Investing in UBER: Evaluating the Case for Long-Term Growth

Renowned for its ride-hailing service, Uber Technologies, Inc. (UBER) has recently captured much of investors' attention. With its shares surging by an impressive 130% over the past year and almost tripling since the start of 2023, the company also hit a 52-week high of $82.14 last month.

Factors Driving Investor Interest in Uber's Shares

Throughout the tumultuous COVID-19 pandemic, ride-share giants such as UBER encountered formidable challenges. Compounded by continuous losses since its 2019 public debut, UBER faced a rocky road to financial stability.

Nevertheless, a significant turning point occurred last year when, for the first time, the company achieved annual profitability and earned its spot in the S&P 500 Index, meeting the Index’s criteria of positive earnings in the most recent quarters. These two milestones sparked a substantial surge in UBER’s share price.

During the fiscal year 2023, the company reported a 16.9% year-over-year increase in its revenue, amounting to $37.28 billion. Net income attributable to UBER came in at $1.89 billion and $0.87 per share versus a staggering net loss of $9.14 billion and $4.65 per share in the previous year, respectively.

Meanwhile, for the fourth quarter, UBER’s topline witnessed a 15.4% year-over-year jump, reaching $9.94 billion, higher than the analyst estimate of $9.76 billion. Its earnings per share of $0.66 was higher than $0.29 in the prior-year quarter and exceeded the analyst estimate of $0.17.

UBER’s strategic response to stay afloat during the pandemic included cost-cutting measures and a concerted effort to develop its emerging food-delivery segment, which has since evolved into a substantial source of revenue.

In the final quarter of 2023, the company’s Delivery segment posted approximately $3.12 billion in revenue, up 6.4% year-over-year. At the same time, the Mobility segment saw a notable 33.9% year-over-year increase.

Reflecting on UBER’s performance in the fourth quarter and the year 2023, CEO Dara Khosrowshahi emphasized the company's ability to sustain significant, profitable growth. He pointed out the expansion and heightened engagement of UBER’s audience, noting that the platform facilitated an average of nearly 26 million daily trips in 2023.

In the fourth quarter, the company’s gross booking saw notable year-over-year growth of 22%, amounting to $37.58 billion. UBER’s CFO, Prashanth Mahendra-Rajah, attributed the record engagement and accelerated gross bookings in the fourth quarter to the platform's advantages and disciplined investments in new growth avenues.

Further, for the first quarter of fiscal 2024, the management projects gross bookings to range between $37 billion and $38.50 billion, while adjusted EBITDA is expected to come somewhere between $1.26 billion and $1.34 billion.

Bottom Line

UBER has garnered significant attention from investors, propelled by its impressive revenue growth, heightened customer engagement, and notable profitability milestones. This remarkable resurgence from the challenges of 2020 underscores the company's resilience and adeptness in navigating difficult conditions.

In addition to its strong financial performance in its fourth quarter and full-year 2023 results, management’s confidence in UBER’s sturdy financial path is evident from the recent introduction of its inaugural share repurchase program, which allows for the repurchase of up to $7 billion of the company's common stock.

Meanwhile, Wall Street forecasts that UBER’s revenue and earnings per share of $43.34 billion and $1.24 for the fiscal year 2024 indicate an improvement of 16.3% and 42.4% year-over-year, respectively.

Furthermore, as the company gears up to reveal its fiscal 2024 first-quarter earnings next month, UBER remains one of the top choices according to J.P Morgan analyst Doug Anmuth, CFA.

Anmuth remains optimistic about UBER’s potential for ongoing execution and earnings growth, even after milestones such as profitability and S&P 500 inclusion have been attained.

With analysts expressing optimism regarding its earnings growth, UBER’s forward non-GAAP PEG of 0.80x, roughly 51.9% below the industry average of 1.67, indicates that the stock is reasonably priced.

UBER’s attractive valuation, impressive financial performance, and strategic initiatives have positioned it as a compelling investment opportunity with strong long-term growth potential in the ride-sharing and food delivery markets. As the company's first-quarter earnings release draws near, investing in UBER’s shares seems like a wise move for potential gains.

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.