Why Uber Stock is a BUY Now!

Overview

Uber Technologies Inc. (NYSE) had an impressive run early this year, becoming a top performer in the Industrials sector upon its inclusion in the S&P 500. However, as the first quarter ended, Uber’s shares declined. Despite these fluctuations, I am upgrading Uber’s stock from ‘hold’ to ‘buy’ due to its potential for growth driven by advertising revenue and new product offerings.

Q1 Performance

In Q1, Uber presented mixed results:

• Operating EPS: -$0.32 (missed expectations)
• Adjusted EBITDA: $1.38 billion (beat the $1.32 billion consensus)
• Revenue: $10.13 billion, up 15% YoY (a modest $40 million beat)
• Gross Bookings: Grew 20% YoY to $37.7 billion
• Mobility Gross Bookings: Increased 25% YoY
• Free Cash Flow: $1.36 billion
• EBITDA Margin: Improved to 9.9%

Challenges in Latin America were notable, but other regions performed well. Guidance for Q2 includes Gross Bookings between $38.75 billion and $40.25 billion and adjusted EBITDA between $1.45 billion and $1.53 billion.

Future Growth Drivers

Uber’s growth potential is underpinned by:

• Advertising Revenue: Expected to exceed $1 billion this year.
• New Product Offerings: Includes Uber Shuttle, scheduled UberX shared rides, discounted Uber One student pricing, and a partnership with Costco.
• Stock Buyback Program: Announced a $7 billion stock buyback program.
• Positive Free Cash Flow: The company remains free cash flow positive despite a recent dip in stock price.

Risks

Key risks include:

• Economic Downturn: Could lead to lower margins and slower user adoption.
• Competition: Increased competition from Lyft and potential future self-driving services.
• Regulatory Changes: Could negatively impact operations.

Valuation and Growth

Using a PEG ratio approach, Uber appears attractively valued:

• PEG Ratio: Assumed normalized EPS growth rate of 25%, with a sector median PEG ratio of 1.65x.
• Implied P/E Ratio: In the low 40s.
• Intrinsic Value Target: In the mid-$80s based on consensus EPS of $2.10 for FY 2025.
• Price-to-Sales Ratio: 3.44x, reasonable given Uber’s growth trajectory.

Technical Analysis

The technical outlook for Uber is positive:

• Support: Shares held key support in the mid-$60s during the latest pullback.
• Resistance: All-time high is around $80.
• Moving Average: Rising long-term 200-day moving average around the mid-$60s.
• RSI Momentum: Bullish divergence observed in late May.

Conclusion

Given the solid financial performance, potential for growth through advertising and new products, reasonable valuation, and positive technical indicators, I am upgrading Uber from ‘hold’ to ‘buy’. Despite recent corrections, the overall trend remains bullish, making Uber a compelling investment opportunity.