Sector

TechnologyConsumer

Background

Mario Cibelli and Ram Parameswaran are Portfolio Managers at Marathon Partners and Octahedron Capital respectively. We cover the opportunity for Uber’s business segments, what deteriorating service means for the product, and what COVID may have revealed regarding Ubers’ financials.

Cover

Date

October 20, 2021

Episode Number

31

Uber Business Breakdown

Background / Overview

Uber, founded in 2009, has transformed from a black-car service to a global platform for ride-sharing, food delivery, and freight logistics. Headquartered in San Francisco, it operates in over 70 countries, leveraging a two-sided marketplace connecting riders and drivers. Its history is marked by rapid global expansion, aggressive capital raising ($25 billion across multiple rounds), and a controversial corporate culture under former CEO Travis Kalanick. Since going public in 2019, Uber has faced regulatory battles, labor disputes, and scrutiny over its unit economics. Despite these challenges, it remains a leader in ride-sharing and is expanding into delivery and freight, aiming to become a "delivery of everything" platform. The company employs thousands globally, with a significant operational focus on technology and data-driven logistics.

Ownership / Fundraising / Recent Valuation

Uber’s IPO in 2019 valued the company at approximately $82 billion. As of the podcast (circa 2021), its market capitalization is around $80-85 billion, significantly lower than competitors like DoorDash ($250 billion at the time). The company raised $25 billion in private capital, reflecting its capital-intensive growth strategy. No specific details on recent private equity ownership or transactions are provided, but the podcast highlights Uber’s transition from a capital consumer to a potential cash generator, suggesting a shift in investor perception.

Key Products / Services / Value Proposition

Uber operates three main segments:

1. Mobility (Ride-Sharing): Connects riders with drivers for local transportation. Its value lies in convenience, real-time pricing, and global scale. In 2019, it generated $50 billion in gross bookings with a 20-25% take rate.
2. Delivery (Uber Eats, Groceries): Facilitates food and grocery delivery, leveraging the same driver network. It scaled rapidly, reaching $50 billion in gross bookings by 2021, matching the rides business. Its value is in high-frequency use and cross-selling opportunities.
3. Freight: A B2B logistics platform for moving goods. It’s less synergistic with the core consumer business and considered a distraction by some analysts.

Segments and Revenue Model

Uber’s revenue model is based on a take rate (20-25% for rides, similar for delivery) applied to gross bookings. The mobility segment generates revenue by charging riders and paying drivers after deducting the take rate. Delivery follows a similar model, with additional fees for restaurants and consumers. Freight operates as a separate B2B model, but its contribution is minimal. The revenue model benefits from network effects, where increased scale improves service reliability and lowers customer acquisition costs.

Splits and Mix

• Channel Mix: Uber operates through its app, with no significant offline channels. The app’s ubiquity drives customer retention.
• Geographic Mix: International markets (e.g., UAE, France, Australia) contribute over 50% of revenue and grow faster than the US, with higher margins (up to 60% in some regions) due to lower driver acquisition and payout costs. The US lags, with 2021 volumes 20-30% below 2019 levels.
• Customer Mix: Primarily consumers for rides and delivery, with businesses as a smaller segment (e.g., corporate accounts). Freight targets B2B clients.
• Product Mix: Mobility and delivery each contribute roughly 50% of gross bookings, with freight negligible.
• End-Market Mix: Urban areas dominate, but delivery has expanded to suburban markets, unlike the urban-focused rides business.
• EBITDA Mix: Mobility generates $4-6 billion in segment EBITDA, delivery $5-7 billion, with freight marginally profitable. International markets drive higher margins.

Historical/Forecasted Mix Shifts:

• Delivery has grown from $14 billion in 2019 to $50 billion in 2021, overtaking rides during the pandemic.
• International markets are expected to continue outpacing the US, with some regions already exceeding 2019 levels.

