Uber's Focus On Cash Flow Is Transforming The Brand

Key Points

• Uber shares had taken on a recovery uptrend for the past year when the company's CEO took on a new focus to cut expenses and expand the underlying free cash flow generative power.
• Markets may undervalue Uber stock due to its perceived lack of A.I. exposure. However, these views may need to be corrected, as well as overseeing the massive improvements in record-free cash flow.
• Further developments in ancillary income strategies will bring more benefits for shareholders regarding valuation and growth, trends that today's analyst targets may not reflect.

Shares of Uber Technologies NYSE: UBER have been on a steady uptrend which started long before the technology stock mania pushed by NVIDIA NASDAQ: NVDA and its quarterly announcements toward the aggressive growth, undertaking the artificial intelligence space, considering that most technology companies today use one form of artificial intelligence or another, NVIDIA's message and results were enough to send the sector flying past averages.

However realistic - or speculative - these assumptions on the future of artificial intelligence may be, Uber's rise is founded on solid fundamental developments.

Uber's CEO realized the turning tides of the market as the FED began its path to hiking interest rates to combat the levels of rampant inflation felt throughout 2022. The executive released a memo with a specific message pointing to cost reduction, tighter hiring criteria, and an ultimate focus on improving the company's free cash flow situation.

Nearly a year after the memo, markets prefer businesses with a robust and sustainable base for free cash flow generation rather than a promise to grow at excessive levels.

Perception in the Markets

Uber reported its first quarter 2023 earnings results, which continued the company's year-long stock price rally. Posting a 19% yearly advance in gross bookings and earning a record free cash flow of $549 million, the CEO's focus on turning the Uber brand into one that could blow past any valuation expectations is working.

As most young technology companies are undergoing their 'growth stage,' Uber still cannot report a positive net income bottom line, despite a growingly positive free cash flow level. 

Where does this discrepancy come from? As these early-stage companies cannot produce enough sustainable net incomes to afford to pay higher salaries, which ultimately attract new and better talent to help support the growth of the underlying operations, management typically resorts to another form of compensation which may be more attractive to the kind of talent they are seeking.

In Uber's first quarter 2023 cash flow statement, investors can find a 'Stock-based compensation' expense for $470 million, a good chunk of the company's earning power. This expense is compensation packaged as stock options.

Some investors - and analysts - may be underestimating Uber's usage of artificial intelligence. Other companies using data more directly as their primary service, such as Salesforce NYSE: CRM, are commanding a richer price-to-sales valuation multiple of 6.4x, aided by this very assumption that the business will benefit a lot more from this artificial intelligence wave.

In comparison, Uber trades at a 2.8x price-to-sales ratio, which implies the broader markets may be underestimating how much Uber depends on large A.I. models to be able to deliver the network services they provide.

More in the Tank

Uber investors face more than a valuation gap, as the markets ultimately realize that the company is just as entrenched in the growth of A.I. enhancements as other companies. Additionally, on a fundamental basis, management is still engineering new ways to increase the company's free cash flow generative power. Initially, it may have been a shock.

Still, investors can expect the company to generate up to $1 billion from its new ventures in sponsoring advertisements. These ancillary venues to capitalize on revenue generation may be the start of something bigger.

An initial $1 billion target may pale compared to Uber's excess of $30 billion in revenue. However, it showcases the market share entrenchment that the company has achieved. Just as New York 'cabs' virtually held a monopoly by introducing television screens in every unit to increase their ancillary income, a similar move by Uber can be taken as a case study.

A resulting stance, which translates into a near monopoly position, may lead Uber into other pockets of additional revenue-generation niches.

These trends may be more evident by looking at Uber's expansion within its health business, which has now expanded its delivery selection by adding groceries and OTC (over-the-counter) products.

As more users value the convenience delivered by the platform, other industries may ask Uber to deliver their products rather than the company knocking on producers' doors to land a delivery agreement. Uber analyst ratings may fall on the conservative side of the spectrum, as they may not yet reflect the tailwinds at play, which will aid the CEO's mission to expand free cash flows.