Uber Technologies (UBER) IPO-ed in early May at $45 per share. Although the company is currently faced with steep losses from growth investment requirements and stiff competition from rivals like Lyft (LYFT) which squeeze its margins, it possesses an enormous growth runway that should eventually lead it to profitability. This leads us to try to determine how dividend growth investors should view the company from a long-term investment perspective: will it ever pay a dividend, and if so, how soon?
As a rideshare, meal preparation, and delivery service application developer and support company, Uber is an early mover in industries that are still in their infancy. This gives it a sizable competitive advantage over its competitors as it has had nearly a decade to build out and optimize its applications’ networks to include more than 700 cities in 63 countries. This gives it economies of scale as well as considerable consumer loyalty and data. Meanwhile, its younger and smaller competitors face even more daunting profitability challenges and are forced to try to persuade the left-overs (i.e., those not immediately attracted to the ride sharing platform who were captured by Lyft early on) to begin using their ride-sharing services more frequently, or at the very least focus solely on the less-desirable markets which Uber chose to pass over initially.
These competitive advantages should position it well for sustaining its impressive growth momentum over the long term as society continues its shift towards ride sharing over individual car ownership. The growth runway looks enormous when considering that the current active-platform consumers represent a mere 2% of the population in Uber’s current target 63 countries, not to mention the regions in which it hasn’t even started a service yet. All told, it is believed that there is a total addressable market of $12 trillion on an annual basis.
Uber’s optimistic outlook does not appear unreasonable given their current growth numbers. As of their Q1 2019 report, the company had grown its monthly active platform consumer network by 33% and its constant-currency gross bookings by 41% year-over-year and by 211% over the past two years.
Source: Investor Presentation
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As for risks, the most glaring one is the company’s consistent string of quarterly losses. In fact, over the past year, losses (as measured by negative adjusted EBITDA) have surged from $280 million in Q1 2018 to $869 million in Q1 2019. Granted, a lot of this negative EBITDA spends from growth related spending such as ads, customer promotions, driver growth and retention bonuses, and application development and enhancement. A look at their first quarter spending relative to revenues reveals this clearly as 54% of revenues were spent on growth-related investments. 36% of revenues was for marketing purposes and research and development expenses consumed 15% of revenues.
All that being considered, there is still the fact that Uber is losing large sums of money with no end in sight. As long as the company has a strong growth opportunity in front of it, has to battle stiff competition, and can raise the capital, profits will probably be minimal to non-existent as the company will undoubtedly pour all of its available resources into capitalizing on the tremendous opportunity in the ride share industry. This could potentially lead to overextension and/or overleveraging the business if markets do not turn out to be as lucrative as initially thought, so investors need to keep that in mind when looking at management growth projections.
Another item that puts a damper on the ambitious growth forecasts at Uber is the fact that organic monthly trip growth among active consumers has stalled at 5.5, up only 7.8% over the past two years and flat over the past four quarters. While the fact that it has not declined is not problematic, it does mean that many consumers do not lean on the rideshare business model for the majority of their transportation needs and still prefer other modes of transportation. While this could be an opportunity for Uber to change customer habits over the long term, it might also mean that there is limited appeal to the ride share model.
This brings us to the main question of whether Uber will ever pay a dividend, and if so, when?
Handicapping An Uber Dividend
First things first, Uber needs to consistently generate substantial free cash flow before it can ever consider taking that step, especially since dividends are typically viewed as a long-term regular commitment between a company’s management and its shareholders. Income investors, in particular, often by a stock for its dividend potential.
However, before it can achieve free cash flow, it will need to substantially decrease its current growth-related spending and the business will need to mature considerably. The only way this likely occurs is if Uber finds itself reaching the limits of its breakneck growth and decides to cut back on growth related investments. When considered in this light, we don’t see any likelihood of Uber generating the free cash flow necessary to pay out a dividend anytime soon given that they have such a large growth runway remaining and such a large free cash flow deficit already.
Another item to remember when considering whether or not to buy Uber for a potential future dividend is that, as a growth company, they trade at a very elevated valuation. Therefore, even if they were to cut a lot of their growth spending today and pay out all of their free cash flow in dividends to shareholders, they would still trade at an elevated free cash flow multiple which would make their dividend yield miniscule and, ultimately, unappealing to income investors.
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Uber is certainly a fascinating business that has achieved phenomenal growth in its near decade of existence. Furthermore, its disruptive application-driven rideshare model will likely change people’s lives for the better by saving on transportation costs, improving transportation efficiencies, reducing traffic congestion and accidents, and improving the air quality in major cities across the globe. Looking ahead, the company should continue to achieve its outstanding growth and may well generate juicy total returns for shareholders. For all of those reasons, Uber is quite worthy of consideration as a long-term investment.
That being said, given its current losses and growth and technology orientation, it will likely be a considerable amount of time before it achieves meaningful profitability, much less decide to open its purse strings and begin returning capital to shareholders. Therefore, income investors are bets served looking elsewhere until Uber’s business matures, its growth slows, and its valuation multiple contracts to the point where it can consider offering an attractive dividend yield to investors.