KPIs

• Driver-to-Consumer Ratio: Targeted at 1:20 in the US, requiring ~15 million drivers at scale.
• Zeroes: Instances where no drivers are available, a key metric for service reliability.
• Wait Times and Pricing: Post-COVID, wait times and prices have increased, reflecting supply constraints.
• Gross Bookings Growth: Rides down 20-30% from 2019; delivery growing >50% annually.
• EBITDA Margins: Mobility at ~32%, delivery nearing breakeven internationally.

Headline Financials

• Revenue CAGR: ~20-25% expected from 2021-2024, driven by recovery in rides and delivery growth.
• EBITDA Growth: Projected to reach $9-11 billion by 2024, with mobility contributing $4-6 billion and delivery $5-7 billion.
• FCF: Expected to turn positive in 2022, with $6-10 billion cumulative FCF over 2022-2024 from rides alone.

Value Chain Position

Uber operates midstream in the transportation and logistics value chain, connecting supply (drivers) with demand (riders, restaurants, consumers). Its primary activities include platform development, driver acquisition, and dynamic pricing. The company is neither backward-integrated (e.g., owning vehicles) nor forward-integrated (e.g., owning restaurants). Its go-to-market strategy relies on app-based convenience, real-time data, and localized operations. Uber’s competitive advantage lies in its scale, data, and network effects, enabling efficient matching and pricing.

Customers and Suppliers

• Customers: Consumers (rides, delivery), restaurants (delivery), and businesses (freight). High-frequency users drive delivery revenue, while rides cater to occasional and business travelers.
• Suppliers: Drivers (gig workers), restaurants, and grocery providers. Drivers are the critical supply constraint, with acquisition costs varying by region (lower internationally).

Pricing

Uber uses dynamic pricing based on supply-demand dynamics, with average order values (AOVs) of $15 for rides and $15-20 for delivery. Pricing is influenced by:

• Mission-Criticality: Consumers tolerate higher prices for urgent rides (e.g., airport trips).
• Data-Driven Algorithms: Uber leverages vast movement data to optimize pricing, discerning intent by location, time, and destination.
• Price Elasticity: Some inelasticity exists, as consumers value reliability, but high surge pricing risks demand erosion.
• International Variance: Lower AOVs ($4-5) internationally, but higher margins due to lower costs.

Contracts are short-term, with no long-term commitments, enhancing flexibility but exposing Uber to supply volatility.

Bottoms-Up Drivers

Revenue Model & Drivers

Uber generates revenue through a take rate on gross bookings:

• Rides: $15 AOV, 20-25% take rate (~$3.50/ride). Volume driven by urban density, travel recovery, and driver availability. Growth factors include new cities, lower-priced ride options, and marketing.
• Delivery: $15-20 AOV, similar take rate. Volume driven by high-frequency food orders, grocery expansion, and cross-selling to ride users. Growth fueled by suburban penetration and acquisitions (e.g., Cornershop).
• Freight: Minimal revenue, with unclear pricing due to B2B complexity.

Revenue Mix:

• Product Mix: Delivery’s rapid growth has shifted mix to ~50% rides, 50% delivery.
• Geo Mix: International markets (>50%) grow faster, with higher margins.
• Organic Growth: Rides expected to grow 15% annually; delivery >50%.

Cost Structure & Drivers

• Variable Costs:
• Driver Payouts: ~75-80% of gross bookings, varying by region (lower internationally).
• Insurance: ~5% of gross bookings in the US ($0.75-1/ride).
• Ops/Support: 10% of revenue.
• Sales/Marketing: 15-20%, higher in competitive US markets.
• Fixed Costs:
• Corporate Overhead: ~$2 billion annually, covering R&D (15%), admin, and facilities.
• Contribution Margin: ~60% for乗り物、delivery nearing breakeven.
• Gross Margin: ~60% for rides, lower for delivery due to restaurant fees.
• EBITDA Margin: ~15% in the US, up to 60% in high-margin international markets.

Operating Leverage: Fixed costs (~$2 billion) are leveraged as revenue grows, driving EBITDA margin expansion (projected 30-35% by 2024).

