While the S&P 500 has surged over 30% in the past year, is currently trading at $60.79 per share, reflecting a decline of approximately 13.5% over the past month. Is now the right time to invest in this stock? Let’s analyze the company's financials using three valuation methods: the Discounted Free Cash Flow (DCF) model, the Comparable Company model, and the Ben Graham Formula for Intrinsic Value.
Why Is Uber Stock Dropping?
Uber’s stock is down by 2% today. In this analysis, I’ll explore the reasons behind this dip and whether it presents a buying opportunity.
As with most declining stocks, uncertainty surrounds Uber's business model. Uber’s current valuation and market potential. The highlighted both the bullish and bearish perspectives on Uber. Some noted the stock's attractive price, while others pointed to Uber's history of issues like tax controversies and underpayment of workers. Additionally, emerging competition from technologies like autonomous vehicles and Tesla's robo-taxis could threaten Uber’s market dominance. However, widespread adoption of these innovations, especially in developing countries, is likely still years away. Therefore, recent concerns over autonomy might be exaggerated.
Uber’s Competitive Edge
Uber’s main competitor in the U.S. is Lyft, which holds a 24% market share compared to Uber’s 76%. While this doesn’t guarantee a direct correlation in valuation, Uber’s market dominance offers advantages like economies of scale and better long-term growth potential.
Earning Overview
Uber reported strong financial results for the third quarter of 2024, with revenue increasing by 20% year-over-year to $11.2 billion. The company achieved a net income of $2.61 billion, a significant improvement from the same period last year, largely due to a $1.7 billion pre-tax gain from revaluations of its equity investments. This resulted in earnings per share of $1.20, surpassing analysts' expectations.
Despite these positive financial indicators, Uber's gross bookings for the quarter were $41 billion, slightly below the anticipated $41.3 billion, indicating a slowdown in growth. This deceleration has raised concerns among investors, leading to a decline in Uber's stock price following the earnings announcement.
Fundamental Analysis
Net Income for Q3 2024 reached $2.61 billion, a sharp improvement from the previous year, largely due to a $1.7 billion pre-tax gain from equity revaluations.
Earnings per Share (EPS) stood at $1.20, surpassing analyst expectations.
Adjusted EBITDA for Q3 was also strong, reaching $1.9 billion, showcasing the company’s ability to generate substantial operating profits.
Despite this positive performance, Uber’s net income margins are still impacted by the volatility in the market and the large investments it has made in expanding its services, such as autonomous vehicles and AI initiatives.
Guidance
Uber has provided guidance for the fourth quarter, forecasting gross bookings between $42.75 billion and $44.25 billion, representing year-over-year growth of 16% to 20%. The company also projects adjusted EBITDA in the range of $1.78 billion to $1.88 billion, aligning with market expectations.
Business Segments and Growth
Overall, Uber’s revenue grew by 20% year-over-year in the most recent quarter.
Uber operates in three key segments:
Mobility: The largest segment, accounting for $6.5 billion in revenue last quarter (up 26% YoY).
Delivery: This has become one of the company’s most significant growth drivers. Uber Eats has expanded rapidly across the globe, leveraging Uber’s logistics network to deliver food to customers quickly and efficiently. The pandemic accelerated growth in this area, and Uber has continued to capitalize on it. Uber Eats is now a market leader in many regions and continues to expand its offerings with initiatives like Uber Eats Pass and delivery of groceries. up 18% YoY.
Freight: Uber has ventured into the freight logistics industry, connecting truck drivers with businesses that need goods transported. This business has shown growth, capitalizing on the shift to digital freight management. Uber Freight leverages Uber’s platform model to offer flexibility and efficiency in the trucking industry.The smallest segment, growing at just 2% YoY.
Valuation
On my growth stock spreadsheet, Uber scores a solid 13.4 out of 20, above the average score of 11.5. With $45 billion in annualized revenue and a market cap of $130 billion, Uber’s price-to-sales ratio is below 3, which is relatively low for a growth stock. Although its gross margins of 39% are lower than software companies, they are still respectable.
Discounted Free Cash Flow (DCF) Model: With projected revenue growth of 21%, Uber appears fairly valued at $58 per share under conservative estimates. The DCF model typically undervalues fast-growing tech companies, but in this case, it supports the current valuation.
Ben Graham Formula: which considers earnings growth, bond yields, and profitability, indicates Uber may be undervalued at current levels, though it requires a strong growth rate (over 27% annually) to justify its current price. Based on current growth estimates (~12%), the intrinsic value is calculated at $30 per share.For Uber to be considered fairly valued under this method, growth would need to exceed 27% annually.
Comparable Company Model: Comparing Uber to competitors like Lyft (LYFT), DoorDash (DASH), and Airbnb (ABNB):Uber's valuation metrics are favorable, including a P/E ratio of 0.85 (Peter Lynch’s PEG Ratio).Enterprise Value (EV) to Revenue suggests a price of $80 per share.EV to EBITDA supports a valuation of $125 per share, averaging to about $103 per share.Compared directly to Airbnb, Uber's fair value ranges between $69 to $78 per share.
Free Cash Flow
Free cash flow for the trailing 12 months has been growing, standing at approximately $5.2 billion for the period, marking a solid recovery from previous years when Uber faced negative free cash flow.
Uber’s free cash flow generation is important for reinvestment in its growth initiatives and improving profitability.
Balance Sheet and Cash Flow
Uber’s balance sheet shows improvement. It has $15 billion in current assets and $11 billion in current liabilities. Even after adjusting for goodwill, Uber's assets exceed its liabilities. The company generates over $2 billion in free cash flow annually, making its long-term debt of $10 billion manageable.
Risk & Challenges
Share Dilution One concern is the steady increase in shares outstanding, which dilutes shareholder value. However, this is common among tech companies due to stock-based compensation for employees.
Debt and Liquidity - Debt levels are high but manageable, with a focus on maintaining liquidity for expansion and acquisitions. The company’s beta is 1.33, indicating it is more volatile than the broader market, reflecting investor concerns about the tech sector’s unpredictability.
Increasing competition from other tech firms and traditional transportation companies may affect profitability and market share.
Economic downturns could lead to reduced demand for discretionary services like ride-hailing.
Morningstar’s Perspective
Investment research firm Morningstar rates Uber as a 4-star stock, indicating it is undervalued. Their fair value estimate for Uber is $80 per share, compared to the current price of around $61—a 25% discount.
Conclusion
While autonomous vehicles could pose a future threat, widespread disruption is still some time away. Uber's revenue, free cash flow, and market share are all trending positively. If the company adapts to future challenges through partnerships or its own autonomous initiatives, it may remain resilient.
The recent sell-off could be an overreaction, similar to when Netflix faced user declines before recovering to new highs. While nothing is certain, Uber’s current valuation makes it a compelling consideration for investors looking to buy the dip.
Let me know in the comments: Is Uber in decline, or is this a buying opportunity?
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