🚗📱Business Overview

🎯Key Metrics

Total: -4.5/17

• +1 ✅ Projected Operating Margin: 17.98%
• +1 ✅ Projected 5-Year Revenue CAGR: 10.13%
• +0 ⚠️ Last 5-Year ROIC: 8.17%
• -2 ❌❌ Estimated Cost of Capital: 8.35% (greater than ROIC)
• -1 ❌ Last 5-Year Shares Outstanding CAGR: +2.83%
• -1 ❌ Projected 5-Year EPS CAGR: 6.70% (given the easiness of manipulation of these values, below 10% warrants caution)
• +0 ⚠️ Projected 5-Year Dividend CAGR: N/A
• +0.5 ✅ Moody’s Debt Rating: Baa1
• -1 ❌ Morningstar Moat: Narrow
• -2 ❌❌ Morningstar Uncertainty: Very High

📈Uber in my opinion can be more than just a ride-sharing business. It changed the way we, and namely the younger generations, see cars and driving as a whole. I believe this company will be at the forefront of the autonomous driving revolution and it is well positioned, if not the best positioned, to take advantage of the AI revolution. It displays solid operating margin projections, showing that even on a very competitive industry it still has competitive advantages. Also, the revenue growth is solid, projected to be above 10% during the next couple of years. I also believe that some of the “failed” metrics presented above will gradually become positives during the next couple of years and quarters, namely the current share dillution used to expand growth and the lower ROIC caused by previous years.

📉The company faces a competitive environment within the ride sharing space, given that new rivals can launch apps without massive capital requirements. Also, given the fact that this company is at the front of a possible revolution with autonomous driving, it increases the risk of the business and this is presented on the Very High uncertainty rating.

Despite all of the above, I believe that Uber is more than a transportation company. This is fundamentally a technology company with widespread access to users data and that some of the concerns and some of the “failed” key metrics, namely for the moat and uncertainty, are not taking into account the privileged position this company have within the industry. However, let’s check its current valuation to see if its a good opportunity at the current prices.

📝Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value using the estimated cost of capital;
• EPS Growth – the fair value is estimated by projected the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital;
• Historical P/S – we assume mean reversion to the historical P/S values;
• Historical P/B – we assume mean reversion to the historical P/B values.

I’ve used the ratios that correlated the most with the stock price during the last couple of years.

Cost of Capital

I’ve used the latest annual financial statement of the company, the 10-Year US bonds as the risk free rate and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Also, given the fact that Moody’s provided a rating for the company I used it as the debt rating.

Cost of Capital: 8.35%.

This value will be used later as a discount rate in the valuation methods.

Please feel free to come up with your own values by using the tool I’ve used: Cost of Capital – The Fair Value Journal. It is and will ever be completely free 🙂

Discounted Cash Flows (Weight: 40%)

I’ve used the latest annual financial statement of the company, the analyst estimates for both revenue and margins and the cost of capital calculated previously.

Some notes on the inputs above:

• Terminal Revenue Growth – I’m using the risk-free rate (10-Yr bonds of the US), because long term the company should not grow more than the rate of the economy. I’m using the risk-free rate as a proxy to it, so the terminal growth becomes it;
• Terminal Cost of Capital – I’m assuming its Cost of Capital begins at its current estimated value and then gradually converges to the industry average;
• Initial and Terminal Tax Rate – Given the volatility of the effective tax rate of the company during the last couple of years, I’ve decided to use for both the industry average.

All the other inputs were taken from the financial statement or from analyst projections.

The DCF gives us an estimated fair value of 73.91 dollars for Uber, very close to its current price of 74.77 dollars.

Something that we can also do now is to play around with Monte Carlo simulations. What this will allow us to do is to simulate multiple DCF valuations with pre-defined ranges for each of the inputs. Each simulation will randomize the inputs between these pre-defined values. For this I also used analysts estimates and assumed that it could have at the higher end a terminal ROIC of ~10%, a little above the default Terminal Cost of Capital given the technology background of the company.

As you can see from the above Uber seems to be fairly valued given that its current price of 74.77 dollars is around the median. From these simulations we can extrapolate that there’s ~50% probability of Uber being undervalued and ~50% probability of Uber being overvalued.

Please be free, as before, to fill in your own values. Make the valuation your own and do yourself a DCF valuation using your own assumptions: DCF – The Fair Value Journal

EPS Growth (Weight: 30%)

For this valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed a 15 PE for the company.

Then again used the Monte Carlo simulations to check what happens when the input values change within a specified range:

Some notes on the inputs above:

• Target PE – I’m assuming here a minimum PE of 13 because I don’t believe that Uber will be priced below that given its premium status within the industry and technology background; and also assumed on the higher end a PE of 25 given its high potential as a company and also because its premium status and technology platform.

Using this valuation method, Uber that is currently priced at 74.77 dollars seems to be fairly valued being currently priced close to the median. From this we can extrapolate that there’s ~50% probability of the stock being undervalued and ~50% probability of the stock being overvalued.

This seems to be in line with what we’ve seen during the DCF valuation.

As before, feel free to try this yourself: EPS Growth – The Fair Value Journal

Historical P/B (Weight: 20%)

The current P/B (Price / Book) ratio is around its 7-8 Year average. This means that the company is fairly valued or a little undervalued by this metric. Assuming a mean reversion to its historical average of 6.73 we can assume a fair value of 85.64 dollars.

This method was a surprise for me to be used to value Uber, given that its mostly suited for capital heavy companies and not asset light businesses like technology platforms like an Uber. However, from what I’ve seen it correlated very well with the price movement of the previous years.

For every type of historical and relative valuation you can use the same free tool: Historical / Relative Valuation – The Fair Value Journal

Historical P/S (Weight: 10%)

The current P/S (Price / Sales) ratio is around its 7-8 Year average. This means that the company is fairly valued or a little undervalued by this metric. Assuming a mean reversion to its historical average of 4.03 we can assume a fair value of 94.05 dollars.

✍️Summary

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, given your confidence in the company, but for me I’ll probably start buying at around 67.50 dollars given my confidence that the company will be one of the companies to make the most of AI during the next couple of years. However it can still be a good opportunity at the current price of 74.77 dollars but be ready to still see the price go down.

Overall it seems Uber is fairly valued at the current prices.

Fair Value: 77.19 dollars