EUR 850.00 For Business Accounts Only

Morningstar | Launching Coverage of Uber Technologies with Narrow Economic Moat, Stable Moat Trend, and $58 FVE. See Updated Analyst Note from 09 May 2019

We are initiating coverage of Uber Technologies with a narrow moat rating, stable moat trend, and a fair value estimate of $58 per share. Uber is becoming a public company as it will sell at least 180 million shares at an IPO price of $45 per share (which is at the low end of the range that the firm was seeking) on May 10, 2019. We note that such pricing is not indicative of low demand. We suspect that, given the lack of performance in Lyft’s IPO since its debut in March and increasing volatility in the equity market, Uber's initial pricing may have come out on the conservative side. The IPO price is more than 22% below our fair value estimate and we recommend allocating capital to this name if Uber’s stock trades at the reported $45 IPO price or lower.

Uber Technologies, founded in 2009, is the leader in the ride-sharing market in the U.S. and likely in the world after the close of the Careem acquisition (possibly in January 2020). With services such as ride-sharing, food delivery, and freight brokerage, the firm has successfully tapped into an addressable market which we value at $740 billion by 2023 and over $1 trillion. In our view, Uber's core business, the ridesharing platform, warrants a narrow economic moat rating as it has displayed some moat sources such as network effects and intangible assets, which could position the firm to become profitable and generate excess returns on invested capital in the future. In addition, Uber has grabbed market share in food delivery very quickly for which we think there is strong growth potential.

We expect Uber's total net revenue to grow at a 19% 10-year CAGR to over $64 billion by 2028. Also, we expect Uber to become sustainably profitable by 2024. Plus, given how effectively Uber is using its scalable platform for other services, we expect further operating margin expansion after 2024.

Based on gross bookings, we think Uber can attain around 31% of its total addressable market by 2028, from what we estimate was 18% in 2018. We expect the firm to maintain its 25%-30% share of the ride-sharing market throughout the next 10 years as it continues to benefit from its first-mover advantage, network effect and data moat sources, and various strategic acquisitions. The latest one was of leading ridesharing service provider in the Middle East, Careem, for $3.1 billion which will close in early 2020. While Uber does not operate in every market globally and has not been successful in markets such as China, it has made investments in regional dominant players such as Didi in China, Yandex Taxi in Russia, and Grab in Southeast Asia. For this reason, we foresee Uber benefiting from overall global growth in ride-sharing directly and indirectly.

We note that Uber has also taken steps to become the one-stop-shop for transportation as it has added micromobility options such as bike sharing (via the acquisition of Jump in 2018) to its app, which we think may further strengthen the firm’s network effect moat source.

On the food delivery front, Uber Eats is gaining market share, especially in the U.S. battling firms like Grubhub and DoorDash, as it may be benefiting from cross-selling to its large ride-sharing user base. In addition, Uber has continued to aggressively invest in and price its service to attract more restaurants and expand the food delivery business. Such strategy could lead to establishing another network effect moat sourced business within the firm. We expect Uber Eats gross revenue to represent over 30% of Uber’s total in 2028, from 16% in 2018.