Introduction to Equity Research

The purpose of an equity research report is to provide Business Information

business and market information of a publicly listed
The purpose of this section is to answer “what?”. It provides the
company. Business information include description of the
base knowledge necessary to understand the “why?” and “how?”
operating model, financial performance, and competitors.
of the company’s valuation verdict. It is aimed at those unaware
Market information include economic and industry outlook,
of what the company does and how they generate revenue.
recent capital market developments and valuations.
However, we recommend all of our readers to read this section as
The combination of the two is necessary to make a sound, there may encounter new information.
realistic and logical valuation verdict – how much a
Market Information
company’s share price is worth today. As capital markets (i.e.
stock markets) tend to ‘misprice’ certain stocks, our This section is the core of our valuation. It uses a combination of
calculated share-price is used to determine the ‘buy’, ‘hold’ information, the assumptions relating to those information and
or ‘sell’ recommendation of the stock. This hinges on the valuation techniques to forecast the company’s financials.
assumption that markets would correct the ‘mispricing’ over Through this, we are able to create the narrative leading to our
time, thus providing opportunities to make economic returns valuation verdict.
(i.e. make money).
However, note that this section contains multiple assumptions,
We recommend for our readers to use our report as majority of which affects our calculated share-price. These
reference materials, rather than an instruction manual. Our assumptions are clearly disclosed in the report and must be
valuation model takes the most up-to-date variables, yet challenged by the reader constantly.
these may become obsolete as the stock market changes.
Thus, it is paramount for readers to have a certain level of Final Word
doubt when consulting our report. That way, you constantly We emphasise that valuation knowledge is not a prerequisite in
challenge the creditability of our report and maximise your understanding our reports – our analysts aim to ‘translate’ the
chance of ‘beating-the-market’. complex world of finance into a more understandable one.
We gather our data from a range of third-party, publicly However, we do believe that basic financial statements and ratio
available resources, including company financial statements, knowledge would come in handy. Lastly, for those uninterested in
press releases, Bloomberg, Financial Times, Yahoo Finance, reading the entire report, we summarise our findings in the first
and various online stock screeners. Where estimates are page.
needed, we refer to these resources as ‘guiding points’,
rather than a definitive answer. Ultimately, we rely on a
combination of techniques and information when choosing OUR QIG EQUITY RESEARCH TEAM
these estimates. For that reason, there are some subjectivity
behind our analysis, but we try to remain on the conservative HEAD OF EQUITY RESEARCH: Tudor Popovici
end.
EQUITY RESEARCH ANALYSTS: Ahmed Gad, Moe Ghalayini,
Terminologies Manav Shah
Buy rating: the stock is 'undervalued’; thus, its underlying
share price is higher than the stock market price. You should
Disclaimer: The report contains herein information obtained from a range of third-
buy the stock. party sources such as Bloomberg, Thomson Reuters, Financial Times, and Yahoo
Finance. While the information is believed to be reliable, WBSS Quantitative
Hold rating: the stock is correctly priced, thus you should Investment Group takes no responsibility or liability (including for indirect,
neither buy nor sell the stock. consequential, or incidental damages), for any error, omission, or inaccuracy in the
data. We are making such content available in our effort to advance understanding
Sell rating: the stock is ‘overvalued’; thus, its underlying of public listed companies. We believe this constitutes a “fair use” of the material.
share price is lower than the stock market price. You should The material contained in this report is distributed without profit for research and
sell the stock. educational purposes.
 Coverages Report Summary
BUY rating at target price of $64.74 UBER Technologies, Inc. (‘UBER’ or the ‘Company’) develops and operates
technology applications supporting a variety of offerings on its platform. The
Company connects consumers with providers of ride services, merchants, and
food delivery services as well as public transportation networks. Its segments
include Mobility, Delivery, and Freight. The Company reported 2020 revenue,
EBIT, and net income of $11,139m, $(5,443)m, and $(5,150)m. It operates
across over 85 countries, with 93 million active app users in 2020, completing
over 4,980 million trips.

