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Uber Technologies Inc(UBER-N)

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This Small Part of Uber's Business Just Helped Multiply Delivery Profits. And It's Just Getting Started.

Motley Fool - Fri May 26, 10:15AM CDT

Uber Technologies(NYSE: UBER) has managed to produce over $500 million in profits from its delivery business over the past two quarters, and there's one key driving force behind the gains.

Management calls out its advertising revenue as the key factor boosting its earnings power on the delivery side. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew from a combined $55 million in the fourth quarter of 2021 and first quarter of 2022 to $529 million during the same period a year later.

What's more, the advertising business is just getting started, with Uber committing to $1 billion in ad revenue by next year. And Uber has the competitive advantages that could get it there and beyond. That kind of high gross margin revenue could provide a massive boost to Uber's bottom line.

The benefits of Uber's advertising business

The majority of Uber's ad revenue comes from its Uber Eats app, but Uber's entire business gives it several advantages over other digital advertising platforms.

First of all, Uber Eats is a marketplace business. It connects buyers and sellers. That means advertising inside Uber Eats is likely to find a consumer right at the moment they're trying to make a decision. What's more, advertisers can immediately see if their ad led to a sale. Ad measurement and tracking have become more difficult with increasingly restrictive privacy policies, but Uber can show conversions with its first-party data.

In that way, many of Uber's advertising products are similar to Amazon's. Amazon has seen tremendous success with advertising on its online marketplace due to the data advantages it possesses.

Likewise, Uber also has a lot of data on its users. Many of its users use both the Uber Eats delivery service as well as its mobility service. Uber has information about where users are going and when they're going there as well as the type of food they're eating and how much they're spending on it. That can help it put together a good user profile for advertisers.

As such, Uber is able to command very high ad prices. Even in the mobility app, Uber's Journey Ads command $45 per million views, CEO Dara Khosrowshahi said. That's higher than typical social media or connected-TV advertising rates.

Lots of growth yet to come

There's a lot of growth ahead for Uber's advertising business as it expands into new ad products and scales its existing offers.

Management expects to generate over $1 billion in ad revenue in 2024. For reference, management said it exited 2022 with a $500 million run rate, implying fourth-quarter ad revenue of about $125 million. Q4 is typically seasonally strong for advertising, but Uber's ads may not see as much seasonality since they're primarily for things like food or grocery delivery, not holiday shopping.

Still, to double ad revenue in less than two years is no small feat. To do so, it'll have to scale existing revenue sources and create new ones.

On the former, management says it has room to grow. Just 25% of merchants are advertising on the Uber Eats Platform. Management thinks it can increase penetration even as it adds new merchants. More competition for ad space from merchants may also drive ad prices higher.

On the latter, the company is finding new places in its apps to put ads, and it's expanding the ads business outside of its apps. It's offering drivers car-top units to tap into the out-of-home advertising market, a market segment that's still recovering nicely from the pandemic. It's also offering drivers tablets that can present trip information to riders alongside various advertisements. Uber will split revenue with drivers.

Uber also detailed opportunities to expand into new verticals like travel, finance, entertainment, and retail during its investor day last year.

The impact on Uber's earnings

Advertising is a huge growth driver for Uber not just for its bottom line, but in scaling the overall business by attracting more users.

At its investor day last year, management detailed the flywheel unlocked by advertising. As it attracts more ad dollars, it will generate more profits; more profits give it more to invest in growth; more growth means more users and data, which provide more value to advertisers, attracting more and more ad dollars.

In the meantime, scaling deliveries and mobility, attracting more users to its Uber One subscription, and getting users to use its services more often will lead to higher profits as well. In other words, advertising has the potential to supercharge Uber's earnings potential, and the early results show that it's doing just that.

Management's outlook calls for $5 billion in adjusted EBITDA in 2024. That will result in significant earnings per share and free cash flow for shareholders.

While Uber shares have rebounded off its one-year lows, it's not too late to invest in the company. The stock still trades below its pre-pandemic highs.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy has positions in The Motley Fool has positions in and recommends and Uber Technologies. The Motley Fool has a disclosure policy.

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