Shares of ride-hailing giant Uber Technologies (UBER) opened Friday on the New York Stock Exchange at $42, below the initial public offering’s price of $45 set the night before. The stock then ended the day at $41.57 — down 7.6% on the session — and where the stock goes from here will reflect not only the depth of investors’ affection for new tech issues, but also whether they believe more in Uber’s potential profit story or its messy current reality.
Uber comes to market with slowing growth on several metrics, a pile of losses, and a business model that for the moment is heavily dependent on billions of dollars paid to drivers to incentivize them to work.
The restrained pricing of the deal appears to have been a response to the poor showing by smaller rival Lyft (LYFT) , which went public a month ago at the high end of its pricing range, surged at the open, but then almost immediately slammed it in reverse, dropping 32% since then to a recent $53.52.
Consider both the simple and the messy story. The simple story of potential profit is the story of a huge market, made possible by Uber, where the company steadily becomes more and more efficient in its operations, thus wringing more and more dollars in fees in return for generating wealth for drivers, restaurants and other participants, while delivering a service many love.
The business model in that case is clear and simple. First, Uber’s logistics operations produce massive amounts of economic activity, with more than 90 million consumers using its services, on average, on a monthly basis, in the form of rides taken and, to a lesser extent, take-out meals ordered, which are delivered by Uber’s drivers.
Known as bookings, that economic activity amounted to nearly $50 billion last year. After deducting the cost of the trip or meal that goes to the driver or restaurant, and incentive fees paid to sweeten the deal for drivers, the company has what it reports as revenue, which was 21% in 2018, or $10.9 billion, known as its “take rate.”
Back out from that take rate the cost of revenue, which includes another bunch of incentive payments, as well as a bunch of sales and marketing and general and administrative costs, and the company has its non-GAAP profit left over, which was $940 million last year. That’s what’s known as “contribution margin,” roughly 9% of sales.
That 9% contribution margin, a kind of proxy for operating profit, is not a huge percentage. But it is profit. As that revenue continues to rise, and as the company gets a bigger take rate as a percentage of the rising revenue, if it can keep its operating expenses within a reasonable bound, the contribution margin gets bigger and bigger.
That’s the simple story. The actually story is messier. The company spends in excess of the cost of just that “core” business of rides and food delivery. It continues to invest in R&D for things such as its “other bets,” which include being a facilitator of freight transport. Because of that, the company actually lost $3 billion last year as its expenses of $14 billion overwhelmed revenue.
Whether those extra investments in things like freight will turn into extra revenue streams that are as profitable as the core, as measured by contribution profit, is a deep question with several puts and takes. Not only are the other bets unproven at this time, the simple model outlined could still break down over time.
In particular, incentives paid to drivers are a way to keep revenue growing. It’s not necessarily the case that they can be lowered over time to yield a higher take rate. On the contrary, it’s entirely possible such incentives may rise as a proportion of bookings in order to make those bookings grow.
Already, the company’s revenue prospects show lower growth. Daniel Ives of Wedbush, who has an outperform rating on Uber stock and a $65 price target, models the company’s revenue growth cooling to 31.7% this year from 42.1% in 2018, and then down to 27% in 2020.
Ives also models the company losing $4 billion on an operating basis this year, and another $3.92 billion next year.
Already, the growth this quarter projected by Uber is somewhat lackluster. The company in its amended prospectus filed last month projected March-quarter revenue growth in a range of 20% from the year-earlier period.
So, growth is not certain. And how much Uber has to spend to keep growth going, and to expand into new areas, remains to be seen. Chief Financial officer Nelson Chai said on CNBC that his company may raise debt in future.
There is, however, one other scenario worth considering in making a full and fair assessment of whether to buy into the shares. That’s data, lots of data. Uber has provided over 10 billion trips to date. As a result, it has gathered enormous amounts of data, something that is not explicitly laid out in its prospectus and not often touched on by observers. In an era when data is “the new oil,” as they say, being in the middle of a new industry and having reams of data is a unique position for Uber.
It is possible that there is lasting value for the company in analyzing that data and seeing insights that other companies don’t see because they don’t have Uber’s market position. There’s also probably lasting value in the tools and techniques that Uber is developing to sift and sort that data, which is itself an amazing undertaking given the scale of such data. Whether or not Uber makes 9% on every trip taken, or nothing at all, the act of simply amassing data and learning how to derive insights from it has a value in and of itself. It gives Uber a unique position at the table in the era of Big Data.
How to value all that in the stock price isn’t clear. For the moment, the operating metrics are still what dominate.
Wedbush’s Ives, for one, values Uber on a sum-of-the-parts basis. He thinks the ride-sharing business should be worth 5.5 times as a multiple of enterprise value divided by revenue, or $74.74 billion. The meals part is worth another almost $20 billion. The part of Uber that develops autonomous vehicles may be worth another $7 billion, and finally the other bets category is worth $8.5 billion.
All that adds up to almost $110 billion, or what Ives deems $65 per share. Whether investors will believe all that should be made clear fairly soon.
(This column has been updated.)
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