2023-12-11 02:38:14 ET
Summary
- Shares of Uber rallied in advance of and immediately after the news that it would be added to the S&P 500 Index.
- Stocks added to the S&P 500 tend to underperform after the announcement, and I see the 50% rally off the October low as a bit stretch.
- Uber's valuation is high, but its growth trends and financial metrics remain strong.
- I highlight key price levels to monitor ahead of Uber's February earnings report.
In a surprising move, not in the change itself but in how soon it came, the index committee that determines what additions and subtractions are made from the S&P 500 announced that Uber Technologies (UBER) would join the US large-cap index. On December 1, shares of UBER rallied in the after-hours on the news, and after dropping in the sessions that followed, the glamor stock is back near its 2021 all-time high.
I urge caution, however, as the performance of stocks added to the S&P 500 tends to be lackluster in the period after the announcement. Bigger picture, I see shares of UBER fairly valued today, leading me to downgrade this 2023 winner from a buy to a hold.
New S&P 500 Entrants Often Struggle Following the Inclusion News
According to Bank of America Global Research, Uber develops and operates proprietary technology applications in the US, Canada, Latin America, Europe, the Middle East, Africa, and Asia ex-China and Southeast Asia. It is a mobility platform that services 63 countries, 750+ ridesharing markets, and 500+ Eats markets, and nearly half of Core Platform Revenue is generated outside of the U.S. The firm now has over 100 million monthly customers with revenues generated from Mobility, Delivery, and Freight services.
The San Francisco-based $127 billion market cap Passenger Ground Transportation company within the Industrials sector trades at a high 164 forward non-GAAP price-to-earnings ratio and does not pay a dividend. Ahead of earnings due out in February, the stock features a moderate implied volatility percentage of 29% while its short interest is low at just 2.4%.
Back in November, UBER reported an earnings miss, but that did little to slow the stock-price advance. Q3 GAAP EPS of $0.10 fell short of the $0.12 Wall Street target and $9.3 billion of revenue also missed modestly. Still, net sales were higher by 11% from year-ago levels and it was the growth company’s second quarter of profits. Gross booking revenue was up 21% compared with the same quarter a year earlier and the management team expects Q4 adjusted EBITDA of $1.18 billion to $1.24 billion, which was well above the street estimate. In net, it was a strong quarter – the revenue shortfall was pinned to an accounting change, per BofA. Margins were healthy with robust operating leverage as the company expanded into new verticals.
Key risks include earnings multiple declines due to macro pressures, including the possibility of a 2024 recession, though lower interest rates today compared to what was seen in Q3 may be a tailwind. Increased competition from other ride-share and delivery players could hurt the valuation, too. Finally, tighter regulations and labor laws are key areas to watch in 2024. Overall, UBER continues to be a Wall Street darling, loved by mutual funds .
On valuation , analysts at BofA see earnings flipping positive in 2023 and then accelerating into 2024 before the pace of EPS gains eases by 2025. The current consensus estimate calls for more than $1 of operating per-share profits next year and close to $2 by 2025. Numbers were taken down modestly following its weaker-than-expected Q3 report last month. No dividends are expected to be paid on the stock, though I would like to highlight that free cash flow is forecast to improve over the coming quarters. The real risk with UBER is now its valuation, in my opinion.
UBER: Earnings, Valuation, Free Cash Flow Yield Forecasts
Last time, I asserted that $2 of earnings coupled with a 25x P/E was a reasonable valuation. Let’s look at it a bit differently today. The PEG ratio, despite the stock’s impressive YTD advance, remains just 0.5, far below the sector median of 1.64 and the S&P 500’s 1.3 average. While shares may be overvalued using the strict earnings multiple approach, the PEG ratio does not scream expensive. What’s more, a 2.4 price-to-sales ratio is hardly a high price to pay for such rapid growth. Thus, I am only moving my valuation rating down a notch from buy to hold.
UBER: A Premium Valuation, Modest PEG Ratio
Compared to its peers , UBER features an arguably high valuation, but there is no debate that growth trends remain strong, and profitability metrics show increasing net income per share and rising free cash flow. Share-price momentum , meanwhile, is best in class compared to other Passenger Ground Transportation stocks. EPS revisions have been mixed, but generally on the good side despite the Q3 miss.
Competitor Analysis
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2023 earnings date of Wednesday, February 14 BMO. The stock will formally be added to the S&P 500 Index on Monday, December 18. No other volatility catalysts are seen on the calendar.
Corporate Event Risk Calendar
The Technical Take
UBER has hailed the bulls since the stock inflected higher in late 2022. Notice in the chart below that shares completed a bullish rounded bottom reversal pattern over the last handful of quarters, first breaking a downtrend off the $64 Q1 2021 peak about a year ago. Then, key resistance in the $37 to $38 range was taken out after a significant correction from early February this year through early May. Shares hit a summertime pause near $50 and then dipped 20% during the Q3-Q4 correction before the bulls put the pedal to the metal just in the last two months – a 50% rally culminated in the index-inclusion news.
There’s obvious psychological resistance at the all-time high, but few shares actually traded there, so a brief pause would make more sense rather than steep selling pressure coming about. Moreover, the RSI momentum oscillator at the top of the graph confirms the share-price rally – it broke out from a downtrend last month. Also, take a look at the long-term 200-day moving average – it is positively sloped, and the bulls defended that mark on two important occasions earlier in 2023. We could project an $80 technical target based on the $30 cup and handle pattern (added on top of the $50 breakout point) for a ballpark measure of the potential magnitude of this rally.
Overall, there is not much resistance on the chart to tap the breaks on the UBER rally, though near-term overbought readings and the all-time high could lead to some consolidation.
UBER: Shares Eye All-Time Highs, Potential Long-Term $80 Upside
The Bottom Line
I am downgrading UBER from a buy to a hold, primarily on valuation. The technicals appear strong, though the index-inclusion announcement would make sense for a pullback or consolidation to ensue.
For further details see:
Uber: Downgrading To Hold On Valuation, Technicals Remain Healthy