The latest round of quarterly earnings announcements has been full of ups and downs for the stock market as a whole. The S&P500 The index has fallen slightly since the end of March.
One component of the S&P 500 has done more than its share to drag down the benchmark index. Uber Technologies (NYSE:UBER) has fallen by about 12% since the end of March.
Uber recently announced quarterly results that were less than spectacular. The disappointment hasn’t stopped analysts who closely follow the company from suggesting it could perform better. The consensus price target of $87.36 per share for Uber implies a gain of about 30% from recent prices.
Individual investors need to understand that the battalions of sell-side analysts who set price targets on Wall Street are generally entry-level employees. The handful of fund managers who click ‘buy’ or ‘sell’ wouldn’t dream of making a decision based solely on a high price target, and neither should you. Here’s a closer look to see if Uber deserves your attention at the recently reduced price.
Why Uber shares fell after the earnings report
Shares of Uber fell on May 8 after the company reported first-quarter gross bookings that missed Wall Street estimates. Instead of the $37.9 billion in gross bookings that Wall Street expected, the company reported $37.6 billion.
Uber also upset investors with its future prospects. The company expects second-quarter gross bookings to reach $39.2 billion, midway within management’s stated range. Wall Street expected the company to forecast $40 billion.
Uber also reported a net loss of $654 million in the first quarter. Wall Street expected a profit of $503 million. Even accounting for a $721 million non-cash headwind caused by a revaluation of the company’s equity investments, this missed the target by a wide margin.
Still a purchase?
Most analysts covering Uber lowered their price targets slightly, but maintained buy ratings on the market leader. They are encouraged by improving profitability.
Operating income fell from a loss of $262 million a year earlier to a profit of $172 million this year. While Uber posted a net loss under generally accepted accounting principles (GAAP) in the first quarter, free cash flow rose 148% to $1.4 billion.
Uber’s biggest advantage is its size, and this advantage appears to be sustainable. The company completed 2.6 billion trips in the first quarter, while its strongest competitor in the US, Lyft, completed only 188 million trips.
Analysts aren’t wrong to suggest that Uber can deliver market-boosting profits, but the stock could be riskier than investors realize. It currently trades for about 42 times free cash flow. This isn’t an unreasonable multiple for a company that has more than doubled its residual free cash flow over the last twelve months. At the same time, such a high multiple comes with expectations of continued earnings growth at a rapid pace.
As the preferred partner for drivers and passengers, Uber could have enough pricing power to grow profits in the coming years. That said, ordinary investors buying at recent prices may be accepting more risk than they realize.
If free cash flow doesn’t continue to rise rapidly for at least a few more years, stocks could fall sharply. Uber is still a good stock to buy, but only for investors with a medium to high risk tolerance.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Uber Technologies. The Motley Fool has a disclosure policy.
1 beaten growth stocks that Wall Street thinks could rebound was originally published by The Motley Fool
