Few businesses have disrupted entire industries like Uber Technologies (UBER -0.70%) has done to the taxi market. The company has become so successful and dominant in its 15-year history that its name is now used as a verb, indicating strong consumer mindshare.
This transportation-as-a-service stock has had an extremely volatile year, now trading 29% below its peak from just two months ago (as of Dec. 11). The dip might incentivize investors to buy, but it's important to know these three things about Uber first.
1. Earning fees
Uber connects drivers with riders in more than 10,000 cities across the globe. It also allows consumers to order items from various stores and restaurants for delivery using those drivers. The company is a perfect example of how technology can provide a valuable service for the world by simply connecting different stakeholders in a way that hasn't been done before.
It generates revenue by collecting a certain percentage of fees from rides and deliveries that occur on its platform. In the third quarter of 2024, the company reported $11.2 billion in revenue on just shy of $41 billion in gross booking value (GBV). The big difference in GBV and revenue is the money that goes to drivers, the largest expense of rides and deliveries.
Uber runs what's known as a platform business model. Other well-known and successful companies, like Amazon, Visa, and Airbnb, all have similarities to Uber in that they make some of their money from earning fees from the activity that occurs on their platforms.
2. Growth and profits
Uber's growth over the years has been exceptional. Its Q3 2024 revenue was almost triple the amount in the same period of 2019. This was driven by substantially more monthly active users and GBV.
The company has now reached a scale that allows it to generate positive earnings, which is what every shareholder wants to see after years of losing money. Uber posted $2 billion in operating income through the first nine months of 2024, up more than fourfold from the same period in 2023.
Uber has also produced a whopping $5.2 billion of free cash flow in three quarters this year, which it's partly using to repurchase outstanding shares.
3. Economic moat
Companies that possess an economic moat have certain traits that give them the ability to fend off competitive forces trying to encroach on their territory. As a huge platform, Uber certainly benefits from network effects. Having more drivers and restaurants available makes the service more valuable to consumers, and vice versa.
The fact that Uber has a moat that stems from network effects might make you believe the business isn't prone to disruption. However, that's not necessarily the case. Investors need to keep an eye on one key risk.
The prospect of fully autonomous vehicles is one terminal downside that Uber shareholders must be mindful of. Whatever company is able to bring this capability to commercialization could theoretically launch its own ride-hailing app to broad acceptance. But with no need for drivers, the service should be cheaper than what Uber currently offers.
Tesla, one of the leaders in the driverless tech wars, held its robotaxi event on Oct. 10. After immediately driving Uber shares higher the next day, the market became worried about its prospects, as the stock has tanked 29% in the past two months.
Now, I'm no expert on development and adoption trends of revolutionary technologies. What I do know, however, is that Uber's direct relationship with consumers holds tremendous value. Going forward, we could see partnerships form, such as the one it has with Alphabet's Waymo, that leverage Uber's reach with another company's technology.
Investors looking to buy Uber shares on the weakness, now have familiarity with how the company makes money, its financial performance, and its competitive positioning.