Through our DCF valuation model, we reached a BUY rating with an implied
General share price of $64.74 (21/10: $46.47 – upside potential 39.3%). Since Q2 2020,
Ticker UBER UBER apps have seen an upward trend in the number of gross bookings,
Exchange NYSE matched by a similar trend in monthly active consumers. UBER generates its
Industry Software & IT revenue from various schemes such as memberships, ride fares and service
Services fees and this year, UBER has reported a 105% y-o-y revenue increase, with
Incorporated USA
adjusted EBITDA margins improving from (52.64)% to (0.67)%. Through its
21 Oct 2021 $ 46.47
mobility and delivery segments, UBER expects positive EBITDA by the end of
Market Cap $ 89.8B
Shares Out. 1,88,43,47,000
this year, and we support this view as we believe that drivers are returning to
Rating Buy: $64.74 use the mobility platform. Moreover, due to regulations causing Uber to
52-weeks $ 32.90 – 64.05 reclassify their drivers as employees, the additional cost will be passed on to
Beta 0.89 users by an increase in service fees, thus not affecting long-term profitability.
EPS (TTM) (0.57) The main drivers leading us to suggest a buy-rating are increasing vaccination
rates, easing of international travel regulations, returning drivers, and UBER’s
Equity Research Analysts: ‘stay-at-home’ business segment which eases the uncertainties of the delta
variant.
Ahmed Gad

[email protected] Figure 1: UBER and S&P 500 market data

Moe Ghalayini

[email protected]

Manav Shah

[email protected]

Head of Equity Research

Tudor Popovici

[email protected]

Source: Yahoo Finance

Company Summary

Figure 2: Revenues over time (in USD, millions) Figure 3: Monthly Active Platform Consumer (in millions)

14,000 13,000
120 111
12,000 11,139 103 103 101
10,433 110 98
100 93
10,000
90 78
8,000 80
6,000 70
55
60
4,000
50
2,000 40

-
2018 2019 2020

Source: Annual Reports Source: Annual Reports

Figure 4: Number of trips over time (in millions) Figure 5: Gross bookings breakdown (in millions)

2,300
1,907 20,000
1,770
1,800 1,661
1,443 1,447 1,511 15,000
1,300 1,184
10,000
737
800
5,000

300 -

-200

Mobility Delivery Freight

Figure 6: Revenue per region over time Source: Annual Reports Source: Annual Reports
(in USD, millions)
14,000
millions)
821
12,000
1,852
1,147
10,000 749
1,862
1,495 2,086
8,000
1,963 1,295
6,000 1,236
1,154
4,000 8,465 609
6,226 6,611
2,000 3,833

-
2018 2019 2020 H1/2021
USA and Canada LatAm EMEA Asia Pacific
Source: Annual Reports
Company Description

Overview
Introduction

UBER is a transportation network company launched in 2011 which offers multi-modal people transportation, restaurant
food delivery, and connecting freight carriers and shippers. It operates through the following segments: Mobility, Delivery,
and Freight. For the fiscal year 2020, UBER reported revenues of $11.4bn and $5.9bn in gross profits, and its key markets
are the U.S. and Canada (c. 60% of 2020 revenues), with EMEA and Asia Pacific (‘APAC’) – Latin America (‘LatAm’) regions
accounting for 18.7% and 14.7% respectively.

Services, Pipeline, and Markets

Mobility (former Rides): UBER’s flagship ride- Figure 7: 2020 Revenue Breakdown per Operating Segment
hailing business. It connects users with drivers
via its app, presenting estimated arrival time, 0%
fees, and vehicle information. UBER Mobility is 9%
the Company’s only profitable segment on an
adjusted EBITDA basis ($1.2bn in 2020, down Mobility Delivery
43.6% from 2019 primarily due to pandemic
effects). For the quarter ended 30th June, 36% 55%
mobility gross bookings increased 54% in
EMEA q-o-q, 37% in the U.S. and Canada and
Freight Other
10% in Latin America, while declining 9% in
Asia-Pacific due to the COVID-19 outbreak in
India. A $250m plan aimed at incentivising
driver back onto the app (e.g. payments made Source: Annual Report (2020)

when drivers complete a consecutive number

of trips over a defined period of time)
contributed to greater-than-expected losses
for the quarter.

