It has been a rough life on Wall Street for ride-sharing giant Uber (NYSE:UBER). Once upon a time, there were private market rumors of a $120 billion valuation for this company. But, when the IPO did finally come around, Uber fetched a valuation of just over $80 billion. Since then, Uber stock has come crashing down amid concerns about slowing growth and a lack of profitability.
Today, Uber’s market cap sits under $50 billion. That’s a far cry from $120 billion.
Many investors are writing off Uber stock as a lost cause. They argue that Uber is a money-losing operation, and that current trends — namely, slowing revenue growth and widening losses — imply limited visibility toward profitability one day. Without profits, Uber stock will just keep falling.
So far, those investors have been right. They will likely remain right for the foreseeable future. But, they won’t be right forever.
There is a semi-visible pathway here for Uber to be profitable in a big way in the future. Sure, that pathway is clouded by a bunch of noise right now. Eventually, though, that noise will clear. When it does, investors will realize that this is a big growth company with a realistic chance at big profits. That realization will spark a huge recovery rally in the price of Uber stock.
When will all this happen? I have no idea. Today’s headwinds need to disappear, and right now, it’s anyone’s guess as to when they will. As such, the best thing to do here is sit on the sidelines and monitor the situation. Wait for signs that the headwinds are clearing up. Once those signs emerge, buy the dip in the Uber stock price with both hands.
Current Trends Are Not Favorable
The current trends underlying Uber stock are not favorable, and broadly imply that shares will remain weaker for longer.
In a nutshell, Uber pioneered the ride-sharing space and leveraged liquidity network effects to dominate the market without sizable competition for a long time. Then, the company took a few missteps, largely the result of bad publicity from former CEO and founder Travis Kalanick. That bad publicity made Uber the “bad boy” in the ride-sharing industry, and created room for competitor Lyft (NASDAQ:LYFT) to gain share under the “good guy” image.
Uber responded by pushing Kalanick out. But, that didn’t solve the problem. Arguably, it only made it worse, because the “bad boy” stuff that Kalanick brought to the table is also what gave Uber its competitive edge. When he left, that fiery, competitive edge left, too. So, as opposed to Uber fixing its image and everything going back to normal following the Kalanick firing, things only got worse.
Growth rates continued to drop. Spending went up, since management had to up driver incentives and marketing spend to help stabilize slowing growth trends. Losses widened. Investors lost faith. Uber stock tanked.
At present, there is no visible pathway for these trends to turn around. So long as this remains true — and so long as Uber remains a slowing growth company with widening losses — Uber stock won’t rebound.
Uber Will Rebound … Eventually
Taking a step back, the fundamentals here imply that Uber’s growth and profit trends will eventually rebound, and when they do, Uber stock could soar.
Those fundamentals are pretty simple. Based on last quarter’s numbers, Uber makes money on every ride, excluding operational expenses. Consumers paid, on average, around $9 per ride. About 70% of that went to the drivers. The other roughly 30%, or just about $3, went to Uber.
That’s not much. And Uber has a ton of operating expenses. So, even at nearly 1.8 billion trips last quarter, $3 in net revenue per trip wasn’t enough to offset opex. But, the idea here is that Uber’s operating expenses are relatively fixed, so while 1.8 billion trips at $3 per trip might not be enough to drive profitability, 3 or 4 billion trips should be.
Thus, scale should drive profitability in the future. Importantly, scale is coming, because there are numerous trends at play here that imply that the ride-sharing market will continue to grow and that Uber will remain a very important player in that secular growth market.
Big picture — Uber will one day be profitable. How profitable? My modeling suggests that $5 in earnings per share is doable by 2030. Based on a growth stock average 20-times forward earnings multiple and a 10% discount rate, that equates to a 2019 price target for Uber stock of almost $40.
Bottom Line on UBER Stock
The Uber stock price is dramatically undervalued today relative to the company’s long-term profit growth potential. But, that profit growth potential lacks visibility because of currently adverse trends, namely slowing growth and widening losses. When those trends reverse course, Uber stock will soar toward $40.
Until then, investors should expect Uber stock to remain weaker for longer.
As of this writing, Luke Lango was long UBER and LYFT.