Uber Technologies: Expensive Despite Profitability Risks

I am certain that Uber Technologies (UBER) needs no introduction. Whether it was for a quick ride somewhere or a speedy food delivery from your favorite restaurant, you have likely used one of Uber’s services.

To describe it, however, Uber is a technology platform that utilizes an extended network, innovative technology, and product expertise to facilitate movement from point A to point B, as the company states.

In my opinion, while Uber has undoubtedly contributed to mobility innovation, I find its stock to be quite speculative regarding its future potential profitability. That is, despite its strong brand recognition, which is undoubtedly a great intangible asset for the company.

Due to the overall uncertainty around Uber’s future net income prospects, I remain neutral on the stock.

Profitability Concerns 

Uber has struggled to post growing profits for quite some time now. The company’s latest quarterly report once again demonstrated this issue. While the company seemingly recorded a substantial profit of $892 million, this was only the case due to a $1.4 billion net benefit adjustment attributed to Uber’s equity investments. It was specifically related to its aggregate unrealized gains derived from the revaluation of Uber’s Grab and Aurora equity investments.

In fact, the company essentially broke even, with adjusted EBITDA coming at just $86 million. Moreover, management’s guidance for Q1 2022 includes the company achieving adjusted EBITDA between $100 million and $130 million. This should point to a gradual improvement in margins, which is definitely encouraging for investors to hear.

However, I find these EBITDA levels to be underwhelming, as any future investments or increases in expenses could easily result in them turning negative again. For context, Uber’s Adjusted EBITDA margin as a percentage of gross bookings was 0.3% in Q4. In the company’s Mobility segment, which is its most profitable one, this figure stood at 5.1%. Hence, I wouldn’t describe Uber’s positive adjusted EBITDA as sustainable yet.

If Uber needs to increase its CapEx and overall expenses for any reason in the near future (e.g., growing competition), it’s more than likely that it will go back to burning cash. After all, despite the somewhat positive adjusted EBITDA in Q4, the company’s adjusted EBITDA for the full 2021 year came in at a negative $774 million.

With ~$4.3 billion in the bank, the company will likely need to raise additional capital to pursue any initiative that is going to cost more than a couple of billion dollars. Since management will likely avoid issuing more stock to avoid dilution, it will likely tap into the debt markets.

However, since Uber’s long-term debt position already stands at an unhealthy ~$9.3 billion, this could be destructive for the balance sheet – especially with rates likely to increase in the medium term and with Uber already featuring expensive interest rates in its senior notes (7%-8%).

Overall, my point is that Uber’s positive adjusted EBITDA should not be relied upon going forward and that the company’s overall financial flexibility remains rather constrained.

Wall Street’s Take

Turning to Wall Street, Uber Technologies has a Strong Buy consensus rating, based on 23 Buys and one Sell assigned in the past three months. At $62.58, the average Uber Technologies stock forecast implies 80.5% upside potential, with Wall St. apparently sharing a different view on the stock.

Conclusion & Valuation

Apart from my concerns regarding Uber’s future profitability prospects, I find the stock hardly investable due to its expensive valuation, which doesn’t seem to be pricing such risks.

Specifically, consensus estimates forecast that the company’s first profitable year on a GAAP basis will be in 2024, projecting EPS of 0.83 by that time. In other words, at Uber’s current price of $34.68, the stock is currently trading at 41.8 times a quite speculative, potential net income that may occur two years away from now.

I would barely pay this multiple for next year’s projected earnings, let alone 2024’s. Accordingly, I find Uber Technologies overvalued at its current levels, and I will remain neutral on the stock.

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