are overvalued.

That’s because ride hailing, even if it becomes profitable, probably won’t be lucrative enough to sustain these stocks at their current levels.

According to Statista, worldwide ride-hailing revenue is expected to reach $133 billion in 2023. Let’s assume that Uber gets 15% of that market and Lyft attracts 3%, and that their operating margins, driven higher by the lower costs of self-driving cars and by the companies’ growth,  are both 20%. Let’s also assume that their only revenue source is ride-hailing.

In that scenario, the adjusted earnings of Uber and Lyft in 2023 would be $2.40 and $2.88 per share respectively. Putting a 20 multiple on both stocks and discounting 10% per year yields a current value of just $29 for Uber stock and $34.50 for Lyfy stock. That’s well below the current values of either, which are $41 and $57, respectively.

Uber Stock and Delivery

But if Uber and Lyft are among the initial few companies to offer self-driving services and they get a large share of the food delivery and non-edible-product delivery market, they can indeed make a killing. If that scenario plays out, Uber is actually dramatically undervalued.

 According to Morgan Stanley, the U.S. online food delivery market will reach $32.3 billion in 2021. Let’s assume that Uber and Lyft get 50% and 15% of that market, respectively. Let’s further assume that their cut amounts to 5% of the total revenue and that their operating margins on that business are 30%, since margins tend to be higher for business-to-business services than business to consumer services.

Let’s also assume that the companies can make about the same profit on food deliveries overseas as in the U.S. Based on those numbers and assumptions, the annual EPS of Uber would be boosted by 28 cents and that of Lyft would rise by $1.55.

If I conservatively take my 2021 food delivery estimates and add them to my 2023 ride-hailing estimates, then discount 10% per year from 2023, the current value of UBER rises to about $35.50 and that of LYFT  jumps to about $53. Those values are only slightly below the current levels.

But of course, people and businesses deliver a lot more than food to each other. If Uber and Lyft get an early start on self-driving delivery vehicles, I believe that they’ll be able to take some share away from FedEx (NYSE:FDX) and UPS (NYSE:UPS), since cutting out human drivers will allow the ride-hailing companies to charge much lower prices than the delivery incumbents.

In 2018, FedEx’s net income came in at $4.5 billion and UPS’  net income was $4.8 billion. Together, that amounts to $9.3 billion of net income. Let’s assume that, in 2023, Uber’s non-food delivery service boosts its  bottom line by 15% of that, or $1.4 billion, while Lyft obtains 5% of FedEx’s and UPS’ combined profit, or about $465 million.

That would add $1.28 to Uber’s EPS and $2.41 to Lyft’s EPS. If I add that onto my previous assumptions about ride hailing and food delivery, the current value of UBER would be about $59 and that of LYFT would be about $82.Those valuations, as we know, are well above where the stocks are currently trading.

The Bottom Line on Uber Stock and Lyft Stock

If Uber and Lyft follow in the footsteps of the internet streaming latecomers, Uber and Lyft will likely drop a great deal. If, however, the companies’ self-driving initiatives are relatively early and successful, and they become top driverless car stocks, their shares are currently undervalued. As a result, the owners of Uber and Lyft should keep a close eye on the company’s self-driving initiatives.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.


Article printed from InvestorPlace Media, https://investorplace.com/2019/05/uber-stock-best-case-overvalued/.

©2024 InvestorPlace Media, LLC