Uber’s Unappreciated Resilience

Dara Khosrowshahi, Uber’s CEO, has recently taken to calling Uber an “all-weather” company. That might leave some analysts and investors scratching their heads. Uber’s mobility business nearly collapsed in April 2020 with global gross bookings down 80% year-over-year. A superficial glance at Uber’s performance during that recession – the only U.S. recession Uber has operated through since its founding in 2009 – could lead one to conclude that Uber is a highly cyclical consumer discretionary business poised to struggle during economic downturns. However, most of the adverse impacts on Uber’s business from the pandemic were the result of changes in behavior due to health considerations, not economic ones. A deeper examination of Uber’s business reveals what Dara means by the “all-weather” comment. There are many reasons to believe Uber’s business will prove highly resilient to fluctuations in economic activity.

For starters, demand for the services Uber provides should be relatively stable over time. Both the mobility and delivery services Uber provides are relatively low-priced and serve everyday use cases. In the third quarter of 2022, Uber’s average gross booking per trip was $14.91, and the average monthly active platform consumer used the service just over five times per month, a level of engagement that has proven remarkably stable over time. Many of the uses cases for Uber’s mobility and delivery services are non-discretionary to at least some degree. People use Uber to get to and from work and to order meals when they don’t have time to cook or dine out. Moreover, Uber’s customer base skews toward the higher end of the income distribution. According to a Pew Research Center survey conducted in fall 2018, individuals whose annual household income is $75,000 or more are roughly twice as likely as those earnings less than $30,000 to have used ride-hailing services (53% vs. 24%).1 Higher income individuals are less likely to face liquidity constraints during a recession that force them to cut spending, especially on low-priced, everyday services. Additionally, demand for Uber’s services may benefit from a trading down effect during a recession. Ordering a meal for delivery on Uber is generally cheaper than going out to a restaurant. Similarly, using Uber as a component in a multi-modal approach to transportation can be cheaper than owning a car, especially in a high cost urban environment or if the car is a second car for the household. All these factors point to stable demand for Uber’s services over time.

Figure 1: Trend in Uber’s Trips & Monthly Trips per Monthly Average Platform Customer

Data on historical consumer spending on the types of mobility services that Uber provides supports this view. The U.S. Bureau of Economic Analysis provides data on personal consumption expenditures for taxicab & ride-hailing (“mobility PCE”) services going back to 1975. Mobility PCE has historically declined only modestly and briefly during recessions. For example, during and after the global financial crisis the year-over-year change in trailing twelve month mobility PCE hit a low of -2.7% in the second quarter of 2008, improved to roughly flat by the first quarter of 2009, and returned to growth by the fourth quarter of 2010. Keep in mind, that recession was far more severe than a typical recession and was also geographically centered on the largest taxi market in the U.S., New York City.

Figure 2: Year-over-Year Change in Consumer Spending on Taxicab & Ride-Sharing Services

Data on passenger miles traveled in the U.S. from the Department of Transportation tell a similar story of resilient demand for mobility services. Aside from the significant swings in 1994 and 2007 that seem to be due to artefacts in the data, passenger miles traveled by car in the U.S. do not change all that much from year-to-year, ranging from flat to up low single digit percentages. An airport trip is probably the mobility use case with the most economically sensitive demand. Even there, demand appears to be relatively stable through periods of economic recession. Passenger miles traveled on U.S. air carriers declined 4.1% in 2008 and 5.2% in 2009 for a cumulative decline during the Global Financial Crisis of 9.1%. If demand for the most economically sensitive mobility use case declines by less than 10% during a once-in-a-century economic downturn, demand for mobility services across all use cases should prove quite durable through a more typical recession.

Figure 3: Year-over-Year Change in U.S. Passenger Miles Traveled

An even brighter picture emerges from the data relevant to delivery services. The U.S. Bureau of Economic Analysis provides historical data on personal consumption expenditures for purchased meals and beverages (“purchased meals PCE”). For the period from the fourth quarter of 1976 through the fourth quarter of 2019, the year-over-year change in trailing twelve month purchased meals PCE turned negative only once. In the wake of the global financial crisis, the year-over-year change in TTM purchased meals PCE hit a low of -0.9% in the fourth quarter of 2009. In the recession that followed the bursting of the dot-com bubble, the year-over-year change in in trailing twelve months purchased meals PCE merely softened from an average of +6.1% for 1999 through 2000 to a nadir of +3.8% in the first quarter of 2002. That points to highly resilient demand for delivery services during a typical recession.

Figure 4: Year-over-Year Change in Consumer Spending on Purchased Meals & Beverages

The resilience of Uber’s business is also bolstered by the diversity of its sources of demand. At the highest level, Uber serves demand for two primary types of services, mobility and delivery. As the pandemic illustrated in dramatic fashion, demand for mobility services and demand for delivery services are anything but perfectly correlated.

Figure 5: Trend in Uber’s Weekly Gross Bookings by Service Since the Onset of the Pandemic

Within each type of service, Uber caters to many different use cases across a variety of products and price points and serves numerous customer segments each composed of millions of individual users. Demand for Uber’s services is also diversified with respect to geographic markets. Uber operates in more than 10,000 cities across 72 countries around the world. As stable as the demand for one of Uber’s services for a particular use case in a given market may be, the overall demand for Uber’s services should be far more so due to the high diversity of its sources.

