A report from Morgan Stanley’s transportation research team, headed by Ravi Shanker, estimates the value of Uber Technologies’ (NYSE: UBER) “sum of parts” at $72 per share. Of that, about $2 can be attributed to Uber Freight, based on valuing Uber Freight at $3.5 billion.
The $3.5 billion valuation does not have a perfect peer comparison, which would need to be a digital brokerage with public financial data. Other leading digital brokerage companies, like Convoy, are privately held.
But that valuation can be compared to public 3PL companies like C.H. Robinson (NASDAQ: CHRW), whose market cap stands at roughly $11.7 billion, or Echo Global Logistics (NASDAQ: ECHO), which has a smaller market cap than the Uber Freight valuation; it stands at roughly $850 million.
Uber Technologies’ current market capitalization is roughly $75.5 billion, and its shares have been trading near $70.
The relatively small number for Uber Freight compared to the larger parent does not take away from the fact that Morgan Stanley’s brief report on Uber Freight, also authored by Brian Nowak, is mostly positive.
When Uber Technologies went public in May 2019, Morgan Stanley said Uber Freight’s offerings only allowed it to reach 10% of the total available market (TAM), which Morgan put at a current $900 billion opportunity.
But with its growth, “Uber Freight’s extensive offering to both carriers (scale advantages, drop solutions and bundling) and suppliers (real-time pricing, tracking, self-serve platform) allows Uber Freight to address over 50% of the US trucking TAM,” the Wall Street company wrote.
Morgan Stanley issued the report after it “hosted” a conversation with Lior Ron, the head of Uber Freight. Ron helped steer the pending acquisition of Transplace, whose primary business is providing transportation management services to shippers, whereas Uber Freight is primarily focused on matching up shippers and carriers through its platform.
“Uber’s acquisition of managed transport provider Transplace furthers this access to the TAM, extends its logistics network, and provides the opportunity to deepen relationships with suppliers,” Morgan Stanley wrote.
It also noted that its valuation of Uber Freight does not yet include a figure for Transplace. The size of the acquisition is $2.25 billion. But the report noted that Transplace is expected to generate positive earnings before interest, taxes, depreciation and amortization of $100 million in 2021, and that Uber Freight expects to break even on an EBITDA basis by the fourth quarter of next year.
In the latest Uber Technologies earnings report, Uber Freight reported adjusted EBITDA of a loss of $41 million in the quarter ended June 30, an improvement from the $49 million EBITDA loss in the corresponding quarter of the prior year.
The Uber projection of break-even by next year is not shared by Morgan Stanley. “We do not have Uber Freight reaching break-even until 2024 and are only modeling an (approximate) 2% EBITDA in bookings for 2025,” it said. As is normal, there’s a provision for a better outcome: “The extent to which Uber can execute over the next 3-5 years could lead to upside in valuation,” Morgan Stanley writes.
While there have been the occasional questions of whether Uber Freight fits into the broader goals of Uber Technologies, those mostly — but not completely — disappeared when Greenbriar Equity Group invested a half-billion dollars into the segment last October.
But based on conversations with Ron, Morgan Stanley sees Uber Freight as potentially being tied in to the other sectors of the parent company, further undercutting the argument that Uber Freight doesn’t fit.
“Uber’s presence in freight allows it to provide retailers and manufacturers with a bridge from first mile (Freight) to last mile (Delivery),” Morgan Stanley writes in its note. (Delivery is the formal name for the group that includes the meal-delivery service that operates as Uber Eats.)
Morgan Stanley added that among 80% of Uber Freight’s customers, the same decision-maker is booking both freight and final mile. Given that, the report noted that “Uber’s multiproduct offering provides it with an advantage over those competitors that can only offer one solution.”
In an email to FreightWaves, Shanker said capitalizing on those synergies has not been undertaken yet, but “this is the goal once the Freight [and] Eats offerings are fully built out.”
The most optimistic part of the report for the short term focuses on Uber Freight’s operating costs. Morgan Stanley said the freight industry as a whole generally operates at a 15% gross margin and EBITDA margins of 5%. It added that two-thirds of what it called “gross profit dollars” now go to operating expenses, which the report refers to as “opex.”
But the report said Uber Freight “continues to see significant opex improvements, reducing opex to half of industry levels over an 18-month period.” The report said Uber Freight has used automation and “network efficiencies” for those reductions. It identified those efficiencies as “lower dead head miles [and] bundling of loads.”
In turn, those efficiencies are generated by the sheer scale of network, which has more than 1 million drivers on the platform. That creates greater possibilities for cutting deadhead miles as well as bundling and drop-and-hook loads, the report said.