Uber: Plummeted 10%, what mistake did the honor student make?

On the evening of October 3rd, before the U.S. stock market opened, "the international version of Didi" $Uber Tech(UBER.US) announced its financial report for the third quarter of 2024. After the earnings release, the company's stock price plummeted by 10%. At first glance, the main issue seems to stem from the slowdown in the growth rate of order amounts in its core ride-hailing business. Dolphin Investment Research provided a preliminary explanation in last night's first take. In this detailed commentary, we will further explore whether there are other flaws, with the key points as follows:

1. The most important order amount indicator (Gross booking) for the Mobility business showed that order amounts increased by 17% year-on-year this quarter, slowing down by about 5.6 percentage points compared to the previous quarter. After excluding the impact of exchange rates, it also declined by about 3 percentage points. The unexpected slowdown in ride-hailing business resulted in actual order amounts being approximately 1.8% lower than expected, which is the biggest flaw in Uber's financial report this quarter. Its main competitor Lyft's launch of the "Price Lock" low-price ride-hailing product may have put some pressure on Uber.

However, on the other pillar, Uber Eats' delivery business saw order amounts increase by 16% year-on-year this quarter, maintaining the growth rate compared to the previous quarter without any slowdown, slightly exceeding market expectations, and there are no flaws in this area.

In terms of price and volume driving factors, although the average order value is still declining year-on-year, the decline has narrowed to 0.7%. The year-on-year growth rate of core business order volume slowed from 20% to 17%, indicating that the weakening of order volume is the main reason for the slowdown in growth. Further analysis shows that monthly active users increased by 13% quarter-on-quarter, remaining basically stable. The average monthly active user placed orders 17.8 times per quarter, which, although still showing a quarter-on-quarter increase, has seen a significant year-on-year growth rate drop of nearly 3 percentage points due to a high base last year. Therefore, the initial signs of fatigue in order frequency growth are the real underlying cause behind all the disappointing indicators mentioned above.

2. From a revenue perspective, although the order amount growth in the ride-hailing business slightly fell short of expectations, the GAAP revenue across various businesses actually accelerated slightly and exceeded expectations, which seems positive. However, this is influenced by Uber's continuous adjustments to its revenue recognition criteria, and after excluding these impacts, the actual revenue growth still has some flaws.

On a comparable basis, the take rate for the ride-hailing business decreased by 0.4 percentage points quarter-on-quarter, leading to a nearly 7 percentage point decline in the comparable revenue growth rate for the ride-hailing business. Moreover, the decline in the take rate quarter-on-quarter suggests that Uber may indeed be affected by Lyft's "price war."

The adjusted monetization rate of the takeaway business this quarter has slightly decreased by 0.1 percentage points quarter-on-quarter, which is somewhat unexpected given that Uber Eats is currently promoting advertising monetization. Therefore, the adjusted revenue growth rate has also slightly slowed down by 2.6 percentage points, but fortunately, the extent is not large.

3. However, another reversal is that although the order volume growth has slowed down, the adjusted comparable monetization rates have also decreased quarter-on-quarter. But the gross profit for this quarter has increased by 20.8% year-on-year, significantly accelerating by 7.4 percentage points compared to the previous quarter. Logically, changes in revenue recognition should not have much impact on gross profit, and the growth in gross profit is "real and reliable." It can be seen that the decline in Uber's adjusted monetization rate has not affected the company's profitability; even though it feels some competitive pressure, the company has the ability to pass it down to drivers or merchants.

4. From the expense perspective, the company's trend of cost control and efficiency improvement is still ongoing. The absolute expenditure on management and R&D, which is more internal, is still declining year-on-year. While the absolute expenditure on marketing and operational costs, which are more related to operational scale, has slightly increased year-on-year, the expense ratio is still contracting quarter-on-quarter under higher gross profit growth. Overall, the proportion of all operating expenses to gross profit has decreased by about 5 percentage points quarter-on-quarter to 76%.

Therefore, gross profit continues to grow rapidly, and the effects of cost control and efficiency improvement are still being released. The company's adjusted operating profit reached 1.51 billion, with a year-on-year growth rate still as high as 70%. More notably, the adjusted EBITDA for this quarter was 1.69 billion, slightly exceeding expectations by 0.04 billion, with a year-on-year growth of 55%.

In detail, although the adjusted monetization rates for ride-hailing and takeaway businesses have decreased, the profit margins of adj. EBITDA per order have actually increased by 0.4 percentage points and 0.2 percentage points respectively. The narrative of significant profit release is "unscathed."

