Published on June 7th, 2019 by Aristofanis Papadatos
Uber Technologies (UBER) had its widely-anticipated IPO in early May at a price of $45 per share. While the first earnings report after the IPO disappointed the investing community, investors should not focus on the short-term results, as the company is in the early phases of a multi-year growth trajectory.
Uber has a market capitalization of $75 billion. However, many large-cap tech stocks like Uber do not pay dividends to shareholders. Of the 500 stocks that comprise the S&P 500 Index, nearly 90 do not currently pay a dividend to shareholders. You can see the entire list of all S&P 500 stocks here.
Nevertheless, the big question for income-oriented investors is whether Uber will ever pay a dividend.
Business Overview
Uber develops and supports technology applications that enable independent providers of ridesharing, meal preparation, and delivery services to transact with riders and eaters worldwide. Its driver partners provide ridesharing through a wide range of vehicles while its restaurant and delivery partners provide meal preparation and delivery services under the Uber Eats brand.
Uber has spent almost a decade in order to build its extensive network and improve its applications. It is currently present in more than 700 cities in 63 countries and aims to offer exceptional returns to its shareholders thanks to a new secular trend, namely the shift of consumers away from car ownership, towards transportation-as-a-service. According to its major competitor Lyft (LYFT), approximately 300,000 people have sold their cars in order to switch to transportation-as-a-service.
Related: Will Lyft Ever Pay A Dividend?
In late May, Uber reported its financial results for the first quarter of 2019. The company increased its gross bookings by 34% on a reported basis and by 41% on a constant-currency basis over last year’s quarter and thus maintained its impressive growth streak.
Source: Investor Presentation
The number of monthly active platform consumers grew 33% over last year’s quarter, from 70 million to 93 million. This number has almost doubled in the last two years.
The image below confirms Uber is still in the early stages of a high-growth era.
Source: Investor Presentation
Management believes that there is tremendous growth potential ahead, as the current active-platform consumers represent only 2% of the population in the 63 countries in which Uber is present while the total addressable market is estimated to be a $12 trillion business on an annual basis.
While these facts and figures are certainly promising, there are some points of concern. For instance, the monthly trips per active consumer have remained flat, at 5.5, for four consecutive quarters.
Source: Investor Presentation
Moreover, the business is still far from becoming profitable. Uber has posted a loss in every single quarter, excluding special factors.
In addition, while its losses narrowed temporarily in early 2018, they have widened again in the last two quarters.
Source: Investor Presentation
There are two majors reasons behind the recurring losses. First of all, Uber needs to invest heavily in its business in order to convince consumers to change their driving habits. For instance, Uber has launched a rewards program across the U.S. to recognize and reward its most loyal consumers.
In addition, Uber has teamed up with vehicle subscription service Fair to reduce the cost of ownership for its drivers. If drivers complete about 70 Uber trips per week for a considerable period, they essentially get their car for free thanks to their payments from Uber. The other reason behind the recurring losses is the competition in this market, as Uber is competing against Lyft, with both companies posting losses quarter after quarter.
Uber’s management has clearly stated that 2019 will be an investing year for the company, thus implying that the company will post significant losses this year. It is also important to note that management has not provided any guidance regarding when the company will eventually become profitable. Given the absence of any guidance in this respect, it is safe to conclude that the company will not become profitable in the next few years.
Free Cash Flow Analysis
As dividends are funded directly from free cash flows, income-oriented investors should always check the free cash flow of their stocks. Uber has been posting negative free cash flows for an extended period, as it has been investing heavily in its business.
In the first quarter of this year, its cost of revenues climbed from 45% of revenues in last year’s quarter to 54% of revenues. Moreover, its marketing expenses increased from 26% of net revenues in last year’s quarter to 36%. While management expects the marketing expenses to decrease in the second quarter, it will certainly need to maintain this type of expense at high a level in order to maintain strong revenue growth. Furthermore, R&D expenses grew from 14% of net revenues in last year’s quarter to 15%.
All these expenses are necessary for Uber to remain in its growth trajectory but they result in negative free cash flows. As these costs will remain elevated for the foreseeable future, investors should not expect meaningful free cash flows for the foreseeable future.
Will Uber Ever Pay A Dividend?
As long as Uber keeps posting losses, investors should not expect a dividend from the company. Even when the company becomes profitable, it will not distribute a dividend right away. As Uber is a high-growth company, its stock will be trading at excessive price-to-earnings ratios when it becomes profitable. Consequently, even if the company considers distributing a portion of its earnings in dividends, those dividends will be negligible for the shareholders.
For instance, if Uber trades at a price-to-earnings ratio of 40 and decides to distribute 20% of its earnings in dividends, it will offer a 0.5% dividend yield to its shareholders. Such a low yield will be negligible for the shareholders of a high-growth stock.
Moreover, a dividend is a long-term commitment. Once a company initiates a dividend, its shareholders expect to receive a regular dividend quarter after quarter. In fact, they often expect to receive a growing dividend year after year. Therefore, a company needs to achieve consistent and reliable earnings for many years before it initiates a dividend. As Uber is very far from posting consistent profits for years, it is safe to assume that the company is very far from initiating a dividend.
As dividends are paramount for income-oriented investors, most investors in this category will reject the stock. However, the rest of investors should not dismiss the stock solely for the absence of a dividend. When a business has tremendous growth potential, management should focus exclusively on investing in the business in the best possible way and not be distracted with a meaningless dividend.
Final Thoughts
Uber is growing its revenues and its customer base at an impressive pace. As its monthly active consumers comprise only 2% of the population in the countries where Uber is present, the company has immense growth potential ahead.
On the other hand, Uber is still very far from becoming profitable. Even if it becomes profitable after many years, it will still need to invest heavily in its business, given the competition in its markets and the early stage of the secular trend of consumers shifting away from car ownership. As a result, investors should not expect a dividend from Uber for several more years.