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- By Dilantha De Silva
Uber Technologies, Inc. (NYSE:UBER) stock is up 47% in the last 12 months, which might come as a surprise to some investors considering the global pandemic that led to a sharp decline in company revenue in the first half of 2020.
The exponential growth in Uber Eats helped the company mitigate some of the losses from its ridesharing segment, and the food delivery business continues to be strong as consumers remain cautious about visiting restaurants. The expected success in the vaccination program is likely to be a hit on the food delivery business, but Uber is well-positioned to grow its ridesharing business as the pent-up demand for travel and leisure activities will create strong demand for Uber rides in the second half of this year.
Thus, even on the back of strong market performance in the last few months, Uber is still undervalued in my opinion.
The market-leading position will lead to competitive advantages
Competitive advantages, or economic moats as they are commonly referred to, play a key role in helping companies earn economic profits over a long period of time. Morningstar identifies five sources of economic moats: switching costs, intangible assets, network effect, cost advantage and efficient scale.
Uber's moat comes from the network effect, a phenomenon in which the value of a service increases along with the number of users. Facebook, Inc. (NASDAQ:FB) is a classic example of a company that benefits from the network effect, and Uber's market leadership position in two high-growth industries is likely to help the company grow its earnings substantially in the future. Uber is the #1 mobility player in every region in which it operates the ridesharing business and is the largest global food delivery company.
Uber mobility market share
The United States and Canada
Australia and New Zealand
The Middle East and Africa
Source: Company filings
Both consumers and part-time drivers have an incentive to use Uber as this platform is home to the highest number of active riders and drivers in the world, and the company expects this network effect will help it become a profitable entity within the next couple of years.
The subscription business will be a catalyst for growth
Uber Pass, a monthly subscription priced at $24.99 which offers a 10% discount on rides and unlimited free delivery of Uber Eats orders for food and groceries, was launched in 2020 in an attempt to increase the number of active users on its platforms. As of Dec. 31, Uber Pass was available in 16 countries, and more than 5 million customers had already purchased this monthly membership plan. In a world that is increasingly embracing subscription products, Uber stands a chance to not only increase its profitability, but also customer loyalty as a result of this new initiative.
Wall Street analysts are turning bullish
Uber reported mixed results for the fourth quarter of 2020, beating earnings estimates marginally and missing revenue estimates. For the third consecutive quarter, the company reported an improvement in gross bookings for both mobility and delivery segments, which confirms the strong momentum behind the company.
Uber reported an adjusted Ebitda loss of $454 million for the fourth quarter, which is a significant improvement from the loss of $837 million reported in Q2 2020. Uber reported a 130% year-over-year growth from the food delivery business, but this was offset by a 50% decline in mobility revenue. The good news is that mobility gross bookings have recovered from the second-quarter lows, so I think it would be reasonable to assume that the worst is behind the company.
A few Wall Street firms raised their price targets for Uber following the release of Q4 2020 earnings. Among these firms were KeyBanc Capital Markets, which raised the target price from $63 to $75, and Cowen Inc., which raised the target from $64 to $74. The Wall Street median target price for Uber is $70.80 per share, which implies an upside of 17% from the current market price of around $61.
Uber, the global leader in the ridesharing industry, is well-positioned to report earnings growth in the recovery phase of the business cycle. The eventual reopening of the economy, including airports and schools, will create robust demand for Uber's mobility segment to an extent the company would be able to mitigate the expected loss in demand for the food delivery segment.
The company is still in the very early stages of its business life and is not expected to reach profitability for a couple of years. Investing in Uber, therefore, could lead to multibagger returns in the long run, and 2021 could turn out to be an inflection point in the company's story if it succeeds in reporting positive Ebitda from both its business segments this year.
Disclosure: The author is long Uber shares.
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This article first appeared on GuruFocus.