UBER TECHNOLOGIES: Tech or Taxi
When your private driver goes public.
Counting dollars at Red Sea shores.
Assets trend until they range.
When diversity and inclusion make you contrarian.
PS: See ”4.1 MacroDozer Conviction” for a real summary.
1. Driving Forces
Last night, I was trying to recreate somewhere off the Red Sea shores with one of my besties here in Egypt, and while I was elaborating on the latest war stories on markets & more, she was visibly excited at first. Then she interrupted and asked, “Juri, where are you doing all this business and investing?” I told her in the US, in dollars. She looked at me in shock, almost fear, and asked, “Isn't that super risky and dangerous to have your money in the US?”
When nothing seems regular, and everything appears upside down, when the anxiety levels of your finest analysts seem more elevated than the VIX, and you realize your contra indicators are becoming the real signal, it is time to take a deep breath and go back into tech.
We examined hundreds of our most liquid securities and categorized them as uptrend, downtrend, and ranging. Then, we compared facts and fundamentals, stories and drama; UBER emerged as one of the winners for a directional mid-term bull play over the next two and a half months.
2. Background Information
With its Mobility division, Uber is the market leader in ridesharing in the US and many other parts of the world. The company is back at all-time highs after the lockdowns and is steadily expanding its fleet, most recently with vans, coaches and party buses, and adding booking services for travel and lifestyle.
Active Drivers and Riders at All-Time-Highs
Meanwhile, Uber has developed two other high-growth businesses: its Delivery service (Uber Eats), estimated to have the second-largest market share in the US, and its Freight service with the recently acquired Transplace.
Delivery is tapping into all sorts of alternative categories, such as the delivery of spirits, groceries, and pharmaceuticals.
Freight is building various partnerships with Volvo, Google's Waymo and Aurora for autonomous driving solutions.
Uber has an EV/sales multiple of 1.9x, with a high of 7.4x and a low of 1.3x. The three-year median is more than double the current value.
UBER: EV / Sales (NTM)
Sellers could dismiss the company as expensive when placing Uber in the passenger and ground transportation sector. However, considering Uber a tech company that facilitates communication and logistics between customers, drivers and businesses, buyers could praise the company as inexpensive.
Annual sales growth from 2021 to 2022 was 83%. For 2023 and 2024, consensus estimates assume moderate growth of 16% and 18%, which we consider conservative.
Strategic growth through well-considered acquisitions will likely continue; we regard the management team as competent.
Uber recently acquired the Australian car-sharing company Car Next Door and is already active in this area in the UK with Hiya. Renting out your car to make extra money could be a game changer for some people and an excellent opportunity for Uber to tap into the enormous car rental market.
2.3 Earnings Revisions & Profitability
For the coming quarter, earnings per share estimates have already been raised twice, and sales estimates sixteen times.
Management appears to have costs under control and is on track for profitability in 2023, despite having a Chief Diversity and Inclusion Officer.1
Operating Losses and Margins ($ In Millions)
Rant Around Chief Diversity and Inclusion Officers
Get this. The old Uber slogan "Everyone's Private Driver" has been upgraded:
“We Reimagine The Way The World Moves For The Better”
We usually try to avoid calling things French, but what a poofy tagline for a cutting-edge technology company. Our wild guess, they've hired a little too inclusive and diverse, forgetting about actual competence in the marketing department, allowing such a brew to seep out to the public and shape the face of the brand. We almost took Uber off our watch lists because of this, but that's just a side note.
Entering this trade is as painful as the slogan; that's probably why it will work. We could be the contra indicator or eventually call ourselves a contrarian like every value investor out there; yet another jarring fact.
Sometimes it helps to trade uniformity for brilliance.
3. Trade Execution
This time, we want to trade directionally and have created a put credit spread. You can also opt for a call debit spread; both setups have similar payoff metrics. The put credit spread leads to slightly faster returns if the stock price moves in the desired direction early but also comes with minimal assignment risk.
Should the stock price move in the wrong direction, we can sell a call credit spread against our position and convert it into a risk-defined straddle to increase the expected value and reduce a potential loss.
We are selling a bullish put credit spread, short 35 put, long 30 put, with Jun 16, 2023 maturity.
Break-even is at 32.50.
3.1 Trade Entry - Apr 4, 2023
The options chains are very liquid, so we were filled mid-price.
Total: 2.71 Credit.
3.2 Trade Risks
Price: We do not expect a rapid price movement to the downside. We are trading above the 200-day moving average, and plenty of support is below. Our put credit spread is risk-defined.
Volatility: Both legs are on the put side, and we are long and short volatility. Hence, neither a contraction nor an expansion in volatility would have a significant impact. However, a contraction would be beneficial since we are short credit and, therefore, slightly more short volatility.
Assignment: Since we sell an in-the-money put right at the start, there will be some assignment risk. However, the contract does not mature for 73 days, and the borrowing cost (0.25%) and the short interest (2.25%) are low.
4. Expected Value & Conviction
Let’s master our maths. The expected value (EV) indicates the expected profit (or loss) if you make the same trade indefinitely.
Expected Value = (Probability of Profit * Expected Profit) - (Probablity of Loss * Expected Loss)
Options brokers in efficient markets and with liquid option chains usually generate an EV of roughly zero at expiration, regardless of the option type or combination. This may differ if call vs put demand is skewed and when probabilities favour one side or the other for some reason.
When we analyze a situation, we want a positive EV after careful macro, micro and technical analysis, considering proactive trade management and early trade closure. In other words: We generate the edge by challenging the market probabilities and proactively managing the position.
4.1 MacroDozer Conviction
The market assigns a higher loss probability to this trade and generates a negative EV on equity of -10%2. We believe the likelihood of realizing half the expected profit with proactive trade management and early trade closure is 70%, with a positive EV on equity of 26%.
Uber is crisis-proven and used the lockdowns to increase efficiency and develop other high-growth businesses.
Earnings have been positively revised recently, and the company is on track for profitability in 2023.
Share price momentum looks positive and is trending upwards with serious support at 29.
5. Final Chapter
Expect updates on BrainDozers within 4-6 weeks. We use the exact headline ending with (+/- xy%) and mark the cover cartoon with a red CLOζED stamp. This way, the performance is easy to track.
We do not send BrainDozer updates via email unless you specifically ask for them here. We want to keep the flow of information short and sweet. However, you can still access a free preview of all updates on MacroDozer as soon as they are released.
My name is Juri von Randow. You can find me on the top banner to the right, MacroDozing like there's no tomorrow. (Email version only.)
Feel free to pass me on. Warm regards.
All BrainDozer articles are purely educational; they are not tailored to any particular individual or portfolio and do not constitute investment advice. Let us know if you are interested in implementing any of our ideas. Perhaps we can help or point you in the right direction.
We are all for equality of opportunity as opposed to equality of outcome, which usually fails to select the best talent.
Rough estimate. Precise calculations will be made for future BrainDozer articles.