Startup under the microscope: Investment manager explains why the WeWork chaos was good for Uber and why it is bullish for the share message

— Uber is forced to grow up faster
Different business areas with different prospects
Future depending on the segments

Loss of $ 2.9 billion: Uber’s balance for the first business quarter was disastrous. The consequences of the corona pandemic and the shutdown, which was ordered in numerous countries, had a massive impact on Uber business. But revenue rose year-over-year: 14 percent to $ 3.5 billion. Because Uber is more than a taxi competitor – just one of the reasons why investment manager Vitaliy Katsenelson continues to bullishly rate Uber shares.

We work drama was good for Uber

In contrast to conventional transport companies, Uber has no assets, the investor notes in an opinion piece at MarketWatch. Instead, the former startup is essentially a digital company that offers software that connects passengers and drivers, which brings the company closer to other tech companies such as Facebook, Alphabet, eBay and Booking.com. But unlike Facebook & Co., Uber’s profit margins have not exploded with increasing sales – instead, the travel agent has burned more and more money with increasing growth.

This development can be seen in some tech startups, the workspace provider WeWork has also financed its high growth through massive losses – and recently received the receipt for it. The planned exchange was canceled because the valuation expectations of companies and potential investors were too far apart. When Groinvestor Softbank then canceled the planned increase in WeWork shares, the company was forced to act and has been pursuing strict cost discipline ever since.

The events surrounding WeWork were a stroke of luck for Uber, Katsenelson continues. “In fact, the WeWork explosion is the best thing that ever happened to Uber. The era of unlimited capital is over (at least for now). Venture capitalists have given their companies a clear message: your company has to support itself.” Uber and its main competitor Lyft would then have increased the prices and started to work more economically – with the focus on saving unnecessary costs, the investor continues.

Uber grows up – at different speeds

Unlike traditional companies that go through such developments step by step, Uber should have grown up more or less faster – and within the company, the maturing process is at different stages, writes Katsenelson.

In the core business, the brokerage of driving services, Uber generates a cash flow of around two billion US dollars. In the model calculation, the Katsenelson investment company now assumes that the segment could grow by 15 percent each year and achieve margin growth of 50 percent. In five years, sales of $ 20 billion are expected to be generated here.

Uber Eats, Uber’s food delivery service, is still very young and struggles to survive in this segment with other children. In the two years of its existence, the division generated sales of $ 1.3 billion in 2019 and made losses of the same amount at the same time.

Katsenelson expects Uber Eats to develop differently from market to market. There is strong competition on the home market, where Uber Eats is the number 2 in the industry. The Uber subsidiary is financially best equipped, which is of fundamental importance in an area in which almost every company burns money. Consolidation can therefore be expected in this area.

The investor has no confidence in the future of Uber Eats and the economic prospects of the Uber subsidiary. Either the business will break even or Uber will close the segment. Should Uber Eats become profitable, “this is just the icing on the cake,” writes Katsenelson.

With Uber’s on-demand logistics platform Uber Freight, the company wants to digitize an industry that “is still operated by telephone and fax machine,” the investor continues. This is where Uber could play out its strength, because few companies would understand real-time logistics as well as Uber. However, the market is highly fragmented: the top 50 players make up only 38 percent of the market. Here, too, it is a matter of demonstrating your ability to suffer: It can be assumed that a number of unprofitable years will initially be expected until profits are made in this area.

An Uber business that, according to Katsenelson, is still in the embryonic stage, is that with self-driving, flying cars. If no breakeven is reached here in the next five years, Uber will probably stop the development. “It will most likely be sold or merged with another company,” he said.

That is the outlook for the Uber share

Examining all of Uber’s businesses, Katsenelson’s worst-case estimates show a potential profit of $ 2.50 to $ 3 per share. Investors would then make money, but buying the share would not justify this.

However, if Uber’s growth rate accelerates and the profit margin increases when Uber Eats and Uber Freight start making money, the company’s value could be significantly higher in five years than it is today.

Meanwhile, the greatest risk for Uber is advances in autonomous driving. Katsenelson calls the autonomous car “the ultimate threat” to Uber. However, he is not too worried about the fact that the required technology is simply not yet available, neither on the hardware nor on the software side.

Editorial office finanzen.net