Shares of taxi giant Uber (NYSE:UBER) went public in May 2019 at $45 per share. Since its IPO, Uber stock has returned just over 54%, trailing the S&P 500 Index (SPX) by a wide margin (the SPX has almost doubled over the same period). However, with a market cap of $134 billion, Uber is among the most recognizable brands in the world and is poised to benefit from multiple long-term tailwinds. I believe UBER stock is an attractive investment this year. I am bullish on the company because of its steady revenue growth, improving profit margins and huge potential in autonomous driving.
Uber slumps after first quarter results
Shares of Uber have fallen more than 7% in the past month, mainly due to missed profits in the first quarter. The company reported revenues of $10.13 billion and a loss per share of $0.32 per share. Analysts forecast revenue of $10.11 billion and adjusted earnings of $0.23 per share in the March quarter. Uber increased revenue 15% year-over-year, but reported a net loss of $654 million due to unrealized losses totaling $721 million related to its stock investments.
However, Uber’s user base rose 15%, while gross bookings rose 20% year-over-year. Thus, the company continues to expand its customer base and customer spending, resulting in steady revenue growth. It appears that while consumer spending in the discretionary retail sectors is slowing, there is strong demand for services such as ride-hailing and food delivery.
Notably, Uber’s first-quarter operating income was $172 million, compared to a loss of $262 million in the same period a year ago. 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, up 58-67% year-over-year, respectively.
Uber’s resilient consumer demand for ride-hailing and food delivery, as well as higher profit margins, should help the company generate organic cash flows in a challenging macro environment.
In the second quarter, Uber expects gross bookings between $38.75 billion and $40.25 billion, indicating 18-23% year-over-year growth. By comparison, Uber’s gross bookings are up 19% in 2023. An acceleration in gross bookings is an encouraging sign as consumers continue to grapple with high interest rates and inflation.
A trillion-dollar market?
In the first quarter of 2024, Uber paid its drivers $16.6 billion, which was the company’s largest expense. However, given the developments surrounding autonomous driving, the company can completely eliminate these costs within the next ten years.
Last year, ARK Invest’s Cathie Wood estimated that the autonomous car industry would generate $4 trillion in sales by 2028, which could be an ambitious expectation considering that self-driving cars have yet to be adopted by the majority of states in The United States.
According to a Statistical According to the report, Uber has a 25% market share in taxi transportation. So if it can gain a similar share of autonomous driving, the company could add as much as $1 trillion in revenue, making it one of the largest companies in the world.
Assuming a 10% cash flow margin, Uber’s autonomous driving business could generate $100 billion in free cash flow if Wood’s estimates are correct.
The network effect
One of the key benefits of marketplaces is that companies benefit from network effects and economies of scale. After several years of reporting losses, Uber is now turning the corner on profitability.
As drivers and restaurants continue to join the Uber ecosystem, its services become all the more valuable to stakeholders. Creating a profitable marketplace can take several years. However, once the company achieves scale, achieving consistent profits is within reach.
Despite its enormous size, Uber is focused on entering new markets as it strives to gain traction in existing markets. In recent months, Uber announced a partnership with Instacart (NASDAQ: CAR) and announced the acquisition of Foodpanda, indicating that the potential for market penetration is far from over.
Are Uber Stocks Overvalued?
Analysts tracking Uber’s stock expect adjusted earnings per share to grow from $0.81 in 2023 to $0.90 in 2024 and $2.10 in 2025. At 30.6x 2025 earnings, the stock seems Uber may be expensive, considering the industry average is much lower at 19.1x. However, Uber’s high growth expectations allow the company to achieve a higher multiple.
Alternatively, Uber’s free cash flow in the last twelve months was $4.17 billion. So the stock is priced at 32x trailing free cash flow, making it a high-risk investment, especially if earnings growth doesn’t materialize.
Is UBER Stock a Buy According to Analysts?
Of the 32 analyst ratings given to Uber stock, 31 are Buys, one Hold, and none Sells, indicating a strong Buy consensus rating. The average UBER stock price target is $88.03, implying 38.6% upside potential from current levels.
The takeaway
In my opinion, Uber’s growing ecosystem and autonomous driving megatrend make it an attractive investment choice this year, especially if you can look beyond its high valuation. By allocating a small portion of your stock portfolio to Uber, you could potentially benefit from market gains in 2024 and beyond.
Revelation
