The IPO market has been red hot this year, featuring multi-baggers like plant-based meats producer Beyond Meat (NADSAQ:BYND) and video conferencing company Zoom (NYSE:ZM). But, the biggest company that went public this year — ride-sharing giant Uber Technologies Inc (NYSE:UBER) — has struggled on Wall Street.
The UBER stock IPO price was $45. The stock opened trading at $42, closed below there on its first day. Nearly three months later, it still trades around $42. In other words, Uber’s days on Wall Street have been defined by a share price that has been consistently below the IPO price.
That’s no good. Investors are concerned about slowing growth converging on huge losses that aren’t shrinking quickly enough. They are also concerned about competition and micro-mobility alternatives short-circuiting the company’s long-term growth narrative, aren’t convinced that the ride-sharing model is profitable at scale, and have expressed worries about UBER stock’s extended valuation.
Net net, UBER stock has gone nowhere in its first three months on Wall Street. For comparison purposes, BYND stock has increased by more than eight-fold in its first three months in post-IPO life.
This weakness in UBER stock won’t hang around forever. In the long run, this company will stay on a robust growth trajectory which will power huge revenue and profit gains, and ultimately propel UBER stock meaningfully higher.
But, near-term pain is here to stay for now. Growth is slowing. Losses aren’t narrowing. Until the company shows with numbers that those two adverse trends are turning around, UBER stock won’t turn into a winner.
The investment implication? Buy UBER stock. Hold it. Ignore the trees. Focus on the forest. Sell in a decade, at significantly higher prices.
Ride-Sharing Presents a Huge Growth Opportunity Over the Next Decade
The long-term bull thesis on UBER stock starts with one big idea: ride-sharing is in the early stages of a huge decade-plus growth narrative.
Ride-sharing is the next big thing in transportation. It helps mitigate traffic issues, is cheap relative to the cost of car ownership, and aligns with the global sharing economy trend. As such, ride-sharing penetration as a percent of the global population has gone from 2.8% in 2015, to 5.2% in 2018, and is projected to hit nearly 7% by 2021. This penetration rate will continue to rise, driven by the aforementioned tailwinds and favorable demographics (over 50% of 18-29 year-old consumers in the U.S. use ride-sharing apps).
Consequently, as younger consumers get older and older consumers phase out of the market, ride-sharing will continue to constitute a bigger and bigger piece of the transportation pie.
At a cadence of roughly 1 point of share expansion each year, 2030 global ride sharing penetration rates could measure around 15%. Assuming a global population of 8.5 billion by then, that translates into a global ride sharing population of 1.275 billion by 2030. That’s up more than three-fold from today’s 400 million global ride-sharing population.
So, the whole ride-sharing market has huge growth potential over the next 10-plus years.
Uber is and Will Remain the Leader
Uber is the global leader in this market. With 91 million monthly active platform consumers (MAPCs) in 2018, Uber commanded around 23% global share. That’s up from 16.5% in 2016.
Given liquidity network and scale advantages, Uber’s share should continue to rise, as the more drivers Uber attracts, the lower wait times will be for riders, the more riders will come to the platform, the more money drivers can earn, and the more drivers Uber attracts. Rinse, repeat.
Again assuming a cadence of roughly 1 point of share expansion per year, that implies ~35% market share for Uber by 2030. On a 1.275 billion ride-sharing population, that equates to nearly 450 million MAPCs, up almost five fold over the next decade. Thus, Uber has huge user base growth potential over the next decade and beyond.
Rides per consumer will also go up. Right now, Uber is recording about 57 trips per consumer per year. Americans take around 1,500 trips per year. Thus, there’s plenty of room for rides per consumer to go up. Bookings per ride will also rise with inflation and as the market rationalizes. Market rationalization will also reduce promotion usage, which will drive up gross margins. Scale will drive operating leverage, pushing the opex rate lower. Contribution margin will rise significantly.
Net net, I realistically think Uber projects as a 450 million MAPC company by 2030, with $400 billion-plus in bookings, $80 billion-plus in revenue, contribution margins of 25%, and net profit of at least $10 billion. Based on a typical growth multiple of 20x forward earnings, that implies a decade-forward valuation target for UBER stock of at least $200 billion — more than twice the current market cap.
Bottom Line on UBER Stock
In the long run, UBER stock is a big-time winner. But, in the near term, three factors will short circuit the shares:
- Valuation friction (if you discount that $200 billion long-term target back by 10% per year, you arrive at a 2019 valuation target of $77 billion, only 10% above today’s market cap).
- Slowing growth (Uber is gutting its marketing department in attempt to assuage the company’s slowing growth trend, as gross bookings improvement has slowed from nearly 60% in the year-ago quarter, to less than 35% last quarter).
- Lack of profitability (Uber’s core margins made big progress last year, but are retreating this year amid heavy investments to sustain growth).
Broadly, then, investors should expect the near-term pain in UBER stock to persist. Eventually, though, it will pass, and UBER stock has tremendous upside potential in a long-term window. Thus, for investors with longer horizons, current weakness is a buying opportunity.
As of this writing, Luke Lango was long UBER.