Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
At a share price of just $33 and change, Uber Technologies (UBER 1.74%) is the very definition of a broken IPO. Investors who bought in at Uber's $45 offer price back in May are sitting on a more-than-25% loss -- but could Uber's next earnings report repair the damage?
In less than two weeks -- Nov. 4, 2019 -- we'll find out the answer to that question when the company reports its fiscal Q3 numbers. One analyst isn't waiting around to hear the good news, though, and just put out an initiation of Uber stock at buy.
Here's what you need to know.
Guggenheim Securities is predicting that after five long months of disappointment, Uber is approaching "a potential turning point" that could lead to its stock price rebounding to $40.
Around the world, comments Guggenheim, "cross ownership" among ridesharing companies is "yielding the potential for consolidation and competitive discipline" as rivals begin acting more like partners, and act more rationally to stop undercutting each other on price.
"Rising prices in the U.S.," says the analyst, "should fuel a strong 2H for UBER" -- a trend we could potentially begin seeing as early as next month's report. Guggenheim is not modeling pricing everywhere else around the world just yet. But even so, it believes price hikes won't be necessary to turn Uber profitable by 2023 (on an earnings before interest, taxes, depreciation, and amortization, or EBITDA, basis). And should the ride-hailing leader and its rivals get their act together, call a halt to their price wars, and permit prices to rise before that, the analyst notes that earning a profit "might get easier to envision if competitive discipline extends beyond the U.S."
What to expect in Q3
So that's the long-term view. What about the short-term news that we'll be hearing about next month?
Here, Guggenheim opines that judging from the "healthy bookings, strong underlying FX-neutral revenue growth and a healthy ride-hail margin" that we saw in Q2 2019, the trends look good heading into Q3's report. Ridesharing revenue could increase 25% to 30%, and revenue from the Uber Eats takeout delivery service could double or more, resulting in total revenue growth on the order of 35% in this year's second half.
Such growth -- if it happens -- would be about triple the rate of revenue growth that Uber showed in Q2, which spooked the market in August. Such growth -- if it happens -- would almost certainly help to attract investors back to the stock.
But would that be the right decision?
Valuing Uber stock
Sadly, I fear not. Even down more than 25% from its IPO price, the numbers I'm seeing at Uber offer little reason for optimism. Consider:
At a market capitalization of $56.6 billion, Uber remains far from a cheap stock. That figure is nearly five times annual revenue -- let alone profits -- for this company. And speaking of profits, rather than making money, Uber is currently losing it at the rate of more than $8.1 billion a year.
Now, maybe Guggenheim is right about Uber being able to reach profitability by 2023 even absent changes in the behavior of its competitors. Personally, I wouldn't recommend relying upon the kindness of strangers as an investment thesis. But more importantly, even assuming the analyst is right, you have to remember that when Guggenheim speaks of "profitability," it's only talking about profits before interest, taxes, depreciation, and amortization. Or in other words, not real profitability.
Real profitability -- net income -- isn't expected to happen for Uber even as late as 2023. (In fact, most analysts think Uber will lose more than $1.60 per share that year, according to S&P Global Market Intelligence estimates, with negative free cash flow to boot.)
Given that this is the optimistic scenario for Uber -- no profits for at least the next four years, and perhaps even longer -- suffice it to say I have little confidence that Uber stock will hit $40 anytime soon, and I'm in no hurry to take Guggenheim's advice today.