Ride sharing and on demand delivery service Uber (NYSE: UBER) fell short of analysts' expectations in Q3 FY2023, with revenue up 11.4% year on year to $9.3 billion. Turning to EPS, Uber made a GAAP profit of $0.10 per share, improving from its loss of $0.61 per share in the same quarter last year.
Uber (UBER) Q3 FY2023 Highlights:
- Revenue: $9.3 billion vs analyst estimates of $9.5 billion (2.6% miss, although Gross Bookings beat)
- EPS: $0.10 vs analyst expectations of $0.12 ($0.02 miss)
- Free Cash Flow of $905 million, down 20.6% from the previous quarter (beat vs. expectations of $830 million)
- Gross Margin (GAAP): 39.5%, up from 30.6% in the same quarter last year
- Monthly Active Platform Consumers: 142 million, up 18 million year on year (slight miss)
Born out of a winter night thought: "What if you could request a ride from your phone?" Uber (NYSE: UBER) operates a global network of on demand services, most prominently ride hailing and food delivery, and freight.
Uber pioneered the online ride hailing model, allowing users to summon taxi’s via their mobile devices, an innovation that disrupted modern transportation. The company next expanded into food delivery with UberEats, and has grown a trucking brokerage business, Uber Freight. It is the largest global ride sharing network, with majority market share in the most countries it operates in.
The company’s value propositions are multiple. For individuals, Uber effectively lowered the cost per mile for taxi transportation vs. legacy cabs, while providing ease of use and convenience. For drivers, it has provided flexible earning opportunities. While for restaurants and merchants, Uber’s platform has allowed them to expand their consumer reach, and provided an online presence.
Gig Economy
The iPhone changed the world, ushering in the era of the “always-on” internet and “on-demand” services - anything someone could want is just a few taps away. Likewise, the gig economy sprang up in a similar fashion, with a proliferation of tech-enabled freelance labor marketplaces, which work hand and hand with many on demand services. Individuals can now work on demand too. What began with tech enabled platforms that aggregated riders and drivers has expanded over the past decade to include food delivery, groceries, and now even a plumber or graphic designer are all just a few taps away.
Uber competes with rival Lyft (NASDAQ: LYFT) in ride hailing and DoorDash (NYSE:DASH), Just Eat Takeaway (ENXTAM:TKWY), Delivery Hero (XTRA: DHER), and Deliveroo (LSE:ROO).
Sales Growth
Uber's revenue growth over the last three years has been exceptional, averaging 56.3% annually. This quarter, Uber reported mediocre 11.4% year-on-year revenue growth, missing Wall Street's expectations.
Ahead of the earnings results, analysts covering the company were projecting sales to grow 17.5% over the next 12 months.
Usage Growth
As a gig economy marketplace, Uber generates revenue growth by expanding the number of services on its platform (e.g. rides, deliveries, freelance jobs) and raising the commission fee from each service provided.
Over the last two years, Uber's users, a key performance metric for the company, grew 15.5% annually to 142 million. This is solid growth for a consumer internet company.
In Q3, Uber added 18 million users, translating into 14.5% year-on-year growth.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Uber because it measures how much the company earns in transaction fees from each user. This number also informs us about Uber's take rate, which represents its pricing leverage over the ecosystem, or "cut" from each transaction. 
Uber's ARPU growth has been exceptional over the last two years, averaging 40.5%. The company's ability to increase prices while growing its users demonstrates its platform's value, as its users are spending significantly more than last year. This quarter, ARPU declined 2.7% year on year to $65.44 per user.
Pricing Power
A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Uber's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 39.5% this quarter, up 8.9 percentage points year on year.
For gig economy businesses like Uber, these aforementioned costs typically include server hosting, customer support, and payment processing fees. Another cost of revenue could also be insurance to protect against liabilities arising from providing transportation, housing, or freelance work services. After paying for these expenses, Uber had $0.39 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Uber's gross margins have been trending up over the last 12 months, averaging 34.2%. This is a welcome development, as Uber's margins are below the industry average, and rising margins could suggest improved demand and pricing power.
User Acquisition Efficiency
Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Uber grow from a combination of product virality, paid advertisement, and incentives.
Uber is efficient at acquiring new users, spending 37.6% of its gross profit on sales and marketing expenses over the last year. This level of efficiency indicates relatively solid competitive positioning, giving Uber the freedom to invest its resources into new growth initiatives.
Profitability & Free Cash Flow
Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.
This quarter, Uber's EBITDA came in at $1.1 billion, resulting in a 11.8% margin. The company has also shown above-average profitability for a consumer internet business over the last four quarters, with average EBITDA margins of 9.5%.
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Uber's free cash flow came in at $905 million in Q3, up 153% year on year.
Uber has generated $2.3 billion in free cash flow over the last 12 months, or 6.2% of revenue. This FCF margin stems from its asset-lite business model and enables it to reinvest in its business without depending on the capital markets.
Key Takeaways from Uber's Q3 Results
Sporting a market capitalization of $98.4 billion, more than $4.4 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Uber is attractively positioned to invest in growth.
It was great to see Uber's strong user growth this quarter, and we were glad that Gross Bookings beat expectations. Additional positives include beats on the adjusted EBITDA and free cash flow lines. On the other hand, Monthly Active Platform Customers missed slightly and revenue also missed analysts' expectations. Overall, the results were mixed but with no major surprises. The stock is flat after reporting and currently trades at $48.05 per share.
Is Now The Time?
Uber may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We think Uber is a good business. Its revenue growth has been exceptional over the last three years. And while its gross margins make it extremely difficult to reach positive operating profits compared to other consumer internet businesses, the good news is its top-tier ARPU growth shows the increasing value of its platform to its users. On top of that, its growth in users has been healthy.
At the moment Uber trades at 19.6x next 12 months EV/EBITDA. There's definitely a lot of things to like about Uber and looking at the consumer internet landscape right now, it seems that the company trades at a pretty interesting price point.
Wall Street analysts covering the company had a one-year price target of $57.8 per share right before these results, implying that they saw upside in buying Uber even in the short term.
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