With a new CFO and improving financials, is Uber taking clear steps toward a 2019 IPO?
As we look ahead, three questions loom large. First, how does Softbank’s big investment look in light of Uber’s 1H:2018 financials? Second, what should CEO Dara Khosrowshahi do to get ready for an Uber IPO over the next 12 months? Third, how would public investors value the IPO?
1H:2018 results suggests Uber shifting gears since Softbank investment: As the ridesharing industry shifts toward sustainable unit economics, SoftBank could play a key role in stabilizing the industry. SoftBank has invested more than $20 billion in ridesharing companies, including 10 percent plus ownership positions in Uber, DiDi, Grab, and Ola. Uber’s recent results seems to reflect its SoftBank investment: the company is slowly, but surely, moving towards a more sustainable economic model based on rational growth and a clear path towards profitability.
Over the past four quarters, Uber’s revenue growth rate has decelerated from roughly 75 percent year-over-year growth in Q3:2017 to 57 percent in Q4:2017, 55 percent in Q1:2018, and 41 percent in the most recently concluded quarter. These figures exclude one-time adjustments and divestitures so they might understate the true growth of the core business. Still, the growth is very strong. During this period, operating losses have gotten increasingly smaller, though this progression has been somewhat bumpy. We believe Uber is on track to generate enough cash from its core business, so it can self-fund its core operations, excluding growth initiatives such as self-driving car and flying taxis.
Uber CEO should focus on management team and culture: Dara’s to-do list remains long. His next step should be prioritizing internal team-building and employee morale over external corporate development initiatives or media/investor relations. Over the next six months, we expect the CEO to resolve lingering regulatory issues in New York and London. Despite a new $500 million investment for Toyota to develop self driving cars, we believe the company should divest this business. Furthermore, we expect Dara to round out an IPO-worthy top-management team, including marketing and HR leaders.
The Institutional Investor’s view of an Uber IPO: If Uber goes public in Q4019 or in Q1:2020, as Dara recently suggested, potential public investors will likely calculate the company’s enterprise value based on a blended average of 2020 and 2021 financial estimates. The most recent Uber disclosures imply a $11 billion to $12 billion annual revenue run rate. Assuming reasonable growth rates, we expect Uber’s net revenue to grow to between $25 billion and $30 billion in 2020–2021. Such an increase would imply a 25 percent four-year CAGR (compounded annual growth rate). Applying an EV/revenue multiple of 5.0x yields a valuation ranging between $125 billion and $150 billion.
So what does that mean for profitability? Peak EBITDA multiples for marketplaces have hovered around 50–60x for one-year forward estimates. Assuming investors are reluctant to pay beyond this range, we estimate EBITDA in the range of $2.5 billion to 3.0 billion in 2020, or overall EBITDA margins in the high single digits in 2020. That would rapidly approach 10 percent in 2021. Hitting these growth rates would be difficult for any company but even more so for the world’s highest valued unicorn.
Creating even more shareholder value: A sum-of-parts valuation analysis reveals significant upside potential: We believe Uber can unlock greater shareholder value if it divests or spins off its self-driving car business, as well as its operations in India and other parts of Southeast Asia. As highlighted in our recent report, we estimate that Uber’s non-core assets are worth more than $17 billion, inclouding Uber’s ownership stake in DiDi and Yandex, its Southeast Asia operations, and its self-driving car business. Assuming $1 billion in cash burn in 2018, Uber would still have $5 billion in cash on its balance sheet at the end of this year. With Uber’s $54 billion blended valuation after the SoftBank investment, we estimate that core business is currently worth $32 billion—nearly three times the company’s estimated net revenues for 2018.
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