Stock Picking: Uber (II)
As mentioned in part one, we want to read Uber’s financials. Before diving in, though, we want to know what information is pertinent and enlightens our analysis of Uber’s fundamentals. To that end, what could be better than to listen to the experts?
2. Listening to the pundits
Financial statements are like Stephen King’s books: they tell a story in a structured manner, are accessible to the broad public, but target a select audience. However, unlike Stephen King, FP&As are poor storytellers (truth be told, they are not allowed to get creative in their deliveries to the public) who provide lots of information and little (if any) analysis of it. This is why I recommend that you know what you are looking for in financial statements before diving in. What pieces of information do you need? What ratios do you want to compute? What results are of interest to your analysis? What are the metrics that you can derive from that information?
One interesting way of formulating such questions is to ask an expert. My preferred, go-to professionals are credit-rating agencies precisely because of their excellent narratives: they are educated individuals who give opinions and pass judgements while supporting their views with data. Also, I like them because some of their releases are publicly available. Besides, why not listening to them? After all, institutional investors are often required to stick to those securities that are rated by one of these firms. By the way, I am talking about Moody’s, Fitch, and S&P Ratings.
A simple Google search took me to Moody’s, where I quickly landed the kind of publication I wanted to find: a rating action, dated September 12, 2019. So far, we have seen that Uber has been the most chastised technology company among those that went public in 2019. How do we assess whether it was unreasonably so or if the company’s results have fell short of the expectations? This is where Moody’s rating actions come into scene. The document I consulted says:
“Uber’s ratings could be downgraded if:
(i) Moody’s believes that Uber does not have ample liquidity to fund its operating plan and investments over the next 2 to 3 years,
(ii) Core Platform Contribution Margins as a percentage of adjusted net revenues are not expected to recover to the over 9% level attained in 2018, by 2020, and remain on a path toward further improvements in 2021;
(iii) anticipated reductions in operating losses fall short of expectations; or
(iv) regulatory changes are expected to have a meaningful negative impact on the business.
The ratings could be upgraded if Moody’s believes that Uber’s core businesses can turn profitable on a sustainable basis over the next 12 to 24 months leading to a substantial reduction in cash burn (cash flow from operations less capital expenditures) and the company maintains a strong liquidity profile.”
Notice that three out of the four conditions for a rating downgrade can be consulted in Uber’s financial statements. Also, there are two conditions for a rating upgrade and both are found in financial statements. In summary, this is what we want to find in the FS:
(i) Liquidity indicators: according to professor Investopedia, we are interested in reading the upper lines of assets and liabilities in the balance sheet: current assets and liabilities.
(ii) Adjusted Net Revenue, as defined by the SEC. I found a good definition for this metric.
(iii) Income Statements. Actually, the lines related to operations costs.
I really think that it is easier to navigate a complex file, as Uber’s Results, if there is a framework that helps us separate the wheat from the chaff. This is what I actually did: first read what the experts say about the company, looking for the key financial indicators; only then did I dive into the complexity of Uber’s financials. Am I an illiterate in financial accounting? No, but I knew nothing about the firm’s financial performance less than one hour ago. At least now I know that, when it comes to Uber, liquidity is the number one concern, then comes the profitability of its core businesses, then its ability to grow while maintaining operating discipline (operations costs).
Finally, if the point was to first ask an expert, why not asking an expert trader instead? This is a good question, and perhaps the best answer is that the best is to listen to traders too. However, the main reason behind choosing rating agencies is that I want to assess Uber’s financial and operating health, not what hour is best to bid for the stock. Anyways, this could be a great subject for another story.
Part three (the final part of this exercise) contains the analysis of the indicators mentioned by Moody’s.
As with all investment decisions, I recommend that it follows the advice of a professional financial planner. The exercise presented in this article is only intended to illustrate one way in which I would inform an investment decision. As a disclaimer, I must add that I do not own Uber stock, nor am I planning on investing any funds on that security. The opinions expressed in this article are exclusively my own, and represent nothing other than my own views.