5. Looking ahead to the fourth quarter, the company guides the median total order amount to be 43.5 billion, slightly below the expected average of 43.7 billion. The median guidance corresponds to a year-on-year growth rate of 15.8%, roughly flat with this quarter, slightly down by 0.3 percentage points. The guidance also includes a 2% adverse impact from exchange rates, so it is not considered weak. From a profit perspective, the median adj. EBITDA guidance is between 1.83 billion, also slightly below the expected 1.84 billion. However, the difference can basically be ignored, with a corresponding year-on-year growth rate still reaching over 40%.

Dolphin Investment Research Perspective:

After a more detailed interpretation, we can see that aside from the main flaw of the ride-hailing order amount growth slowing down beyond expectations, we can also identify some additional issues, including: ① The slowdown in growth is mainly due to a decline in volume rather than price, which is relatively a more serious issue, as changes in volume may have more trend-like characteristics; ② Under comparable standards, the monetization rates for ride-hailing and takeaway businesses have actually decreased, reflecting that the company may indeed be feeling more competitive pressure (such as from Lyft)

However, there are also highlights. First, the gross profit is still growing rapidly, demonstrating Uber's strong bargaining power. Even though the monetization rate is declining, it has sufficient capability to reduce costs (passed down to drivers or merchants) to ensure its own capacity. This is also true for domestic players like Didi and Meituan; even with slowing growth and declining per capita consumption, the platform's profits continue to rise.

Therefore, it cannot be denied that Uber has indeed experienced a slowdown in its ride-hailing business, and competitive pressure may have marginally increased. However, the company's overall profit is still growing at a high double-digit rate, remaining "unscathed," and the platform's profitability has not felt any pressure.

In other words, Uber's biggest problem remains that the market's expectations and pricing are overly optimistic under a consistently bullish outlook. Even after a significant drop, the current market value corresponds to a 26-year net profit with a PE ratio of over 20x. Under overly optimistic expectations, the market anticipates an "A student" score of over 80 points, making a score of "60-70 points" a failure. In summary, it is still a matter of good companies needing good prices. Although we believe that Uber's medium to long-term barriers and profit margins have not fundamentally changed, waiting for a better price is the undefeated strategy.

The following is a detailed interpretation of this quarter's financial report:

1. Ride-hailing business unexpectedly slows down, with weak order frequency growth as the fundamental cause

The order amount indicator (Gross booking), which most reflects the real operating conditions, shows that in the ride-hailing (Mobility) business, this quarter's order amount is approximately 21 billion, a year-on-year increase of 17%, slowing down by about 5.6 percentage points compared to the previous quarter. However, after excluding the impact of exchange rates, the actual growth rate has declined by about 3 percentage points, which is a slightly smaller margin. The unexpected slowdown in the ride-hailing business resulted in the actual order amount being about 1.8% lower than expected, which is the biggest flaw in Uber's financial report this quarter.

However, Dolphin Investment Research has learned that some investment banks had predicted the potential slowdown in ride-hailing business growth based on high-frequency data. Additionally, its main competitor Lyft's launch of the "Price Lock" low-price ride-hailing product may have indeed put some pressure on Uber.

Meanwhile, the Uber Eats delivery business had an order amount of approximately 18.7 billion this quarter, a year-on-year increase of 16%, which is basically flat compared to the previous quarter's growth rate and thus slightly exceeds market expectations. This also aligns with certain high-frequency data showing that delivery demand is relatively more resilient.

Due to the unexpected slowdown in the ride-hailing business, the combined growth rate of the core business's overall order amount (delivery + ride-hailing) also slowed from about 20% in the previous quarter to 17%, slightly below market expectations by about 0.7%

In terms of price and volume driving factors, the year-on-year growth rate of core business order volume (takeout + ride-hailing) slowed from 20% to 17%. As for the average order value, although it is still declining year-on-year, the decline has narrowed to 0.7%. It is evident that the issue lies in the weakening of order volume or demand. Rather than being affected by exchange rate factors or changes in price due to an increase in the proportion of overseas business.

Further examining the reasons for the decline in order volume growth, this season's monthly active users achieved a quarter-on-quarter increase of 13%, showing no significant slowdown compared to the previous season. Meanwhile, the average monthly active user places orders 17.8 times per season, which, although still increasing quarter-on-quarter, has seen a significant year-on-year growth rate drop of nearly 3 percentage points due to a high base last year. Therefore, the weakening growth in per capita order frequency is the real underlying cause behind all the disappointing indicators mentioned above.

