Uber Technologies Inc. (UBER) carries CFRA's highest investment ranking of 5-STARS, or Strong Buy; this rating reflects our view of opportunities in the Transportation as a Service (TaaS) arena and the potential for sustainable profitability, explains analyst Angelo Zino, in CFRA Research's flagship newsletter, The Outlook.
We believe the business models of TaaS providers now look more attractive and could lead to a period of sustained profitability in the not-too-distant future.
Essentially, a combination of higher volume as the pandemic subsides, growth in new adjacent markets, and prior moves to reduce fixed cost structures will allow UBER to be adjusted-EBITDA profitable in the second half of this year.
We believe commute and travel could drive upside for UBER. While we believe UBER will continue to benefit from higher volumes as life slowly returns to normal, we do see a permanent change in the workforce where a more hybrid model towards work at home is the reality.
Given this, commuter travel should continue to progressively improve through 2022. We believe UBER's better market share than peers in this category should make it a big beneficiary and note that these rides typically command higher prices.
This is also the case as it relates to travel, with a greater mix towards airport pick-ups driving a better pricing mix as well as margins. Although commercial travel has also been permanently changed, with the greater emergence of video capabilities, it will improve from current levels as we look out to 2023 and beyond.
We believe the circumstances over the last 18 months have proven that pricing power for the ridesharing space is much stronger than we had previously anticipated.
UBER's food delivery business is also stickier than we anticipated. Earlier this year, we questioned the ability of delivery volumes to hold up as the economy reopened and especially amid the historically slower summer months. However, in the U.S., delivery volumes went up over the summer. Basket sizes have grown and frequency has grown.
While the comps are getting tougher in a post pandemic landscape, consumer behavior with food delivery has become very sticky. In addition, a growing portion of the delivery business for UBER is engaging with new verticals. Still less than 10% of revenue, it includes anything non-food related but has led to several positives.
In addition to higher revenue potential from expanding the addressable market, a non-new vertical user has proven to increase their frequency of spend and seen improving retention rates.
Our 12-month target of $75 is based on our DCF analysis. We apply a WACC of about 8.5% and beta of 1.1, while utilizing a terminal growth value of 4%. We note ample liquidity, with $6.5 billion in cash and equity stakes worth $13.1 billion at the end of September. We see an annual FCF run rate of $5 billion-plus by 2025, which makes the company's current valuation appear extremely attractive for long-term investors if this can be achieved.
The biggest risk for ridesharing/food delivery platform providers is regulatory in nature. Any major unforeseen change to the regulatory environment, specifically in the U.S., could have severe negative consequences to the sustainability of their business models.
In late August, the California courts invalidated Proposition 22, calling the voter-approved law unconstitutional and unenforceable. While the court ruling was unexpected by many and won't change how the companies treat their drivers in the intermediate term, it does increase the likelihood that the gig economy model could be at risk in California.
In addition, other states (e.g., Massachusetts) are looking to upend the business model of the ridesharing/food delivery space, and a negative outcome in one state could have a trickle-down effect on others.