Morningstar analysts are sticking with recently floated ride-sharing firm Uber (UBER) despite its first results as a public company showing a $1 billion loss in the first quarter.
Analyst Ali Mogharabi is maintaining his $58 per share fair value estimate for Uber, against a current price just below $40 and above the float price of $45. He is encouraged by the firm’s revenue growth of 20% year-on-year, which was driven by “impressive” expansion at food delivery arm UberEats.
Mogharabi forecasts that Uber will become profitable in 2024 as the firm’s first-mover advantage and brand appeal allow both it and rival Lyft to establish dominant positions and keep the price of a trip stable, as well as retaining drivers.
Mogharabi doesn’t expect any further price pressure on the price Uber can charge for taxi journeys. “However, we think aggressive pricing to attract diners, restaurants and drivers on the Uber Eats side may continue in the short-term.”
The commission, or “take rate”, received by Uber is higher for taxi rides than for food deliveries under UberEats, but this division is showing strong growth: bookings for UberEats have more than doubled over the year to $3.1 billion and net revenue is up 89% in the same period to $536 million. The number of active users per month was up almost 33% to 93 million, again driven by the growing army of UberEats customers.
Morningstar assigns a “narrow moat” rating to Uber, meaning it has a slender competitive advantage but says its “uncertainty” rating is very high.
Despite that uncertainty, Morningstar notes that Uber's technologies could tap into future trends such as AI and self-driving vehicles: “The firm’s on-demand technology platform could eventually be used for additional products and services, such as autonomous vehicles, delivery via drones and Uber Elevate, which, as the firm refers to it, provides 'aerial ride-sharing'."
Hype and Hope
Uber’s IPO was one of the most heavily hyped floats of recent years but shares plunged 8% on their first day of trading. Uber's early failure to live up to initial expectations, at least in terms of valuation, has raised questions about the value of IPOs to smaller investors and the price of tech “unicorns” coming to market this year. Shares in smaller rival Lyft (LYFT), which floated in March, surged to $78 on the first day of trading but have since dropped to around $55. Wider stock market volatility has played a part in these price falls too and Airbnb and WeWork are next up for this year’s tech floats.
A recent article on Morningstar.co.uk looked at the long-term performance of IPOs over 40 years. According to data run by UBS, the average float saw the share price rise by around 18% on the first day of trading, but subsequent performance of shares didn’t match the first day’s exuberance. Twitter (TWTR) is an extreme example of a share that soared on its first day, surging more than 70%, but is still below its IPO price nearly six years later.
Mark Hargreaves, head of global equities at Axa Framlington, says investors need to be patient when investing at IPO. He says: "While being an early investor can offer some initial or short-term upside, not all opportunities will be profitable. By waiting to see how well a company can translate innovation into a commercially viable business model and ultimately into profits, you can potentially separate the winners from the losers in any given area.”