Uber benefits from limited dependencies more broadly. Not only is no individual customer significant to Uber, no individual driver, courier or merchant is either. Even the largest merchants on Uber’s delivery platform account for far less than 10% of Uber’s overall delivery business, and most merchants on the platform are individually insignificant. While Uber is dependent on regulators for fair and forward-thinking treatment, Uber is generally regulated most meaningfully at the local and state levels. Given the geographic diversity of Uber’s operations – more than 10,000 cities in 72 countries – no single regulator has so much sway over Uber’s business that it could unilaterally deliver an unbearable blow to the company. Uber has been able to absorb unfavorable regulatory developments and court rulings in critical markets like the U.K. without obvious disruption to its aggregate financial performance, for example. Uber’s limited dependencies insulate the company from sudden, meaningful disruptions to its business due to the actions of customers, suppliers, regulators and other third parties and thereby enhance the resilience of its business.

While nearly all of Uber’s revenue is reoccurring in that it is related to everyday mobility and delivery needs, a notable and increasing portion of it is explicitly recurring. Uber launched its flagship membership program, Uber One, in November 2021. Uber One members pay $9.99 per month or an annual price of $99.99 and receive a discount on rides and unlimited $0 delivery fee on orders above a certain value threshold, among other benefits. Currently offered in seven markets, Uber One recently surpassed 10 million members, or just under 10% of monthly active platform consumers, and accounts for 27% of total gross bookings. The recurring revenue from Uber One should prove even more stable over time than Uber’s traditional revenue streams. Moreover, the benefit to the stability of profits should be even greater than to the stability of revenue. Most of the profit Uber earns from an Uber One member comes from the membership fee. To the extent Uber does a good job of retaining Uber One members during a recession, the impact on Uber’s profits from any decline in usage by Uber One members during a recession should be minimal. The resilience of Uber’s business already benefits from the recurring nature of Uber One membership fees, and that benefit will only increase over time as the number of Uber One members grows in existing and new markets.

Figure 6: Summary of Uber One Membership Program

Uber’s highly flexible operations and cost structure further add to its resilience. Uber is essentially a marketplace for mobility and delivery services. As demand and supply fluctuate, Uber’s algorithms quickly adjust pricing and incentives to bring the various sides of its marketplaces into value-maximizing balance. During a recession, demand should soften and supply should increase. Driver and courier compensation would fall, user-facing prices would decline and incentives would shift from the supply side of the marketplace to the demand side. Due to the fall in driver and courier costs, Uber would have the option of either expanding its take rate or investing in new user acquisition and existing user engagement. Lower user-facing prices and a shift in incentives from the supply side to the demand side would mitigate the impact of softer demand on trip volumes and Uber’s profits. This adjustment would happen seamlessly due to the sophistication of Uber’s platform and the independent contractor status of its drivers and couriers. Furthermore, more than two-thirds of Uber’s cost structure is variable. If a trip doesn’t happen, neither do expenses such as insurance, payment processing, and customer/driver/courier support, among others. That is why Uber was able to maintain the profitability of its mobility business on an adjusted EBITDA basis throughout the pandemic. In the second quarter of 2020, Uber’s mobility gross bookings declined a shocking 73% year-over-year on a constant currency basis, yet the company was remarkably still able to deliver $50 million of adjusted EBITDA from the segment for the quarter. Very few businesses could withstand a decline in demand anywhere near that magnitude and still remain profitable. Simply put, Uber has incredibly flexible operations that allow it to adapt quickly and well to changing market conditions.

Figure 7: Early Pandemic Trend in Uber’s Mobility Gross Bookings & Adjusted EBITDA

Last but not least, Uber is conservatively financed. The $9.4 billion of debt on Uber’s balance sheet represents less than 3.0x the consensus Adjusted EBITDA forecast for 2023 and less than 2.0x Uber’s Adjusted EBITDA target for 2024. Net of $4.4 billion of cash and an additional $5.0 billion of equity investments at carrying value, Uber is essentially debt-free. Uber’s liquidity position is strong and improving. In addition to the cash on its balance sheet, Uber has more than $2.0 billion of availability on committed credit facilities. None of Uber’s debt matures within the next two and a half years, and over half of it matures more than four years from now. Uber recently turned cash flow positive and should begin to generate billions of dollars of free cash flow annually in the near future. Uber is also well insulated from recent increases in interest rates. The vast majority of Uber’s debt is fixed rate senior notes. Uber’s balance sheet was able to weather the crushing blow dealt to its mobility business by the pandemic; there should be no question about how it will fare during a more typical economic recession.

The odds are good that the U.S. and many other economies around the world will fall into a recession in 2023. No one can say how severe or long lasting any recession will be, but any recession would almost certainly be a more typical economic recession than the one induced by the COVID pandemic. A more typical recession will be an opportunity for Uber to earn its “all-weather” moniker. Uber seems poised to perform better through a recession than most analysts and investors fear, and should come out of one more fully appreciated and more highly valued by analysts and investors than it currently is.

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