Uber flexes its network effect and delivers strong result
Uber’s business is humming along but autonomous vehicles add uncertainty to the longer term outlook.
Uber’s second-quarter earnings met its forecast for 18% growth in gross bookings and beat adjusted EBITDA expectations. The firm guided to further operating margin expansion next quarter, underscoring stability in high teens growth and beneficial operating leverage. Users reached an all-time high.
Why it matters
Operating performance, free cash flow, and network effects are all strong; however, autonomous vehicles are likely to dominate the Uber (NYS: UBER) narrative going forward, whether for good or bad. We like Uber’s position in the value chain, but we also acknowledge potential competition.
Monthly active platform consumers, trips, trip frequency, and adjusted EBITDA margins are at all-time highs while the delivery business is reaccelerating, all of which signal robust network effects and impressive pricing power.
We believe Uber sits in a strategically advantageous demand aggregator role relative to AV car companies. Uber can solve for nonlinear demand throughout the day by flexing human driver supply to meet peak rider demand and ensure high utilisation of expensive AVs.
The bottom line
We maintain our narrow moat rating, while we increase our fair value estimate to $90 from $84 due to reacceleration in the food delivery segment and the increased likelihood of cross-selling and advertising revenue benefits.
Despite Uber maintaining an enviable level of network strength, we emphasise our Very High Uncertainty Rating as the future competitive dynamics are in flux due to AVs.
We appreciate that Uber is reemphasising its cross-platform, “super app” strategy with delivery and mobility under one leader, with the belief it will create a more streamlined advertising and autonomous vision across segments.
Impressive profitability trajectory
We are impressed with Uber’s adjusted EBITDA margin trajectory and advantageous operating leverage as it adds users to the network.
The marginal cost of adding a user to the platform is quite low relative to the marginal revenue collected, and the company continues to scale well, with faster core user growth than Lyft (NAS:LYFT) on a network of monthly users that is already roughly 7.5 times the size.
While we believe Uber has critical mass in which network effects become self-sustaining, and this often results in increased pricing power, the firm can push too hard. Uber’s take rate has been ticking up, meaning that it iskeeping more on a per-ride basis. An aggressive take rate can push riders and drivers to alternative platforms if the aggregator (Uber) pinches too much.
Market share dipping?
Looking at data across millions of rides within New York City, Uber’s market share has dipped slightly in recent months while Lyft’s and traditional yellow cabs’ have gone up.
Uber still holds a 60%-70% market share in NYC, but this is a dynamic we will be keeping a close eye on. Empower, a competitor on the East Coast, also seems to be gaining some popularity and free publicity on X (formerly known as Twitter) for its affordable rides. Virtuous cycles, where demand (ridership) reinforces supply (drivers), can turn unvirtuous when price-conscious riders turn away from the platform and it becomes less appealing to drivers.
Regarding AVs, we believe Tesla’s Full Self Drive, or FSD, is the most formidable competitor due to its still significant cost advantage relative to Waymo’s LiDAR approach.
The major question is whether FSD is safe. Right now, passengers in a Tesla (NAS:TSLA) Robotaxi still have a “supervisor” in the front seat, while Waymo is completely machine-run and appears safe. As it stands, Tesla does not appear willing to deploy its Robotaxis on the Uber network, but Uber CEO Dara Khosrowshahi left the door open to potential partnerships with the company during a CNBC interview.
Thinking ahead, should FSD prove safe and should Tesla stay focused on demand aggregation, we believe we will see a duopoly emerge in which Tesla Robotaxis compete with Uber’s network and Uber’s network will house all alternative AV options (including Waymo).
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