I’ve always said in the past that sometimes one of the easiest investments to make is in a company that you consume all of the time.
I bought Uber in the low $70s and told you it was a $100 stock inside twelve months. Since then the company has reported its best quarter as a public company, announced a $14.8 billion acquisition, and signed a partnership aimed at a million drone deliveries a day.
Since that last coverage, UBER 0.00%↑ has seen its fair share of volatility but is trending higher than the S&P 500 SPY 0.00%↑.
When the price does nothing and the business gets better, the position gets more attractive. Therefore, I wanted to check whether the thesis actually improved or whether I am just telling myself it did. So far, it seems like UBER remains a compelling opportunity for investors that want to accumulate a high quality company at a discount.
Here is what changed since I bought, what I got wrong in my last write-up, and the new leg of the story that I think matters more than the robotaxi debate everyone is still having. I have achieved a $10,000 position and am working my way towards $20,000.
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Earnings Report Confirms Strength
Uber reported Q2 on August 5, and the number that matters most is gross bookings at $58.0 billion, up 22% and above the high end of the company’s own guidance. That is the fourth consecutive quarter above 20% growth. A business supposedly being disrupted into the ground is accelerating. Fundamentally, UBER is seeing more volume, higher margins, and expanding its recurring revenue from subscription revenue.
Look at where the growth came from. Delivery grew 25% and Freight grew 25%, both faster than Mobility at 20%. That matters for the bear case, because Delivery is the segment robotaxis do not touch, and it is now growing faster than the segment they supposedly threaten.
Trips rose 18% to 3.87 billion and monthly users rose 16% to 208 million, so the volume is coming from more people using the platform rather than from raising prices.
Its segment operating income crossed $1 billion in a quarter for the first time, landing at $1.055 billion, up 38% year over year. Its margin on bookings has gone up every single quarter for five quarters running, from 3.5% to 3.8%. Mobility is still the bigger profit pool at $2.215 billion and a 7.6% margin, and Delivery is the one improving faster. Freight, the segment nobody talks about, went from shrinking to growing 25% in constant currency, though it still lost $24 million.
Start with the merchant funded offers, up about 70%. Those are discounts the restaurants pay for rather than discounts Uber pays for. Uber gets the volume, the customer gets the deal, and somebody else absorbs the cost. That is the cleanest explanation I can give you for why Delivery margin has now risen five quarters in a row. The company is running bigger promotions and spending less of its own money doing it, which is what pricing power looks like when a platform gets large enough that merchants compete to be on it.
Then look at non-UberX trips, up about 110%. That is people trading up to Uber Black, Comfort and the premium tiers rather than taking the cheapest ride. Higher-priced trips at the same take rate mean more bookings and more profit per trip, and it is happening because membership perks make the upgrade feel free. There are also more than 400,000 participating merchants now, up about 50%, and 35-plus outside partners including Delta, Marriott, Disney+, PayPal and Qantas, most of whom fund their own perks in exchange for access to Uber's users.
Then there is the one I care about most as an income investor at heart. Trailing twelve-month free cash flow reached $10.1 billion, the first time it has crossed ten figures in company history. The five-quarter path is $8.5 billion, $8.7 billion, $9.8 billion, $9.8 billion, $10.1 billion, so this is a trend rather than one good quarter. Uber generated $2.8 billion of it in the quarter alone against a market cap that has not moved, which works out to roughly a 6.6% free cash flow yield on a business compounding bookings north of 20%.
The Trap I Warned You About, Running In Reverse
In my last write-up I told you to ignore Uber’s GAAP net income because it had absorbed a $1.5 billion non-cash markdown on the company’s equity investments. The headline looked like a collapse and the operating business underneath was fine. That was the right call and the stock has since proven it.
This quarter GAAP diluted EPS came in at $1.17 against $0.63 a year ago, and GAAP net income rose 77%, which looks spectacular on the headline. It also includes a $1.6 billion pre-tax benefit from revaluing those same equity investments.
If I told you to look through it when it made the numbers ugly, I have to tell you to look through it now that it makes them beautiful. The honest read on this quarter is the non-GAAP figure of $0.81, up 35%, and that number is strong enough that nobody needs the accounting help.
Put the last five quarters side by side and the point makes itself.
I am flagging this because it is exactly the kind of thing that gets quoted back at you in six months. If the stock re-rates and someone tells you GAAP earnings nearly doubled, you will know that a chunk of that was a mark-to-market entry on private company stakes rather than money Uber earned moving people and food around.
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