Revenue generation

UBER generates revenue from flat-rate ride fares, memberships (e.g. UBER Pass), and service fees from drivers (25% on
all fares). This covers the use of software, credit card commissions, distribution of invoices to clients, and collection and
transfer of fares. UBER calculates fares based on the estimated length of the trip, factoring in variable costs based on time
and distance travelled. The total fare also includes a base rate, tolls and surcharges, surge pricing, a booking fee, route-
based adjustments, and other promotions. The total fee is calculated by applying this formula: ((base fare + time rate +
distance rate) * surge multiplier) + tolls and other fees.

Delivery (former Eats): Enables clients order meals from restaurants remotely for either pickup or delivery via UBER
drivers. For the quarter ended 30th June, UBER Delivery reported a $161m loss. Nevertheless, delivery gross bookings grew
4% q-o-q and 75% y-o-y, with triple digit y-o-y growth in EMEA and strong double digit y-o-y growth in the U.S. and Canada,
LatAm and APAC.

Revenue generation

Customers:

• A delivery fee, based on the distance of the restaurant and availability of couriers
 • Service fees accounting for 15% of the total order
• Small order fees for orders less than $10

Drivers:

• A percentage of each driver’s gross fare

Restaurants:

• $350 activation fee to new restaurants

• 30% fee on each order to use the platform. The cut is decreased to 15% if the restaurant has its own delivery staff
or offers customer pickup.

Freight: Launched in 2017, UBER Freight connects truck drivers to shippers looking to move freight. The shippers pay a
pre-determined price to use these services. Car rides on per mile basis has a key role in helping UBER generate revenues.

UBER Freight only makes up a small portion of UBER’s total revenue - about 9% during 2020. According to the Company,
UBER Freight represents an approximately $900bn TAM U.S. opportunity, which is about 2.5x the size of the U.S.
restaurant delivery TAM, sized at c. $350bn. UBER Freight addresses over 50% of the US trucking TAM, up from 10% at
the IPO. UBER Freight has over 1m drivers, making UBER the largest digital network in the U.S. with 1.4x more app
downloads than the next largest competitor. On the supply side, over 9.5k shippers are using the service. UBER Freight’s
competitive advantages include its real time dynamic pricing, automated load creation, and automated tracking, which
are likely to improve margins. Currently, the industry operates at c.15% gross margin and 5% EBITDA margins (as
percentage of gross bookings), with c. 67% of these gross profit dollars being spent on operating expenses, with UBER
seeking to reduce by capitalising on lower dead head miles and budling of loads.

Figure 8: Operating channel

Customers Uber App Drivers

Mobility

Delivery

Freight
LTM Financial and Stock Market Performance
UBER is set to report its first-ever profitable quarter on an adjusted EBITDA basis for Q3 2021. Having witnessed a
staggering increase in monthly active platform users (MAPUs), the Company has bounced back to its pre-pandemic levels
as the easing of lockdown restrictions has made the app more usable. Therefore, a general recovery in global economic
conditions has been in the Company’s favor with Q3 performance figures looking to exceed analysts’ expectations.

Total revenue for Q2 2021 increased 105% y-

o-y, with the UBER’s EBITDA margin increase Figure 9: Q2 revenue breakdown per region

from (52.64) % in Q2 2020 to (0.67) %. This can

be attributed to a major increase in monthly 18%
active platform users (MAPUs) which helped
boost the company’s revenues, an increase of
84%, jumping from 55 million users in Q2 2020 17%
56%
to 101 million users in Q2 2021. Investors are
encouraged by the edge towards profitability 9%
as seen by the EBITDA margin for Q2 2021 of
(0.67) %. Consequently, if UBER continues to
grow its profit margins, we can expect the USA and Canada LatAm EMEA Asia Pacific
company to begin reinvesting its profits into
its different business segments. Source: Quarterly Report (2021)

For the period between Q2 2020 – Q2 2021,

notable changes in revenue for each business
segment were as follows:

⁃ Mobility revenue grew 106% y-o-y and gross bookings reached $8.6bn in Q2 2021, with vaccination rates
increasing in major revenue-producing countries such as the U.S. leading to a recovery in consumer demand for
ride services.

⁃ Delivery revenue grew 122% y-o-y due to higher volumes with gross bookings for delivery reaching $12.9 bn (+85%
y-o-y), an increase in 14% in basket sizes globally driven by stay-at-home order demand related to COVID-19, and
improved network efficiencies as well as growth in active merchants of over 60% y-o-y in Q2 2021.

