Updated on May 17th, 2022 by Aristofanis Papadatos
Uber Technologies (UBER) had its widely-anticipated IPO in May-2019 at a price of $45 per share. Since then, the stock has been on a roller-coaster. It slumped shortly after its IPO due to concerns over rich valuation, it then retrieved its losses thanks to strong business performance but the stock has plunged again in the last two years due to the impact of the pandemic on its business and the inability of the company to turn a profit. Overall, the stock has shed 48% since its IPO.
Note: See upcoming IPOs here.
Uber has a market capitalization of $48 billion. Still, many large-cap tech stocks like Uber do not pay dividends to shareholders. While Uber has never paid a dividend, many other stocks have maintained long histories of dividend growth, such as the Dividend Aristocrats.
The Dividend Aristocrats are a group of 65 stocks in the S&P 500 Index, with 25+ consecutive years of dividend growth. You can see all 65 Dividend Aristocrats here.
Additionally, you can download a full list of all 65 Dividend Aristocrats, along with important metrics that matter (such as dividend yields and price-to-earnings ratios) by clicking on the link below:
As the company is in the early phases of a multi-year growth trajectory, it would be a myopic approach to focus on the short-term gyrations of the stock price. Instead, investors should try to evaluate the long-term prospects of this innovative company.
Nevertheless, the big question for income investors is whether Uber will ever pay a dividend.
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 more than a decade in order to build its extensive network and improve its applications. It is currently present in approximately 10,000 cities across 71 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?
Uber has grown its revenues at a breathtaking rate in the last five years. In 2020, it incurred a severe downturn due to the coronavirus crisis, which caused a collapse in economic and social activity. However, Uber proved much more resilient than Lyft in that downturn thanks to its delivery business, which thrived during the pandemic.
Moreover, thanks to the distribution of vaccines and the unprecedented fiscal stimulus packages offered by the government in response to the pandemic, Uber has returned to growth mode. Notably, despite the pandemic, Uber grew its revenues at a 19% average annual rate between 2018 and 2021.
Even better, the company enjoys strong business momentum right now. In the first quarter of 2022, its gross bookings grew 2% sequentially and 35% over the prior year’s quarter, to a new all-time high.
Source: Investor Presentation
The strong performance resulted from a steep increase in the number of trips as well as strong growth in the number of consumers who used the applications of the company.
Source: Investor Presentation
Thanks to its strong business performance, Uber grew its revenue 19% sequentially and 136% over the prior year’s quarter.
Source: Investor Presentation
As shown in the above chart, the recovery of the company from the pandemic has been consistent, with no signs of fatigue on the horizon. This certainly bodes well for the performance in the upcoming quarters.
Indeed, management recently stated that it expects sustained sequential growth of revenues, with accelerated growth in the second half of this year.
Moreover, Uber has exhibited great improvement in its EBITDA in recent quarters.
Source: Investor Presentation
While it incurred negative EBITDA at the core of the coronavirus crisis, Uber has posted positive and rising EBITDA in each of the last three quarters.
Moreover, management believes that there is tremendous growth potential ahead, as the current active-platform consumers represent only 2% of the population in the 71 countries in which Uber is present while the total addressable market is estimated to be a $12 trillion business on an annual basis. It is also worth noting that Uber accounts for less than 1% of all the miles driven globally.
While these facts and figures are certainly promising, there is a point of concern, namely the fact that 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 widened shortly after and have remained elevated in the last three years.
There are two major 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 a rewards program across the U.S. in order to recognize and reward its most loyal consumers.
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 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.
Even worse, while analysts used to focus on the impressive revenue growth in recent years, they have begun to shift their focus on profitability lately. This helps explain the sustained decline of the stock during a period of strong revenue growth.
Management recently stated that it will drastically change the terms of cooperation with the drivers of Uber, in an effort to render the company profitable. However, this is much easier said than done. If terms become much worse, they will provide an incentive to drivers to shift away from Uber.
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 consumed 67% of revenues. Moreover, its marketing and administrative expenses consumed 28% of net revenues, while R&D expenses consumed another 9% of net revenues during the quarter. While management does its best to limit all the types of costs, it will certainly need to maintain high marketing and R&D expenses in order to maintain strong revenue growth.
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.
Related: Growth stocks versus dividend stocks.
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.
The pandemic temporarily disrupted the multi-year growth trajectory of Uber in 2020 but the company is recovering at a fast clip, after the initial shock in its business. 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.
See the articles below for analysis on whether other stocks that currently don’t pay dividends will one day pay a dividend: