What Does Uber’s $7 Billion Share Repurchase Plan Mean for Investors?

Uber Technologies, Inc. (UBER) recently announced a stock buyback strategy for the first time in the company's history. The company's board of directors had authorized $7 billion in share repurchases. Investors cheered the plan, evidenced by UBER’s share price rise of about 14% on February 14, despite the nationwide strike staged by Uber drivers demanding fair pay.

UBER’s Chief Financial Officer Prashanth Mahendra-Rajah said the repurchase plan “is a vote of confidence in the company’s strong financial momentum.” He added, “We will be thoughtful as it relates to the pace of our buyback, beginning with actions that partially offset stock-based compensation and working toward a consistent reduction in share count.”

UBER joins the league of tech companies, planning initiatives to enhance shareholder returns. Also, last week, the company’s CEO, Dara Khosrowshahi, said 2023 was an inflection point, marking a possible capital return to shareholders.

Stock repurchases allow firms to utilize their cash reserves to buy back their shares from the market. This reduces the total number of outstanding shares and escalates the ownership fraction for existing shareholders. Consequently, net earnings are divided among fewer shares, leading to an enhancement of earnings per share. Such a buyback could escalate UBER's Return on Equity, a parameter highlighting the proficiency with which a company generates profits from its equity.

As of December 31, 2023, UBER had expended $1.94 billion on stock-based compensation. Furthermore, in conjunction with the share count reduction, the recent buyback was aimed at counterbalancing the equity-based compensation.

The buyback revelation arrived hot on the heels of UBER's fourth-quarter results announcement, surpassing Wall Street's top- and bottom-line predictions. Khosrowshahi referred to 2023 as a landmark year of "sustainable, profitable growth" for UBER and credited this success to a shift in consumer expenditure from retail to services.

Furthermore, special mention goes to UBER’s fiscal earnings of 2023, marking its debut annual profit since its public listing. The San Francisco-based company recorded a $1.89 billion net profit on revenue worth $37.28 billion for the year ending December 31, 2023. Its operational income was $1.11 billion, compared to a loss from operations of $1.83 billion. Moreover, adjusted EBITDA increased 137% year-over-year to $4.05 billion.

UBER’s mobility segment revenue for the fiscal fourth quarter of 2023 was up 34% year-over-year, primarily attributable to the expansion of mobility gross bookings triggered by a 24% year-on-year elevation in trip volumes. Its delivery segment’s revenue was up 6% from the year-ago quarter.

For the fiscal first quarter of 2024, the company anticipates its gross bookings between $37 billion and $38.5 billion, while its adjusted EBITDA is projected to come between 1.26 billion and $1.34 billion.

The company announced new long-term financial targets indicating an anticipated surge in bookings, adjusted pre-tax earnings, and free cash flow that surpasses previous predictions.

The company expects its Gross Bookings (GBs), driven by a rise in Monthly Active Platform Consumers (MAPCs) and increased usage frequency, to experience mid-to-high teen CAGR growth over the following three years. Concurrently, it projects a high 30s to 40% adjusted EBITDA CAGR rise for the same period, achievable through scaling GBs and realizing annual margin expansion within both the Mobility and Delivery segments. The lower limit of the company's target implies a potential increase in free cash flow, amounting to approximately $9.3 billion in 2026, a near-tripling from last year's total.

Furthermore, UBER anticipates its FCF conversion to surpass 90% of adjusted EBITDA, inclusive of insurance reserve adjustments. Cash tax is predicted to be substantially below the accrual due to loss carryforward utilization.

These financial projections have fortified analysts' optimistic views on the company's potential for enhancing MAPCs and platform frequency, intensifying even more bullish analyses. Wedbush analysts, for instance, have raised their 12-month price target to $85. Gerber Kawasaki Wealth and Investment Management’s CEO and president, Ross Gerber, who is also an investor in the company, has commended it as a "fire-breathing dragon."

Echoing these positive sentiments, New Street Research Analyst Pierre Ferragu affirms UBER's growing strength in the ride-hailing market, saying, “Uber is really playing out the way we were expecting," and maintains a ‘Buy’ rating on the company's stock.

Wall Street analysts expect the stock to reach $80.41 in the next 12 months, indicating a potential upside of 1.6%. The price target ranges from a low of $62 to a high of $95.

Bottom Line

Once a noteworthy unicorn of Silicon Valley, UBER was previously valued much less than its present value, providing artificially inexpensive taxi and food delivery services.

However, a change of management, an initial public offering, and a climate unfavorable to unprofitable market share pursuit prompted UBER to revise its strategies.

Much of UBER's transformation occurred under Dara Khosrowshahi, the former chief executive of Expedia Group Inc., who took over from co-founder Travis Kalanick in 2017. Kalanick's assertive leadership style incurred UBER a reputation marred by extravagant spending, PR disasters, corrosive workplace culture, and a combative relationship with local authorities.

Khosrowshahi redirected UBER beyond its cornerstone ride-sharing into sectors like restaurant and grocery delivery and advertising, subsequently enhancing profit margins.

The pandemic made a business re-evaluation necessary, as stay-at-home measures dampened ridesharing demand. Transitioning toward a more asset-light model, UBER divested its loss-incurred bike and scooter ventures and scaled down its capital-intensive autonomous vehicles division. Meanwhile, investment in the Uber Eats service allowed it to benefit from the lockdown-induced surge in food deliveries despite the slump in shared rides. This transition vastly strengthened UBER's market value last year, which escalated to over $162 billion following February 14 gains.

UBER has effectively utilized economies of scale in various markets domestically and globally, aiming for further expansion into sectors like delivery, inexpensive ridesharing options such as two-wheelers, and corporate travel products.

Another sign of UBER's improving financial health is the initiation of stock buybacks after years of amassing a $30.59 billion accumulated deficit due to unrestrained spending aimed at gaining market share and penetrating new markets.

Dividends may be forthcoming, but for now, the beginning of buybacks suggests the company might not be just a conventional tech startup depleting its cash reserves with limited results.

The buyback strategy could convey to market watchers that UBER perceives its shares to be undervalued and that it possesses robust financial prospects. By returning capital to shareholders, the company could bolster investor satisfaction and loyalty while attracting investors seeking greater returns.

The recent surge in growth and profitability implies a positive turnaround for the company. Its share price is nearing record highs concurrent with continuing revenue expansion.

Projections of an increase in orders starting from early 2024 underscore the expected continuity of the upward trend. UBER's bottom line appears to have been favorably impacted by cost control measures and economies of scale. The upward trend is expected to continue, provided the company remains on its current path and keeps up with developments in the autonomous driving sector.

Beyond its positive attributes, investors should take heed of UBER's Quick Ratio, which stands at 0.93. This could suggest a potential shortfall in quick assets to cover all its short-term liabilities. As of December 31, 2023, the company also exhibited long-term debt amounting to $9.46 billion. Against this figure, it holds cash, cash equivalents and short-term investments worth $5.41 billion, a factor not to be overlooked by investors.