UBER I.P.O. To Buy Or Not Buy?

Uber, the biggest ride share company, with what they claim is 69% of the U.S. market, is going public May 10th, 2019.

If you didn’t read my article about Lyft going public, “To buy or not buy” Lyft stock, click

www.millionairevalet.com/investing/lyft-i-p-o-to-buy-or-not-buy/

Uber will trade under the ticker symbol “UBER”

So, will I buy Uber when it becomes public?

Uber is pricing its shares at $47/share, in between the expected range of $44-$50/share. This would give Uber a market capitalization of 86 billion. I never base the valuation of a company strictly off of its stock price.

https://millionairevalet.com/investing/why-we-dont-care-about-stock-price/

Here is the S-1 for Uber

https://www.sec.gov/Archives/edgar/data/1543151/000119312519103850/d647752ds1.htm

One thing that stands out about Uber is the company is not getting any of the proceeds of going public. Usually the company will get some money, as this money is used to;

—grow the business,

—pay off debt,

—acquire other companies

—my favorite general term; “For corporate purposes”

In this I.P.O.(initial public offering) Uber is not getting any proceeds!

Interesting.

It’s all insiders selling their shares.

Uber operates as 3 categories, unlike Lyft, which only has one.

—Uber Rideshare

—Uber Eats

—Uber Freight

All work in synergies with each other. All work off of Ubers main platform.

The average Uber rider waits less than 5 minutes. Due to Uber having so many drivers on the road, Uber Eats can provide meals delivered in under 30 minutes. Much lower than the closest competition.

Uber has a massive scale. They operate in over 63 countries. In countries where they don’t operate the Uber brand, they own part of the local leading rideshare companies.

Russia- 38% of Yandex taxi

China-15% of Didi

Southeast Asia-23% of Grab

Let’s mention Uber Freight for a moment. This is the exciting part of Uber.

https://www.uberfreight.com/

Uber Freight started in May 2017. For the quarter ended December 2018, Uber Freight did 125 million in revenue. That’s quite a growth! By taking Uber’s platform, that already exists to service individual passengers and food, Uber has easily gotten into the billion dollar transportation/logistics industry.

According to the American Trucking Association, businesses spent 700 billion on trucking in 2017. That is a big, and lucrative, market Uber is going into.

Remember, WalMart got so big, they started their own trucking company! You won’t see Uber trucks driving around, but trucking companies will be able to use the Uber platform to sell excess inventory.

 A win for the trucking company!

A win for the shipper!

A win for Uber.

A win, maybe, for Uber shareholders. (If I decide to buy)

So, all that info is needed to show where the company is headed. But, how has the company behaved! Revenue has increased dramatically from 2014 to 2018

                 Revenue                Loss from operations

2014         495 million           644 million

2015         1.9 billion              1.3 billion

2016         3.8 billion              3 billion

2017         7.9 billion              4 billion

2018         11.2 billion            3 billion

However, notice the losses have accelerated as well.

Going from 644 million, 2014, to 3 Billion!! Yes, Billion….with a B, in 2018.

However, looking at the income statement, the cost of revenue, as a percent, is decreasing!

I’ll do the math for you!

In 2014, Uber had 495 million in revenue. The costs of that revenue, was 388 million.

That is a 78% cost!

2015-54%

2016-57%

2017-52%

2018-49%

This is a GREAT Thing!

Lower costs means more operating income! This gets the company closer to profitability as it scales!

One of those major costs, in the cost of revenue, is driver incentive and acquisition costs.

This picture shows the swing in income, from a loss of 1, to a profit of 2, on a hypothetical $10 booking, without drivers incentive. As the company gets bigger, which, looking at the income statement, is happening, the costs of acquiring drivers will decrease. This will help Uber lower its “Driver Incentives” costs, enabling Uber to increase its contribution margin.

So, what risks does Uber face?

Well, plenty!

Unless you are in a regulated industry, like utilities or government, you will have competition. Uber faces major competition from Lyft as well as food delivery services, such as Postmates, GrubHub, Doordash.

However, these companies aren’t even Ubers biggest threat! The biggest threat comes from cities, and the regulation of allowing Uber to do business in their city.

“In 2018, we derived 24% of our Ridesharing Gross Bookings from five metropolitan areas — Los Angeles, New York City, and the San Francisco Bay Area in the United States; London in the United Kingdom; and São Paulo in Brazil”

24% of rideshare booking come from 5 areas. That is scary. If any business had 24% of its business come from a concentrated area, I would be concerned. Uber is no different. These cities can, overnight, require Uber to a strict control, like licensing, or tougher background checks, which could impact its business in those cities.

Uber drivers aren’t employees of Uber. They are classified as independent contractors, labeled as 1099 employees. They don’t get benefits, 401k’s, a guaranteed salary/wages, and they have to pay their full share of employment taxes, equal to 15.3% of their income. There has been numerous discussions about making these 1099 contractors, and reclassifying them as employees. This will dramatically increase Ubers labor costs, resulting in increased losses.

However, the real income to Uber isn’t going to lie in its core business, Uber rideshare. No. The real income will be in its fast growing, and margin contributing, business, Uber Freight.

Ubers business model reminds me of another company, that took about 20 years to become profitable, Amazon(AMZN).

Here is the 10-k for Amazon.

https://www.sec.gov/Archives/edgar/data/1018724/000101872419000004/amzn-20181231x10k.htm

When you think of how Amazon makes money, you think it’s via selling crap, right? Well. No.

The backbone of Amazons profits, not its sales, but its profits, is in Amazon Web Services(AWS).

As you can see, Amazons sales, we will include North America and International, are, combined, 207 billion.

The operating income for the combined regions are 5 billion. A 7 billion profit from North America, and a 2 billion loss for international.

Now, look at AWS(Amazon Web services). Sales for A.W.S. for year ending 2018, were 25 billion. Up 100% from 2016.

The operating income for A.W.S.? 7.2 billion, for the year ending 2018. More than 100% 2016s operating income of 3.1 billion.

Amazon made more money from A.W.S. that it did selling you toilet paper and dog food!

So, what does this have to do with Uber? Ubers big market growth isn’t delivering you somewhere, or delivering your food from somewhere to you. Those two segments are just around so Uber can get into the most lucrative business, Uber Freight.

So, with a market capitalization, suspecting to be 86 billion, will I be buying Uber?

                                                                                                            “YES”

I like Uber at these prices.

If you followed my advice on Lyft, I saved you a 20% decline since Lyft went public. Now, I don’t know how rational, or irrational, the markets can be. I’m never promising you I will always be right, but with a little insight; an educated guess can be made. Uber on!!!