Table of contents
After the widespread tech sell-off, I had recently been looking at stocks from this sector that had fallen increasingly sharply. Out of pure interest to see if there could be opportunities beyond my micro- and nano-cap path. In doing so, I noticed that one tech stock wasn't affected that much at all. Uber had actually lost 'only' about 40% from the high. That's why I took a particularly close look at these quarterly figures and was curious to see if there was a concrete reason for this and if the stock could surprise me positively.
If we look at the shareholder letter and its lurid language, we might well get the impression that Uber is growing profitably, operates an asset-light business model, generates free cash flow and is more or less already 'out of the woods'. I will show you below that this is not the case at all.
With regard to the consensus estimates of analysts, Uber was not able to deliver a convincing performance in its entirety. Revenue came in at $8.34 billion instead of the expected $8.08 billion. However, loss per share was $0.61 instead of $0.17. Sales increased, losses expanded. All that's missing is negative cash flow and we have the archetypal tech stock. However, a different impression emerges when we look at the company's shareholder letter, i.e. the primary form of communication with investors after the quarterly figures.
Here, the loss of 1.2 billion in the 3rd quarter is openly communicated, but otherwise the tenor is positive in my opinion. Adjusted EBITDA at an all-time high of 516 million, free cash flow at 358 million and the prospect of higher Adjusted EBITDA figures in the future and further "profitable growth". Basically, I am not too much of a critic of adjustments in profitability numbers. On the contrary. I myself like to adjust/adjust for one-offs, i.e. one-off effects that cloud the view of the operating strength of the respective company and are eliminated in the future. Often, these are also non-cash, which is why free cash flow is usually the more meaningful indicator. At least if it has been calculated correctly. To what extent the adjustments at Uber are justifiable and the free cash flow really belongs to the invested parties, we look at each individual case.
The figures in detail
I watch CNBC's Closing Bell more often out of sheer delight in the awfulness, in order to catch the narratives that are spread to the broad mass of investors every now and then. If you can spare two minutes of your time, you are welcome to also get an idea of what borderline to wrong opinions are being spread there.
So Uber is said to have proven that they have created a logistics network that is both growing and profitable. Emphasis is placed on the growth in EBITDA and free cash flow. This is probably what investors get when they only read the shareholder letter.
Net income & operating income
If we look at the most classic definition of "profitable", Net Income, there is no doubt at first that Uber is not profitable. 1.2 billion loss in Q3 and 9.7 billion loss YTD 2021 speak volumes. However, a significant portion of non-operating losses play the largest role. Uber's investments in other companies, such as Didi, Grab, and Aurora, have been of little success to say the least, and the negative impact has been correspondingly large. Since these are mostly non-cash costs that can reverse in the next quarter, I generally advise focusing on operating profits. The fact that it takes more than one quarter, if at all, to offset the non-operating losses is not taken into account.
However, operating profit also showed a significant loss of 495 million. Neither net income nor operating income can therefore be said to be profitable, although the negative operating margin has improved significantly. Q3-2021 was still affected by the Corona impact, but the stagnation of sales and marketing costs at least suggests that operating leverage is available.
On Adjusted EBITDA, Uber kindly provides us with an overview of how they get from a strongly negative Net Income to a positive Adjusted EBITDA, now and in the past, in just 16 steps. Not all of the steps are questionable. After all, with traditional EBITDA, we would also add interest and depreciation back onto the profit.
I don't want to argue about the finer points of the other items, whether they are one-off costs or not, but I do have my usual clear opinion on one item, and that is the stock-based compensations (SBC). Apparently, the no-cash-no-cost theory in accounting is more widespread among analysts than we would like, because on a 9-month view, after adjusting for SBC, a negative Adjusted EBITDA of 263 million can be seen. In Q3, it was slightly positive at 34 million.
For the sake of completeness, I have calculated the classic EBITDA below, which is still negative. You are welcome to use Adjusted EBITDA as the basis for your investment decision, since the adjusted costs will probably be eliminated in the future, but I think it is at least premature to talk about profitability in this context. After all, we don't know how many lawsuits Uber still has to fear with its business model.
