Ride sharing and on demand delivery service Uber (NYSE: UBER) fell short of analysts' expectations in Q2 FY2023, with revenue up 14.3% year on year to $9.23 billion. Uber made a GAAP profit of $394 million, improving from its loss of $2.62 billion in the same quarter last year.
Uber (UBER) Q2 FY2023 Highlights:
- Revenue: $9.23 billion vs analyst estimates of $9.34 billion (1.16% miss)
- EPS: $0.18 vs analyst estimates of -$0.01 ($0.19 beat)
- Free Cash Flow of $1.14 billion, up 108% from the previous quarter
- Gross Margin (GAAP): 40.2%, up from 28.5% in the same quarter last year
- Monthly Active Platform Consumers: 137 million, up 15 million year on year (in line with analyst estimates)
- Bookings: $33.6 billion (in line with analyst estimates)
- Q3 Adjusted EBITDA guidance: $975 million to $1.025 billion (beating analyst estimates of $914.6 million)
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.
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 53.1% annually. This quarter, Uber reported mediocre 14.3% year-on-year revenue growth, missing Wall Street's expectations.
Ahead of the earnings results, analysts covering the company were projecting sales to grow 16.4% 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 18.6% annually to 137 million. This is solid growth for a consumer internet company.
In Q2, Uber added 15 million users, translating into 12.3% 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 43.7%. 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 grew 1.81% year on year to $67.37 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 40.2% this quarter, up 11.7 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 $0.40 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 35.6%. 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 38.7% 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.
Uber's EBITDA was $916 million this quarter, translating into a 9.92% margin. The company has also shown above-average profitability for a consumer internet business over the last four quarters, with average EBITDA margins of 8.12%.
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 $1.14 billion in Q2, up 198% year on year.
Uber has generated $1.74 billion in free cash flow over the last 12 months, or 4.84% 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 Q2 Results
Sporting a market capitalization of $100 billion, more than $5.53 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. Free cash flow was also solid and so was profit guidance for the next quarter. On the other hand, it was unfortunate that revenue slightly missed analysts' expectations. Overall, this was a decent quarter for Uber, showing that unit economics are moving in the right direction. The stock is up 4.12% after reporting and currently trades at $51.5 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. We'd expect growth rates to moderate from here, but 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 and its growth in users has been healthy.
At the moment Uber trades at 23.2x 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 $53.6 per share right before these results, implying that they saw upside in buying Uber even in the short term.
To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.