⁃ Freight revenue accelerated to 65% y-o-y with strong customer adoption of its technology-first offering driven by
real-time demand channels.

Costs of revenues, which primarily consist of insurance costs related to their Mobility and Delivery offerings, credit card
processing fees, bank fees, data center and networking expenses and other service costs, were recorded at $5.1bn for
2020, decreasing 15% y-o-y. This was mainly due to a $2bn decrease in Mobility driven by COVID-19 related gross booking
declines, however this was partially offset by a $984m increase in Delivery. Nevertheless, cost of revenues increased
$1.2bn, or 127% in the last 3 months ending June 30 compared to the same period in 2020, mainly due to a $503m increase
in Courier payments and incentives in certain markets, a $392m increase in Mobility primarily driven by higher insurance
costs resulting from increased volume, and a $125m increase in Freight carrier payments.

Margins 2018 2019 2020

Gross profit 54.13% 53.38% 53.73%
EBITDA -23.34% -27.14% -31.07%
EBIT -29.07% -66.12% -43.66%
Net income -28.67% -65.86% -43.35%
 Liquidity 2018 2019 2020
Debt/Equity -1.33 0.61 0.85

Other LTM Financial Events

• In January 2021, UBER completed the sale of Apparate (ATG Business), a subsidiary focused on the development
and commercialization of autonomous vehicles technologies, to Aurora. In addition, at closing of the transaction,
UBER also made a $400 million cash investment in Aurora and entered into a collaboration agreement to
collaborate with respect to the launch and commercialization of self-driving vehicles on the UBER network.
• In February 2021, UBER completed a series of agreements with Moove, a vehicle fleet operator in Spain, including
an equity investment in which UBER acquired a 30% minority interest in the company, a term loan of up to
approximately $230 million to Moove, and a commercial partnership agreement.
• In February 2021, UBER entered into a definitive agreement to acquire 100% ownership interest in The Drizzly
Group which operates an on-demand alcohol marketplace in North America.

Industry Overview
Overview

The Company has experienced an increase in its gross bookings despite the Delta variant wave. For Q2 2021, aggregate
gross booking rose more than 30% than July 2019 in cities such as New York, London, and Paris. This translated in drivers
returning to the platform, especially in the U.S. where Mobility drivers are up 50% from February to July 2021. Additionally,
UBER expects the driver recovery to gain momentum in Q3 and Q4.

Industry Trends

Similar to other industries, the COVID-19 pandemic had a substantial impact on the ride-sharing industry. The shock to
global mobility slashed the demand for rides, and companies had to identify alternative revenue sources that could
flourish during the pandemic. For UBER, this was the Delivery service (i.e. UBER Eats), which generated $4.8 billion in
revenue in 2020, a 152% increase y-o-y.

Firstly, companies operating in the ride-sharing industry face the challenge of attracting drivers back to the platforms.
Financial packages have been implemented to incentivise drivers to return, with benefits including financial stimulus on
meeting a certain number of consecutive rides/within a specific time frame. Nonetheless, these packages will impact
short-term profitability. For instance, UBER announced a $250m package which pushed the Company into a larger-than-
expected loss for Q2 2021 despite doubling revenues. The ‘take rate’, or its share of the fare, also dropped to 18.7% from
25.8% a year ago due to ‘elevated investments’ in reviving driving availability. As a result, ride-hailing companies may
propose investors different profitability measures (e.g. adjusted EBITDA) that do not account for these non-recurring
expenses. However, we will be closely monitoring the evolution of the incentive packages over time and decide whether
these truly represent ‘one-off’ costs.