FCF Drivers

• Net Income: Not explicitly provided, but EBITDA growth suggests improving profitability.
• Capex: Low, as Uber is asset-light (no vehicle ownership). Primarily tech infrastructure.
• NWC: Minimal, with short cash conversion cycles due to real-time payments.
• FCF: Expected to reach $2-4 billion by 2022, with $6-10 billion cumulative from rides over 2022-2024.

Capital Deployment

• M&A: Acquisitions like Postmates and Cornershop aimed at delivery expansion, but Postmates was criticized as poorly executed. Future M&A should focus on synergistic targets.
• Organic Investment: Preferred for reinvesting in engineering, product development, and talent to regain innovation edge.
• Share Buybacks/Dividends: Premature, given growth opportunities and talent challenges.

Market, Competitive Landscape, Strategy

Market Size and Growth

• Ride-Sharing: Global TAM estimated at $100-150 billion, growing ~10-15% annually, driven by urbanisation and gig economy adoption.
• Delivery: $200 billion TAM, growing >20%, fueled by e-commerce and suburban expansion.
• Freight: $4 trillion TAM, but Uber’s role is small and less strategic.

Growth Drivers:

• Volume: Urban density, travel recovery, and gig economy participation.
• Price: Dynamic pricing reflects supply-demand but risks alienating price-sensitive customers.

Market Structure

• Ride-Sharing: Oligopoly with Uber as the global leader (60-70% US market share, higher internationally, except China). Lyft holds 30-35% in the US, with smaller players in specific regions (e.g., Ola in India).
• Delivery: Fragmented, with DoorDash leading in the US, followed by Uber Eats. International markets are more consolidated around Uber and regional players (e.g., Delivery Hero).
• Freight: Highly fragmented, with Uber as a minor player.

Industry Traits:

• Regulatory scrutiny (labor laws, gig worker status).
• Labor constraints post-COVID.
• Cyclical demand tied to economic recovery.

Competitive Positioning

Uber’s scale, data, and network effects position it as the ride-sharing leader and a strong delivery player. It competes on convenience, reliability, and price, with a first-mover advantage in many markets. Risks include:

• Disintermediation: Autonomous vehicles (long-term threat, mitigated by Uber’s data moat).
• Talent Attrition: Losing engineers to competitors like DoorDash.

Market Share & Relative Growth

• Ride-Sharing: Uber’s volume growth (15% projected) outpaces the market (~10%), reinforcing its dominance.
• Delivery: Uber Eats trails DoorDash in the US but leads in 8/10 international markets. Growth (>50%) exceeds market averages (~20%).
• Freight: Negligible share, with unclear growth prospects.

Competitive Forces (Hamilton’s 7 Powers Analysis)

1. Economies of Scale: Uber’s global scale reduces driver acquisition and marketing costs, enabling higher returns than competitors. Its $2 billion fixed overhead is spread over $100 billion in bookings, driving margin expansion.
2. Network Effects: More drivers reduce wait times, attracting more riders, creating a self-reinforcing flywheel. This is strongest locally, where Uber dominates.
3. Branding: Uber’s brand is synonymous with ride-sharing, enhancing customer trust and willingness to pay.
4. Counter-Positioning: Uber’s asset-light model contrasts with traditional taxi fleets, making it hard for incumbents to compete without overhauling their business.
5. Cornered Resource: Uber’s local movement data is unmatched, providing pricing and operational advantages.
6. Process Power: Standardized playbooks for city launches ensure efficient scaling, unmatched by smaller competitors.
7. Switching Costs: Moderate, as consumers can use Lyft or other apps, but Uber’s app stickiness (saved preferences, payment integration) reduces churn.

Porter’s Five Forces:

• New Entrants: High barriers due to scale, network effects, and regulatory hurdles.
• Substitutes: Taxis, public transit, or personal vehicles are less convenient, with moderate switching costs.
• Supplier Power: Drivers have low bargaining power due to gig economy flexibility, but labor constraints increase costs.
• Buyer Power: Consumers are price-sensitive but value reliability, giving Uber pricing power in high-demand scenarios.
• Rivalry: Intense in delivery (vs. DoorDash), moderate in rides (vs. Lyft), with rational competition emerging.

