Thanks to positive business updates from both Uber (NYSE:UBER) and its main competitor Lyft (NASDAQ:LYFT), Uber stock soared in early June to its highest levels since the novel coronavirus pandemic emerged.
First, Lyft reported that May ride volume rose 26% from April. More than that, the company said ride volume has risen for seven consecutive weeks since early April. And, in cities where stay-at-home orders have been fully lifted, ride demand trends are improving more quickly.
Uber followed that up by saying that it’s own ride volume trends are steadily improving across the globe, too – including an 80% recovery in Hong Kong, a city that has been lauded for its containment of and response to the coronavirus outbreak.
In other words, the ride-sharing industry – once thought to be on the brink of extinction thanks to Covid-19 – is back.
So is UBER. Shares are up 170% from their March lows.
But the ride-sharing recovery still has a long way to go. As does Uber stock, which is still more than 10% off its pre-Covid-19 levels.
In the coming months, these trends will persist. Uber’s demand trends and Uber stock will both rebound to pre-Covid-19 levels. So don’t fade this rally in Uber stock. Chase it.
Ride-Sharing Is Back
There was a point in time when many investors and consumers alike thought that the ride-sharing industry was done for good thanks to Covid-19.
Those days are long gone.
As it turns out, the virus is (fortunately) not as bad as feared, with most recent official estimates pegging the death rate at levels only slightly above that of the seasonal flu for most people.
As the science surrounding Covid-19 has shifted over the past few months, so have consumer attitudes.
A recurring Statista survey shows that consumers have grown increasingly less afraid of the virus over the past two months. The number of consumers saying they are very worried about the virus has dropped from 28% in late March, to 20% in late May.
Less-afraid consumers have been going out more (the ISM’s Non-Manufacturing PMI, traditionally considered a gauge on America’s service sector, came in at 45.4 in May, ahead of expectations and up 3.6 points from April). This has, in turn, created greater demand for ride-sharing services.
All of these trends will persist over the next few months.
Covid-19 hysteria will abate. Stores, bars and restaurants will open. Ride-sharing demand trends will rebound. Uber’s growth trends will fully recover.
More Upside for Uber Stock
Before Covid-19 emerged, Uber stock was trading just north of $40. That’s exactly where I expect shares to trend over the next few months.
Why? Two big reasons.
First, it would complete an entirely rational round trip in the stock.
That is, I expect Uber’s demand trends to reach pre-Covid-19 levels by the fall. It only makes sense that, if so, the price of Uber stock also reaches pre-Covid-19 levels by the fall. After all, a full recovery in fundamentals should correlate to a full recovery in valuation.
Second, it’s where the company’s long-term growth prospects peg the fair value of the stock today.
Assuming that Covid-19 was just a hiccup in the ride-sharing growth narrative – and that Uber continues to leverage secular demand tailwinds and liquidity network effects to post strong revenue growth and margin expansion throughout the 2020s – then my modeling calls for $5 in earnings per share from Uber by 2030.
Based on a 20-times forward earnings multiple – which is historically normal for technology stocks – and a 10% annual discount rate, that equates to a 2020 price target for Uber stock of more than $40.
Consequently, both the fundamentals and the optics support the idea that Uber stock has another 10%+ upside over the next few months as the ride-sharing industry continues to bounce back.
Bottom Line
Stick with the recovery rally in UBER stock.
Sure, the best of this rally has already happened. But it’s not over, either.
Instead, on the back of economic normalization tailwinds, this stock can and will head higher over the next few months. Not by another 50%+. But by enough to make shares worth holding onto.
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 did not hold a position in any of the aforementioned securities.