Another challenge is represented by managing price levels in an inflationary environment. Notably, natural gas has surged
to a record peak in Europe and coal prices from major exporters have also hit all-time highs, which ultimately resulted in
elevated petrol prices (e.g. 15/10/2021: UK petrol price passed £1.4/litre – highest in a decade). Consequently, this
resulted in fewer drivers being willing to operate, pushing up ride fees and increasing waiting times. Nevertheless, UBER
claims that this is instead a result of pent-up demand. While we agree with the statement concerning regions such as the
UK where the electric car market is growing quickly (nearly 300,000 pure-electric cars on UK roads at the end of August
2021, and more than 600,000 plug-in models if including plug-in hybrids), the effect for slow-adopting countries may be
rather explained by rising prices.
Thirdly, companies operating in this industry face regulation risks, particularly related to the classification of drivers as
employees and not as independent contractors. While this is likely to impact short-term stock movement, we believe the
additional costs will be passed onto the users by raising the service fee to c.30% and will not have a material impact on
the long-term profitability. Additionally, companies seeking to build mobility ‘super-apps’, such as UBER, face less
regulation risk because of diversified revenue streams. Finally, because of high vaccination rates in countries where UBER
derives most of its revenues, we consider that is unrealistic to assume further lockdowns due to the Delta variant.
Nonetheless, we agree that this is a subjective call for our model.

Figure 10: Summary of industry trends

Delta variant Elevated oil prices

Incentives for drivers Inflationary

environment

Drivers: Employees or
contractors?

Peer Comparison

Company Key Metric Competitive Advantage / Weakness

+ Lyft has a transparent pricing system,
in which their receipts involve a
Market cap $ 17.38 B
breakdown of the price calculation,
EV $ 16.5 B
whereas UBER’s receipts do not.
LTM Sales $ 2.44 B
- Lyft’s app is a work-in-progress as it
Gross Profit $ 1.03 B
has no wheelchair access option, a
EV/Gross 16x
limited rewards system (e.g.,
Profit
customer loyalty) and is still working
on a cost-splitting feature.
+ DiDi serves as the largest ride-hailing
companies in China, where most of
its business is located. There are very
few players in the Chinese mobility
market who can match DiDi’s scale of
operations and target audience.
+ DiDi has strategic investments in
Market cap $ 39.84 B other global companies such as Lyft,
EV $ 64.50 B Bolt and Grab, all of which pose a
LTM Sales $ 25.7 B threat to UBER’s market share.
Gross Profit $ 2.8 B + DiDi has an active 15 million drivers
EV/Gross who rent cars from the company’s
Profit 23x partnerships with Toyota and Nissan,
whereas UBER has about 5 million
drivers with independent vehicles.
- China’s cyberspace regulator ordered
app stores to remove Didi and
accused the company of violating
 security rules. From July, Didi has lost
30% of daily users after the
crackdown, which could result in a
downgrade of the 19% y-o-y revenue
growth target for 2021.
+ Curb connects meter run taxis to
customers, unlike other ride-sharing
mobility services. It uses its strategic
partnership with Verifone to secure
Not listed Not listed payments.
+ No surge pricing, and every driver is
licensed along with an insured car as
taxi drivers require to pass an FBI
check.

Assumptions

*Detailed assumptions and projected financial figures can be found in the accompanying Excel file*

Revenue Growth

UBER’s 2020 revenue declined 14.3% y-o-y with the main explanatory factor being the impact of COVID-19 reducing the
mobility demand, and a fall in the number of gross bookings and active users due to multiple nationwide lockdowns and
mobility restrictions. We are forecasting revenue growth to be 45% in 2021, 40% in 2022, and 35% in 2023 before
converging towards the market growth rate of 10% by the end of our forecasted period (i.e. 10 years). These revenue
growth rates are in line with our market outlook. Our 2021-2023 revenue assumptions hinge on the post-pandemic
recovery, which is fuelled by increasing numbers in nationwide vaccinations and an easing of international travel
restrictions. After comparing 2021 Q1 and Q2 figures with the year before, UBER has already reported a 20% increase in
revenues, and we expect this trend to continue from half-year 2020 to half-year 2021. Moreover, we believe that UBER
has the capabilities to thrive in the uncertainties that arise due to the delta variant, due to its ‘stay-at-home’ business
segment (i.e., Delivery).

Despite this, we have factored in the recent news of US regulations in employment, the renewal of UBER’s London license,
and the shortage of drivers (due to unsatisfaction and Brexit). The current has crisis also has an adverse effect on UBER’s
drivers, though the Company has stated that the petrol shortage has a minimal impact on its business. With greater
emphasis being placed on increasing incentives for drivers and consumers, UBER is seeking a competitive advantage to its
peers. Finally, UBER sold its “Elevate” business segment to Joby Aviation and plans to increase on existing segments that
can deliver sustainable profits.

