3 Reasons Why Uber Stock (NYSE:UBER) Looks Attractive

3 Reasons Why Uber Stock (NYSE:UBER) Looks Attractive

Shares of ride-sharing giant Uber (NYSE:UBER) went public in May 2019 at a price of $45 per share. Since its IPO, Uber stock has returned just over 54%, lagging the S&P 500 (SPX) by a wide margin (the SPX almost doubled during the same period). However, with a market capitalization of $134 billion, Uber is among the most recognizable brands in the world and is poised to benefit from multiple long-term tailwinds. I think UBER stock is an attractive investment this year. I am bullish on the company due to its consistent revenue growth, improving profit margins, and huge potential in the autonomous driving space.

3 Reasons Why Uber Stock (NYSE:UBER) Looks Attractive

Uber collapses after first quarter results

Uber shares have fallen more than 7% over the past month, mainly due to the lack of profits in the first quarter. The company reported revenue of $10.13 billion and loss per share of $0.32 per share. Analysts are forecasting revenue of $10.11 billion and adjusted earnings of $0.23 per share for the March quarter. Uber grew sales 15% year-over-year but posted a net loss of $654 million due to unrealized losses totaling $721 million related to its stock investments.

However, Uber’s user base grew 15%, while gross bookings increased 20% year-over-year. Thus, the company continues to expand its customer base and its spending, which translates into constant growth in its turnover. It appears that while consumer spending is slowing across discretionary retail verticals, services such as ride-hailing and food delivery are seeing strong demand.

Uber’s operating profit notably amounted to $172 million in the first quarter, compared to a loss of $262 million a year earlier. It expects to end the second quarter with adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of between $1.45 billion and $1.53 billion, an increase of 58% to 67% year-over-year. on the other, respectively.

Uber’s resilient consumer demand for rides and food delivery, along with its higher profit margins, should help it generate organic cash flow in a challenging macroeconomic environment.

In the second quarter, Uber expects gross bookings between $38.75 billion and $40.25 billion, representing growth of 18% to 23% year-over-year. In comparison, Uber’s gross bookings grew 19% in 2023. An acceleration in gross bookings is an encouraging sign as consumers continue to struggle with high interest rates and inflation.

A multi-billion dollar market?

In the first quarter of 2024, Uber paid its drivers $16.6 billion, which was the company’s largest expense. However, given developments surrounding autonomous driving, the company could completely eliminate this cost within the next decade.

Last year, ARK Invest’s Cathie Wood estimated that the autonomous ride-hailing industry would generate $4 trillion in sales by 2028, which could be an ambitious prospect, given that self-driving cars have not yet been approved by the majority of American states.

According to a Statesman report, Uber has a 25% market share in the ride-sharing space. So, if it manages to have a similar share in autonomous driving, the company could add a whopping $1 trillion in revenue, making it one of the largest companies in the world.

If we assume a 10% cash margin, Uber’s self-driving business could generate $100 billion in free cash flow if Wood’s estimates are correct.

The network effect

One of the main advantages of marketplaces is that businesses benefit from network effects and economies of scale. After several years of losses, Uber is now reaching a milestone in terms of profitability.

As drivers and restaurants continue to join the Uber ecosystem, its services become that much more valuable to stakeholders. Creating a profitable market can take several years. However, once the business reaches scale, it is entirely possible to generate consistent profits.

Despite its enormous size, Uber is focused on entering new markets and aims to gain traction in existing markets. In recent months, Uber announced a partnership with Instacart (NASDAQ: BASKET) And announced the acquisition of Foodpanda, indicating that the potential for market penetration is far from exhausted.

Is Uber stock overvalued?

Analysts who follow Uber stock expect its adjusted earnings per share to increase from $0.81 in 2023 to $0.90 in 2024 and to $2.10 in 2025. So, at a price of 30, At 6x 2025 earnings, Uber stock may seem expensive, given that the industry’s median multiple is well below 19.1x. However, Uber’s high growth estimates allow it to achieve a higher multiple.

Furthermore, Uber’s free cash flow over the trailing 12 months was $4.17 billion. Thus, the stock is valued at 32 times free cash flow, making it a high-risk investment, especially if earnings growth fails to materialize.

Is UBER Stock a Buy, According to Analysts?

Of the 32 analyst ratings assigned to Uber stock, 31 are Buys, one is a Hold, and none are a Sell, indicating a Strong Buy consensus rating. THE average price target for UBER stock is $88.03, implying 38.6% upside potential from current levels.

Takeaways

In my opinion, Uber’s expanding ecosystem and autonomous driving megatrend make it a compelling investment choice for this year, especially if you can look past its high valuation. Allocating a small portion of your stock portfolio to Uber can potentially help you enjoy market-beating gains in 2024 and beyond.

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