If we understand the language of the markets, sentiment on Uber Technologies (NYSE:UBER) stock has been neutral since the initial public offering. Uber stock has remained sideways and I believe that market participants are waiting for the next company specific trigger.
The key question is: Will the trigger be positive or negative?
I am of the opinion that the stock is likely to head higher and this article will elaborate on the potential stock upside triggers.
Cash Burn Not a Concern
Uber reported negative EBITDA of $869 million for the first quarter 2019 as compared to a negative EBITDA of $280 million for the comparable 2018 period. Clearly, EBITDA has worsened and cash burn could look like a potential worry.
However, it is worth noting that the company’s sales and marketing expense for Q1 2019 was $1.0 billion as compared to $627 million. The company also reported higher R&D expense in Q1 2019 as compared to Q1 2018.
I believe that these investments will translate into cash flows in the coming years. My point is backed by the fact that Uber reported 93 million monthly active platform consumers for the 2019 period compared to 70 million for the first quarter of 2018. The number of trips has also increased from 1,136 million to 1,550 million during the comparable period. Which means that sales and marketing investment has translated into a surge in consumers and that’s a long-term positive.
With a cash buffer of $13.7 billion (including IPO proceeds of $8.0 billion), Uber has the financial headroom to invest in sales, marketing and R&D.
Importantly, with global reach (700 cities in 60 countries), monthly active platform consumers should trend higher. For a company that’s aggressively expanding, the growth in active users and revenue implies good times ahead.
Big Opportunity for Uber Freight
To be sure, Uber Freight has bright prospects in the U.S. and the European markets. The segment has witnessed a robust start with 36,000 carriers and more than 400,000 drivers contracted in the last 18 months.
Uber Freight has presence in 48 states and the segment booked $125 million in quarterly revenue. With its expansion into Europe, which has a $500 billion trucking market, Uber Freight can potentially scale up rapidly.
Uber is offering drivers various incentives that include a fuel card providing a 20-cent per gallon fuel discount. The company is also providing 50% savings on truck maintenance and parts. Other benefits include health plans and phone discount plans.
The key point being that I expect more drivers being contracted. Even if Uber has only a 1% market share in a $500 billion trucking market, the revenue visibility is $5 billion. I am certainly not suggesting that this growth is happening overnight. However, there is a big market and Uber has started well.
Inorganic Growth Opportunities
As mentioned earlier, Uber has cash of $13.7 billion. This provides the company with ample flexibility for inorganic growth to expand market share.
In March 2019, Uber announced the acquisition of Careem for $3.1 billion. Careem is a ride-sharing, meal delivery and payments company operating in the Middle East. Uber has presence in 23 cities in the Middle East while Careem has presence in 98 urban areas. Clearly, Uber will make significant inroads in the region once the acquisition is completed.
There is also speculation that Uber is interested in acquiring Postmates. According to a report from Needham & Company, the acquisition would take Uber close to profitability. The food delivery industry could see some consolidation and that would likely be a positive for Uber. It remains to be seen if this trigger plays out any time soon.
Advanced Technologies Group Spin-Off
The company’s ATG business received investment of $1.0 billion from Toyota, DENSO, and SoftBank Vision Fund. ATG-Toyota is collaborating for next generation autonomous vehicles and this is another big market for the coming decade.
According to Uber representative, the deal is not a spin-off of Uber ATG. However, Uber will shed the business in the foreseeable future, which could potentially serve as another upside trigger.
Since the ATG business is high on R&D, the spin-off is likely to ensure that Uber Technologies will see a decline in R&D investment. This will further efforts to squeeze positive cash flows from core business operations.
Bottom Line on Uber Stock
Uber continues to deliver robust growth of both active platform consumers and revenue. The company’s freight initiative also has bright prospects.
With the Uber stock IPO providing healthy cash inflow, Uber is likely to pursue inorganic growth that captures market share from competitors.
These factors make me bullish on UBER stock and I am of the opinion that there is impending upside after the current sideways move.
As of this writing, the author owned no shares in companies mentioned in this article.
