Uber (NYSE:UBER) stock continues to trade below its IPO price, following in the footsteps of its smaller peer, Lyft (NASDAQ:LYFT), Uber stock price fell by 17% from its $45 IPO price in the first two days of trading, but Uber rebounded over the last two days and is currently trading around $41.
Uber’s current business isn’t too impressive. Until the company can redefine itself, investors have little to gain by owning Uber stock.
Uber stock bulls point to the transformative nature of the company. I think most agree that Uber and its peers have changed and will continue to change the way people and products move from point to point.
However, transformative does not necessarily translate into triple-digit price–sales (PS) ratios. While Uber stock could some day reach that valuation, I think it first has to follow further in the footsteps of another game-changing company.
The History of Netflix Show the Path That Uber Should Follow
I think that both Uber and its smaller counterpart, Lyft, are similar to Netflix (NASDAQ:NFLX). Some may recall that Netflix did not start as a streaming service. Instead, its original business was mail-order DVDs. While that business did not earn huge profits, it made Netflix a household name. Once technology progressed to the point that NFLX could support streaming video, Netflix gradually took more of its media online. Today, even though the DVD business still operates, most consumers know Netflix only as a streaming service.
Some analysts have speculated that Uber will never make a profit. As long as Uber retains its current business model, I agree with that assessment. In a recent filing, the company revealed that its cost of revenue came in at $5.6 billion, or 50% of its total top line, in 2018. Uber’s cost of revenue included insurance, driver incentives, and Uber Freight’s carrier costs.
However, much like the Netflix of 20 years ago, in the long-term Uber plan to build its future on a newly-created technology. In Uber’s case, the breakthrough will likely be driverless cars. Since 2016, the company has invested over $1 billion in self-driving vehicles. In a recent filing, it disclosed that it owned 250 self-driving cars which had completed tens of thousands of trips.
By switching to driverless cars, Uber should dramatically lower its cost of revenue, thereby forging a path to profitability. Then Uber will be able to become the next NFLX or Amazon (NASDAQ:AMZN), and Uber stock price will rise tremendously.
Competition Could Hurt Uber Stock
However, many investors merely see the mounting losses and have sold their Uber stock in the wake of the Uber IPO. I see this as the correct decision for now. I think investors should stay away from Uber stock until its situation changes.
Investors should also keep in mind that Uber stock may suffer even if it unveils driverless cars. Uber has something Netflix did not have for many years: competition. This competition comes not only from Lyft, but also from Grab in Southeast Asia and Didi Chuxing in China. It could also face off against firms such as Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) as the latter’s investment in Waymo makes it a leader in driverless cars. Moreover, Ford (NYSE:F), GM (NYSE:GM), Tesla (NASDAQ:TSLA), and other automakers could also enter the market.
The Bottom Line on Uber Stock
The path to profits for Uber, and by extension, the road to growth for Uber stock, will only come after its technology progresses. Uber has transformed the way both people and goods move from one point to another. However, like Netflix, Uber will only become prosperous when it adopts new technology; in this case, the new technology is driverless cars. Autonomous vehicles could push the transformation created by Uber to new heights, as many more people will be able to survive without owning cars.
For now, high revenue costs and mounting losses will probably continue to weigh on Uber stock. Until the technological shift happens, or unless investors stop caring about the company’s weak financials, there’s no reason to buy Uber stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.