Shares of Uber (NYSE:UBER) stock have naturally plunged over the past few months as the novel coronavirus pandemic has brought the global ride-hailing market to screeching halt. In short, thanks to the coronavirus outbreak, consumers across the globe aren’t leaving their homes right now — let alone traveling or hopping into a stranger’s car.
From its mid-February highs, Uber stock has shed more than 30%.
When it comes to looking at the investment thesis on Uber stock, there are three big questions. First, will Uber survive the coronavirus crisis? Second, if yes, what will Uber’s business look like on the other side? Third, looking out long-term, is Uber stock undervalued?
My answers to those questions are as follows:
- Yes, Uber stock will survive the coronavirus pandemic. The company has enough cash on hand to weather several months of zero revenue.
- Uber’s business will look slightly different in the back-half of 2020. But, by 2021/22, ride-hailing demand trends should normalize because ride-hailing’s benefits are enduring, while fears of catching coronavirus are fleeting.
- Relative to its long-term earnings growth potential, Uber stock is undervalued below $30. The fundamentals say this stock could rally to $40 soon.
All in all then, I think it’s a good time to be buying — not selling — Uber stock. Near-term pain will pass. And when it does, long-term gain will take its place.
Uber Will Survive
First, and foremost, it’s important to understand that Uber has more than enough resources to weather this near-term economic apocalypse.
Thanks to tons of venture capital investments over the years and a big IPO, Uber exited 2019 with $10.9 billion in cash on its balance sheet and another $440 million in short-term investments. Collectively, this makes a total liquid cash balance of over $11 billion. That huge cash balance gives the company working capital of over $8 billion, against a quarterly expense base that measured less than $6 billion last year.
Even further, of that $6 billion quarterly expense base, most of it is variable and ties to ride volume. So as ride volume drops in 2020, those costs should drop, too.
In other words, Uber has more than enough resources and a dynamic enough cost structure to more than withstand several months of zero revenue — a worst-case scenario which has yet to come because Uber is still generating tons of revenue through Uber Eats.
Overall, Uber will survive this crisis.
Demand Trends Will Normalize
Secondly, it’s equally important to understand that the ride-hailing market is not dead. Instead, ride-hailing demand trends will rebound in the back-half of 2020, and fully normalize by 2021/22.
Why? Because the benefits of ride-hailing — cheap, convenient, on-demand transportation built for travel and urban mobility — are enduring. The fears of catching coronavirus, in contrast, are fleeting.
That is, once the pandemic is largely contained and a vaccine and multiple effective treatments are readily available, consumers won’t be afraid of catching the virus because it will either be entirely gone or the risk of catching it will be abysmally low. Consumers also won’t be afraid of catching a “new” virus because they have short-term memories, and because such fears are irrational; Pandemics only happen once every few decades, and the chances a new one pops up in 2022 are very small.
However, Uber will still be a cheap, convenient, and on-demand way to travel.
As such, by 2021/22, ride-hailing demand will normalize back to levels it was at in 2019. Thereafter, the market will resume its secular growth trajectory.
Valuation Is Attractive
Third, it is perhaps most important to understand that coronavirus hysteria has plunged Uber stock into deeply undervalued territory.
Assuming that Uber does survive this crisis, ride-hailing demand trends normalize, and Uber leverages liquidity network effects to sustain a leadership position in the ride-hailing market, then the long-term growth trajectory of Uber is minimally impacted by the coronavirus pandemic.
I’ve revised my long-term estimates slightly lower to account for 2020/21 demand disruption. Still, I see Uber netting about $5 in earnings per share by 2030, versus $6 in my prior model.
Based on a 20-times forward earnings multiple — a medium-term average multiple for technology stocks — and a 10% annual discount rate, that implies a 2020 price target for Uber stock of over $40.
Down below $30, then, Uber stock appears to be significantly undervalued relative to its long-term profit growth potential.
Bottom Line on Uber Stock
The coronavirus pandemic has created a near-term apocalypse situation for Uber. But the company has more than enough resources to weather this storm, and ride-hailing demand after-shocks of the pandemic should be largely contained to 2020.
Assuming so, recent weakness in Uber stock is nothing more than a long-term buying opportunity.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long UBER.