EBIT Margin

UBER’s EBIT margin in 2020 was -43.6%, an improvement from the -66% margin in 2019 that was primarily driven by a
$4.6bn stock-based compensation expense, of which size we consider to be non-recurring. We assume that the Company’s
EBIT margin will be c.(37) % in 2021 and that it will rise by 6.6% per year, reaching 29% in 2031. We believe this is a sound
basis for forecasting EBIT growth as the fundamental EBIT growth rate is a product of the firm’s return on capital invested
(ROIC) and its reinvestment rate which are the primary determinants of future growth.

We prefer to remain conservative, and we believe our EBIT margin assumptions are upholding our valuation principles. A
29% EBIT margin in 2031 is achievable with UBER’s current operating trajectory and it is a margin that can be sustained
over the long-term with our revenue projections and the Company’s cost efficiency. For example, cost of sales is c.45% of
sales (3YR average) which is a relatively low percentage compared to competitors (e.g. Lyft – c.60%). We are forecasting
that both internal and external economies of scale will allow UBER to become even more efficient with lower cost of sales
over the forecasted period which contributes to the increase in the EBIT margin.

Reinvestment (Net Capital Expenditure ‘Net CAPEX’ + Net Working Capital ‘NWC’)

We have forecasted net CAPEX which is the difference between capital expenditures and depreciation and amortisation.
We have used Aswath Damodaran’s methodology of redefining R&D expenses as a CAPEX because, at a fundamental level,
the Company has incurred the R&D expenses with the expectation that they will generate long-term future economic
benefits. Therefore, this redefinition of R&D expenses as CAPEX is more theoretically sound and gives us a better idea of
how much the Company is reinvesting for future growth. This also means that assumptions about net CAPEX are highly
linked to assumptions about future growth; high growth firms will have much higher net CAPEX than low growth firms.

Net CAPEX was 20.6% of 2020 sales and our assumption for 2021 is 23.0%. This figure was calculated by taking the average
for years 2018 and 2020, with 2019’s figure being excluded due to an unusually large stock-based compensation (SBC)
expense which hinders the extrapolation’s accuracy. Over the forecasting period, we assume that net CAPEX will decline
in line with the decline in revenue growth rates to around 5% (i.e. industry average) by 2031 when the company will have
reached a peak in maturity and will have decreased its reinvestment rate due to its large scale.

Our NWC calculation used the main non-cash current assets (short-term investments, inventories, and accounts receivable)
and non-debt liabilities (accounts payables, accruals, and deferred income) as this is our concern from a cash flow
perspective. Using the same methodology, we have forecasted NWC as a proportion of sales since future revenue growth
impacts working capital needs. In 2019 and 2020, NWC as a percentage of sales was (13.9) % and (27.5) % respectively.
Therefore, we have assumed the NWC margin will decline to (18.7) % and remain at that level until 2031.
 Valuation Summary
FCFF ($ millions) 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E

EBIT * (1-effective tax rate) (5,985) (6,886) (7,282) (6,846) (5,283) (2,511) 1,672 7,123 13,968 22,600 29,715

Less: CapEx (3,711) (4,522) (6,105) (7,937) (7,441) (4,961) (5,209) (4,464) (5,134) (5,904) (6,495)

Less: Changes in WC (43) 1,206 1,478 1,710 1,853 2,316 2,316 2,779 2,501 2,876 2,205

Free cash flow to the firm (9,739) (10,202) (11,909) (13,073) (10,871) (5,155) (1,220) 5,438 11,335 19,572 25,426

Cost of capital 8.71% 8.71% 8.71% 8.71% 8.71% 8.71% 8.71% 8.71% 8.71% 8.71% 8.71%

Discount period 1 2 3 4 5 6 7 8 9 10 11

Discount factor 0.92 0.85 0.78 0.72 0.66 0.61 0.56 0.51 0.47 0.43 0.40

Present value of FCFF (8,959) (8,633) (9,270) (9,361) (7,161) (3,124) (680) 2,788 5,347 8,493 10,149

Share price calculation ($ millions except share data)

Enterprise value
125,543

Less: debt 9,279

Plus: cash 5,647

Equity value 121,911

Shares outstanding
1,884,347,000

Implied share price

$64.70