Uber Q3 2019 – Edge of the woods

Uber is not quite out of the woods yet.

• I have been very negative on Uber since long before the IPO, but I think that the time has come to view the company is a somewhat more positive light.
• This is due to a combination of the current valuation, improving fundamentals (with caveats) and the increasingly negative sentiment both in the market and in the press.
• Once the expected deluge of supply from pre-IPO investors whose lock-up will soon be removed is out of the way, we could be getting close to a bottom.
• Q3 2019 results were very mixed with revenues / EPS of $3.53bn / LOSS $0.68 compared to consensus at $3.68bn / LOSS$0.84.
• Key highlights are steady revenue growth, a profitable core business but truly awful cash flow with $2.5bn of cash leaving the business over the first 9 months of this year, $900m of which left in Q3 19.
• Cash flow from operations is the key metric to look at from here and until this improves, any positive view that I may have will be tempered with extreme caution.
• Uber’s enterprise value is now around $40bn (taking out net cash) meaning that the company is trading at around 3-4x EV / 2019 Sales which puts it pretty low down on the valuation table compared to its peers.
• Furthermore, the core business itself is faring reasonably well with adjusted EBITDA margins of 21% meaning that if investments in other areas were to cease, the company could achieve real profitability.
• However, this has been offset with big losses at Uber Eats as well as the investments that are being made in the platform that underpins all of Uber’s businesses.
• This is where most of the losses are coming from which even when the non-cash share-based-compensation is taken out still cause $800m – $900m of cash to be lost every three months.
• Uber has plenty of cash with $12.5bn in the bank and around $5.7bn in debt and so it could continue like this for years before there is any real threat to its viability.
• However, a company that can’t generate cash has no equity value meaning that something needs to be done.
• Uber attempted to do this by promising profitability (and presumably cash generation) in 2021 but the market is highly skeptical and has taken another 9.5% off of the valuation.
• Given the competitive dynamic with Lyft, this could easily be pushed out, but Uber should be able to turn the screws on Lyft in its core market given its much greater size and scale.
• The fact that no one seems to believe the 2021 forecast gives me some confidence that we may be close to seeing a bottom on the negative sentiment and hence the share price.
• The one thing that remains are the sellers that have not been able to sell and their lock-up expires tomorrow with a lot of supply expected to come to the market.
• Once this is out of the way, there should be no more demand or supply shocks meaning that the stock should start to trade close to its fundamentals rather than sentiment.
• As long as the cash flow can be addressed, these fundamentals are beginning to reflect the valuation meaning that it is almost too late to sell.
• Hence, I am starting to look for a time to buy rather than recommending to immediately sell the shares.
• Uber is not out of the woods yet but I am beginning to see where the edge of the forest is to be found.