Free cash flow
In terms of free cash flow (FCF), the company reports 358 million, based on operating cash flow of 432 million and deducting CapEx (capital expenditures). In fact, I think the word free cash flow is misleading for Uber for several reasons. Free cash flow is supposed to express how high the cash flow is that exceeds the operating and capital expenditures and is thus due to the invested parties. To what extent this is the case for Uber is for each person to decide. I have designed the following calculation in such a way that you can add back the components that appear to have been incorrectly deducted.
Possibly the most controversial point comes right at the beginning. The adjustment for working capital deferrals. The thought process here is that a company should not generate cash only by deferring payments to its suppliers into the future. As these items tend to get larger in growing companies, we could certainly argue that this cash is permanently due to the company, but a company should also be able to generate cash when it stops growing or has to go through a recession. This is where the rude awakening often comes, when a negative working capital that is actually beneficial turns into the opposite and becomes an additional burden. Therefore, my tip is always to look at the 'normalized' cash flows, i.e. as if the company would stop growing today and therefore deduct the movements in working capital. By the way, this does not mean that you do not have to take a critical look at the individual positions and conspicuous increases as well as possibly too low provisions.
I have already dealt with the topic of stock-based compensation in detail in a Article entered into. In short, they are nothing more than an exchange system to make salary costs a non-cash cost, but they continually reduce your share of free cash flows. As a result, they are about the same as if the company were to perform a capital increase in which you participate, and then distribute the cash thus obtained to its employees. This makes the actual principle or the meaningfulness of the free cash flow absurd.
The last point worth discussing is finance leases. These are nothing more than hidden CapEx expenses, since the investment risk lies with the lessee. They do not play a major role for Uber, but should be taken into account for the sake of completeness.
After taking into account all the above-mentioned components, the free cash flow is negative at 531 million. It would therefore also be negative if we did not deduct the movements in working capital. If we calculate FCF using the same methodology on a 9-month basis, we arrive at a result of -1.76 billion. Whether you are convinced by this approach is up to you. However, I treat the issue in the same way for all my own shares and consider it fundamentally wrong to simply ignore the components mentioned.
Apart from the above-mentioned key figures, I do not want to minimize the fact that Uber continues to grow, but on the one hand, this is not my focus and on the other hand, we could argue about the quality of this growth, since it resulted to a not insignificant extent from acquisitions and a change in the business model in the UK. If we adjust for these special effects, the revenue growth in the Mobility segment is only 30.7 % instead of 73 %. While Uber is also growing in its core business, it is nowhere near as much as the revenue increases suggest. How and whether these changes, acquisitions, etc. will affect profitability in the long term is not yet clear, in my opinion, because too many influences are distorting the figures at once. That is why it is worth taking a close look at the actual free cash flows and operating profits. But even apart from that, there are components that do not make an investment in the company worthwhile at the moment.
When looking at the "Risk factors" in the 10-Q. i.e. the official annual report, we should tend not to over-interpret all the risks. After all, not all of them are probable risks that could materialize in the future, but Uber's business model definitely exposes it to significant risks in some places, which we should be aware of before making an investment. I won't go into the aspects in individual cases, as it doesn't even seem possible to me to evaluate the individual risks, but we should definitely be aware that the regulation of Uber's business model is open-ended in a wide variety of states that are relevant to the company. And if I cannot assess a risk, I refrain from investing.
I don't want to deny that Uber has operating leverage in some areas, but even without the various specific risks that hang over the company like a sword of Damocles, there is no reason to invest. Neither profitable growth nor free cash flow can be mentioned. Even if so-called analysts repeatedly make it onto CNBC with these claims. Even if we put a multiple on the reported free cash flows, this is in relation to an enterprise value of just over 60 billion. Whether we want to have an unprofitable company in our portfolio at this valuation, in this market situation, which does not generate real cash flows, is something everyone has to decide for themselves. For me, the answer is clear.
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