Strategic Logic

• Capex: Minimal, as Uber is asset-light, focusing on tech and talent.
• Economies of Scale: Uber operates at minimum efficient scale (MES) in most markets, deterring new entrants. Diseconomies are avoided by focusing on core segments.
• Vertical Integration: Limited, as Uber avoids owning assets, preserving flexibility.
• Horizontal Integration: Delivery and grocery expansion leverages existing infrastructure, but freight is less synergistic.
• M&A: Should be disciplined, focusing on high-margin, scalable targets.
• Talent Investment: Critical to regaining product innovation edge, countering attrition to competitors.

Unique Business Model Dynamics

Uber’s business model is distinguished by:

• Network Effects at Local Scale: Unlike global platforms like Amazon, Uber’s flywheel operates city-by-city, requiring localized driver density to minimize wait times. This creates a high barrier to entry, as competitors must replicate scale in each market.
• Data Moat: Uber’s unparalleled dataset on local movements enables dynamic pricing, demand forecasting, and operational efficiency. This moat is a long-term advantage, even against autonomous vehicles.
• Cross-Selling Synergies: The consumer business (rides, delivery) benefits from shared customer acquisition costs. A rider acquired for mobility is a near-free acquisition for delivery, enhancing profitability.
• Asset-Light Model: By not owning vehicles or restaurants, Uber avoids capital intensity, enabling rapid scaling and flexibility. However, this exposes it to supply constraints (e.g., driver shortages).
• International Margin Advantage: Higher margins in markets like the UAE (60%) due to lower driver costs highlight Uber’s ability to exploit regional cost structures, a dynamic less pronounced in competitors like Lyft.
• Advertising Potential: Emerging ad revenue from Uber Eats (sponsored placements) and potential in-app ride ads could add high-margin income, a unique upside not fully priced into valuations.
• Talent Challenges: Unlike traditional tech giants, Uber’s loss of engineering talent threatens long-term innovation, a critical dynamic for sustaining its edge.

Critical Insights from Interviewees

• Mario’s Focus on Mobility: Mario views the mobility business as a near-certain cash cow, capable of justifying Uber’s valuation alone. His skepticism of freight and cautious optimism on delivery highlight a disciplined focus on high-return segments.
• Ram’s Long-Term Vision: Ram sees Uber as a “delivery of everything” platform, with delivery’s rapid growth and advertising potential as underappreciated drivers. His concern about talent attrition is a forward-looking risk not widely discussed.
• Supply-Demand Imbalance: Both acknowledge post-COVID supply constraints (driver shortages) driving higher prices and wait times, but view this as temporary, with no evidence that pre-COVID service levels are unattainable.
• Capital Allocation Debate: Mario’s openness to capital return (buybacks, dividends) contrasts with Ram’s insistence on reinvesting in talent and product, reflecting differing priorities for a cash-generating Uber.

Valuation Overview

Uber’s $80-85 billion market cap (2021) is modest compared to DoorDash ($250 billion) and May 21 ($250 billion), despite projected $10 billion in FCF over three years. Assuming a 10x EV/EBITDA multiple on 2024 EBITDA ($9-11 billion), Uber could be valued at $90-110 billion, suggesting upside from current levels. However, talent risks and delivery competition warrant caution. The mobility business alone could support a significant portion of the current valuation, with delivery and advertising as potential upside.

Conclusion

Uber’s business model thrives on network effects, data, and scale, positioning it as a leader in ride-sharing and a strong contender in delivery. Its asset-light approach and international margin advantages are unique strengths, but talent attrition and freight distractions pose risks. The mobility segment’s cash generation and delivery’s growth trajectory make Uber a compelling investment, provided management prioritizes innovation and disciplined capital allocation.