Uber should steer clear of buybacks

All it took was 15 years for ride-hailing company Uber to report its first annual operating profit. Delayed gratification has been rewarded. For years, Uber shares traded below their listing price. Now, they are twice as high.

Last year, chief executive Dara Khosrowshahi claimed that Uber was a business that could produce substantial sums of cash. Given it had only just begun to report positive free cash flow, this was a bold claim. But annual free cash flow of $3.4bn in 2023, up from $390mn the previous year, suggests he may be right.

This does not mean that Uber should commit to what Khosrowshahi has called “buybacks etc”. For a company that reported more than $37bn in revenue, Uber’s free cash flow margin is about 9 per cent. Compare that with Meta, which recently announced plans for a mega buyback programme and its first dividend. There, free cash flow is equal to nearly a third of revenue. Note that free cash flow does not take into account stock-based compensation expense. At Uber, this is high at $1.9bn last year.

Take a look at the difference between Uber’s operating profit of $1.1bn and net income of $1.9bn and it is also clear that something beyond rides and food delivery is helping push up profits. Over time, Uber has sold off various parts of its business, including autonomous driving and Chinese ride-sharing, while retaining a stake in the acquiring companies. Revaluations of these equity investments amounted to $1.6bn last year. Of course, the problem with equity investment valuations is that they can fluctuate. Last year, the company reported a loss of $7bn.

But Uber can be congratulated for strict cost cutting and the strength of its ride-hailing business. Back in 2022, Khosrowshahi said the company had to make sure that its unit economics worked before pursuing growth. Even as the number of bookings for rides and food delivery have increased, admin costs have fallen. Last year, sales and marketing costs were equal to 12 per cent of revenue, down from 15 per cent in 2022. Adding advertising to food delivery has helped to nearly double adjusted earnings before interest, taxes, depreciation and amortisation in that part of the business. 

Meanwhile, Uber seems to be turning on the taps in its ride-hailing division. “Mobility” accounted for about half of gross bookings but three quarters of positive adjusted ebitda in the final quarter of the year. This indicates higher prices, a larger take rate and a more efficient business. The long-running fight with ride-hailing rivals that has kept prices down could be coming to an end.

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