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Why You Shouldn’t Throw in the Towel on Uber Stock

Bad timing killed the Uber IPO, but it won't kill Uber stock

In the markets, timing is everything. Unfortunately, timing couldn’t have been worse for the highly anticipated Uber (NYSE:UBER) initial public offering. The ride-sharing giant went public at the end of a week wherein financial markets tumbled on re-escalating trade tensions between the U.S. and China, on the heels of an unprecedentedly calm and big early 2019 stock market rally, and on the same day that President Donald Trump raised tariffs on $200 billion-plus worth of Chinese goods.

Don't give up on Uber stock due to poor IPO timing
Source: via Uber

The next trading day, China retaliated with its own set of tariffs, and tech stocks had their worst day of the year. Against that dour market backdrop, the Uber IPO was a dud. The IPO price was $45. Two trading days later, Uber stock trades hands around $37.

But investors shouldn’t confuse bad timing with a bad company or a bad investment. Uber is a great organization: it enjoys multiple secular-growth tailwinds, has a healthy operating profile, and is only scratching the surface of its long-term potential. Meanwhile, Uber stock now features a pretty cheap valuation with a $62 billion market capitalization. That compares favorably to several analysts’ estimates of a $120 billion market cap earlier this year.

Sure, bad timing killed the Uber IPO and hurt the Uber stock price. But to kill off shares completely? That’s not happening. Instead, powerful long-term growth drivers will propel Uber stock meaningfully from here deep into the future.

As such, post-IPO weakness in the Uber stock price should be seen as an opportunity for long term investors.

Bad Timing Killed the Uber IPO

Ultimately, factors outside of the ride-sharing company killed the Uber IPO. Here are some facts worth noting with respect to the financial-market context surrounding Uber’s ill-fated debut:

  • Heading into the week of the Uber IPO, the S&P 500 had rallied nearly 18% over the course of the first four months of 2019. That rally didn’t feature a single drop in excess of 2.5%. As such, stocks had come very far, very fast, and without much volatility. The broad implication was that a big drop was just around the corner.
  • During the week of the Uber IPO, U.S. and China trade tensions re-escalated after several months of cooling off. Specifically, President Trump accused China of breaking the trade deal, and threatened to raise tariffs on Chinese goods from 10% to 25%. Stocks dropped all week heading into the public offering.
  • On the same day as the Uber IPO, the U.S. upped its tariffs on Chinese goods from 10% to 25%. Stocks were initially hit hard. When Uber finally started trading, the markets were deep in the red.
  • In the days after the offering, China retaliated by introducing its own set of tariffs against American goods. The very next trading day, tech stocks proceeded to have their worst day of 2019.

Management couldn’t have foreseen all these negative developments; hence, the fallout in the Uber stock price. Nevertheless, the positive read here is that these timing factors are one-off events. They won’t repeat and the markets have priced in much of the bad news.

Broadly, these non-recurring headwinds are moving into the rear-view mirror. As they do, sentiment surrounding Uber stock should change. Thus, what was an IPO dud should turn into a long-term winner.

Bad Timing Won’t Kill the Stock

In the long run, strong numbers will ultimately propel Uber stock price significantly higher from where it trades today.

The sharing economy, or more broadly what I call the “coordinated economy”, is the biggest trend of the century. In a nutshell, technology companies are leveraging the internet to democratize single-supplier ecosystems and turn them into multi-supplier ecosystems. This matches supply with demand, which ultimately produces better consumer outcomes in the form of lower prices and higher conveniences.

Uber is the king of the sharing economy in the transportation sector. The company started the ride-sharing world by leveraging the internet and incentives to turn anyone with a car into a potential paid driver.

Now, they are the king of the multi-billion-dollar ride-sharing world, with a huge moat in the form of a scalable liquidity network. Uber has the most drivers, so they have the lowest fares and wait times. This advantage leads to the most riders, which leads to the highest earnings, incentivizing more drivers to jump onboard. Lather, rinse, repeat.

Don’t Ignore the Full Potential

Because of this liquidity network, Uber projects as the leader in the ride-sharing market for a lot longer. That’s a favorable position because this market is just getting started.

Ride-sharing represents, at most, only a few percentage points of global vehicle-miles traveled. It’s likely somewhere around 1%, depending on whom you ask. Further, Uber is just scratching the surface of how much value it can extract from this coordinated driver base. Delivering rides is just part one. Delivering food and packages is part two. Uber Air is part three.

In other words, Uber is in the first inning of a massive growth narrative. The company does run huge losses today. But gross margins are positive and moving higher. Thus, scale should drive operating leverage over time, and big losses should one day turn into huge profits.

Net-net, I think Uber can actually be a $100 billion-revenue and $15 billion-profit company one day. Under those assumptions, today’s $60 billion market cap for Uber stock seems like a steal. That’s why I’m a buyer on post-IPO weakness.

Bottom Line on Uber Stock

Bad timing killed the Uber IPO. But bad timing won’t stick around forever, so it won’t kill Uber stock. Instead, secular growth tailwinds will ultimately propel Uber stock higher in the long run, making today’s post-IPO weakness look more like an opportunity than anything else.

As of this writing, Luke Lango was long UBER.

Article printed from InvestorPlace Media, https://investorplace.com/2019/05/why-you-shouldnt-throw-in-towel-on-uber-stock/.

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