One of the most highly-anticipated tech IPOs in years, Uber (UBER) , released its first quarterly earnings last week. So far, Uber's IPO has been disappointing and upon deeper analysis, an even worse investment case is presented.
Slowing Pace of Growth -- Already?
Uber's earnings results were marked by an abundance of new metrics that presume to reflect transparency over its operations, but in fact, do the opposite.
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Essentially, investors should focus in on what Uber calls its adjusted net revenue. This figure includes its Ridesharing and Uber Eats, as well as its Other Bets (which includes Freight, Logistics platform, and New mobility). Note that Uber's ATG group, its autonomous driving unit, is included within Research and Development, and thus it's not presented within its adjusted net revenue.
You will immediately notice that Uber is not the dynamic high-growth company which many thought it to be. Accordingly, there are plenty of mature tech companies with similar growth rates, such as Amazon (AMZN - Get Report) or even stronger growth rates, such as or Alphabet (GOOGL - Get Report) .
Economies Of Scale Will Bring Better Days
The idea of investing in Uber is that this high growth company would grow unencumbered and rapidly reach massive scale, such that its top-line growth would rapidly offset its losses. However, that narrative doesn't line up with the facts.
As a reminder, Uber's Core Platform Contribution Margin is made up predominantly of Ridesharing and Uber Eats and excludes general and administration, as well as, R&D and its ATG research (autonomous driving) and other technology programs. In other words, Uber uses this metric to define a profit margin solely derived from its Rideshare and Eats operations.
And even then, despite continuous top-line growth, Uber's Core Contribution Margin for the first quarter of 2019 was still negative 4%. Uber asserts that investors should not be overly concerned, and that its business model works well. The company highlighted that its top 5 countries had 54% Core Platform Contribution Margin in in Q1 2019. Furthermore, despite giving no formal guidance, starting with Q2 2019, its margin contribution is expected to improve and investors should continue to see sequential improvements throughout the year, according to the company.
Does Uber Actually Have A Moat?
Uber's story is that of a disruptor company which relies on scale and efficiency improvements to aggressively carve out market share from a total addressable market which Uber says could be as large as $12 trillion.
The reality is that Uber's main platform is its Ridesharing service, which accounts for just over 85% of its total core platform. And ultimately, the only way which Uber can succeed in growing its bottom line is through price increases.
Uber can adopt different strategies such as improving its drivers' productivity through lower insurance and ease of payment, but those are not likely to meaningfully drive passengers to opt for Uber's ecosystem versus that of a competitor's.
For example, Uber's Monthly Active Platform Consumers grew by 33% to 93 million in Q1 2019, compared with 43% growth in the same period a year ago. This slowing growth rate implies that despite its app's ease of use and convenience, passengers remain extremely price sensitive and just as satisfied with a competitor.
Valuation - No Edge
There is no question that investor appetite for Uber and the ride-hailing space, in general, is hot right now. Shares were only down slightly on Tuesday despite news coming out that the IRS is probing Uber's tax returns for 2013-2014, as a wave of analyst buy recommendations on Uber were released with the end of the quiet period.
But as the table reminds readers, Uber has yet to generate cash flows from operations. Nevertheless, investors are pricing the stock off its top-line in the hope that Uber will in the near-term generate vast amounts of cash.
Now, the irony is that highly cash generative Alphabet, with its Waymo project, could in time be viewed as a strong competitor to Uber. And, for now, Alphabet's stock is priced with approximately the same multiple as Uber, implying a vastly better potential investment as its revenue continues to grow faster than the supposedly high-growth Uber.
The Bottom Line
Despite hemorrhaging large sums of cash, investors continue to clamor for Uber. But readers should remember that putting hard earned cash into largely unproven companies is risky at best. And when such a company's stock already priced beyond perfection, there's even more reason to avoid it.