2. Monetization rate appears to rise but actually falls; is competition pressure truly felt?

Due to legal reasons, some of Uber's operations in regions like the UK and Canada have shifted from a platform model to a self-operated model, leading to a change in confirmed revenue from net commission to total payment amount, which has resulted in inflated revenue. Therefore, the following analysis mostly excludes the impact of accounting changes.

From a revenue perspective, although the gross booking for ride-hailing slightly missed expectations, the GAAP-based revenue for ride-hailing actually accelerated slightly and exceeded expectations, with the take rate also increasing slightly. However, excluding the impact of model changes, the comparable take rate decreased by 0.4 percentage points quarter-on-quarter, thus the adjusted comparable revenue growth rate for ride-hailing has decreased by nearly 7 percentage points, which is quite significant. The decline in the take rate quarter-on-quarter suggests that Uber may indeed be affected by Lyft's "price war," leading to a reduction in monetization rate to cope with competitive pressure.

The monetization rate of the adjusted takeaway business this quarter has slightly decreased by 0.1 percentage points compared to the previous quarter, which was somewhat unexpected by Dolphin Investment Research. Logically, with the development of Uber Eats' advertising business, the monetization rate should have a continuous upward trend. Therefore, the revenue growth rate has also slightly slowed down by 2.6 percentage points, but it is still within an acceptable range.

As for Uber's freight business, the revenue this quarter is approximately 1.31 billion yuan, a slight increase of 2% year-on-year. Although it has finally exited the contraction phase, there is still almost no growth under a low base, indicating that this business still shows no significant improvement and does not require much attention.

Summing up all businesses, Uber's total revenue this quarter is approximately 11.2 billion USD. Nominally, this is higher than market expectations, and the growth rate has increased by 4 percentage points compared to the previous quarter to 20%. However, as mentioned above, if we exclude the impact of the change in accounting standards, the actual comparable revenue growth rate has indeed experienced a certain decline.

3. The monetization rate has slightly decreased, but the gross profit margin has still improved, and the company's bargaining power remains excellent.

Due to the instability and continuous changes in the company's revenue accounting standards, the gross profit/revenue ratio indicator is not entirely comparable. Therefore, we also mainly focus on the growth of gross profit. This quarter, gross profit has increased by 20.8% year-on-year, significantly accelerating by 7.4 percentage points compared to the previous quarter. Although it can be seen from the above that the adjustment of revenue accounting standards this quarter has exaggerated the revenue growth under GAAP standards. Logically, the adjustment of revenue accounting standards should not have a significant impact on gross profit, so from the perspective of gross profit, the decline in Uber's adjusted monetization rate has not affected the company's profitability, even though there is pressure that has been transmitted downwards to drivers or merchants.

4. Cost Control and Efficiency Improvement Continue, Profit Release Remains Intact

From the perspective of expenses, the trend of cost control and efficiency improvement in the company continues. The absolute amount of spending on management and R&D, which is more internally focused, is still declining year-on-year. Although the absolute spending on marketing and operational expenses, which are more correlated with operational scale, has seen a slight year-on-year increase, the expense ratio is still contracting quarter-on-quarter under higher gross profit growth.

Overall, the proportion of all operating expenses to gross profit has decreased by about 5 percentage points quarter-on-quarter to 76%.

As gross profit continues to grow rapidly, the effects of cost control and efficiency improvement are also being released at a high speed. The company's adjusted operating profit reached 1.51 billion, with a year-on-year growth rate still as high as 70%. Therefore, although there are indeed some signs of weakening from a growth perspective, the trend of rapid profit release has not changed.

The company's more focused adjusted EBITDA for this quarter was 1.69 billion, slightly exceeding expectations by 40 million, with a year-on-year growth of 55%. Looking at the breakdown of various business segments :

1) The adjusted EBITDA for the ride-hailing business was 1.68 billion, nearly 50 million higher than expected, but although the adjusted take rate has decreased, the profit as a proportion of gross bookings has still increased by 0.4 percentage points quarter-on-quarter to 8%.

2) The food delivery business achieved an adjusted EBITDA of 630 million, with the profit margin as a proportion of gross bookings also increasing by 0.2 percentage points, slightly better than expected;

3) As for the freight business, there was a small loss of 19 million this quarter, which is not significant;

4) The loss at the group headquarters level was 610 million, slightly widening quarter-on-quarter.

Overall, it can be seen that although the growth of the ride-hailing business has slowed and the adjusted monetization rate has decreased, the profit margins for both ride-hailing and food delivery are still improving. The story of significant profit release remains "intact."