When it comes to ride-sharing, there are only a handful of options such as public transportation services like buses, metros, or trains. These options often require commuters to stand around and wait for their ride. Uber Technologies (UBER 0.96%) recognized this disconnect and created a one-stop shop for commuters to hail a ride on demand. The convenience factor and some savvy marketing allowed Uber to raise billions of dollars in venture capital as a private company.
Unfortunately, management shakeups and failed product launches, among other things, led to a rocky initial public offering three years ago. Since then, Uber's stock price has mimicked that of a yo-yo, soaring high and crashing low. However, some analyst on Wall Street see a great investing opportunity in Uber and have declared the stock a top pick for 2023. Let's dig into the company's financials and explore why there appears to be a bullish sentiment on the stock.
What is Wall Street saying?
Last week, Evercore analyst Mark Mahaney discussed Uber during an interview on CNBC. Mahaney included Uber as a top pick for 2023, comparing the company's product to that of a utility more so than a consumer discretionary item. This is an interesting perception of Uber. Essentially, Mahaney argues that even though there are fears of recession and inflation remains a pain point for consumers, Uber's selling point of mobility as a service offers a convenience factor that is unparalleled. The analyst believes that even in the current economy, Uber will still see its share of rides to the airport as well as consumers preferring to call a ride on demand over driving to their destination during leisure activities.
Evercore isn't the only analyst that's bullish on Uber. Goldman Sachs also includes the ride-hailing leader as a good name to own in 2023. Like Mahaney, Goldman's Eric Sheridan also uses the word "utility" when speaking about Uber and its investment prospects. Sheridan highlights a different aspect of Uber's business, though. He cites that the company's new subscription service, Uber One, is beginning to gain traction. Uber One provides subscribers with discounts and special pricing promotions for rides and food delivery, among other things.
Sheridan describes the potential upside of Uber One by comparing it to Amazon's Prime subscription. Given Prime offers subscribers faster parcel delivery and specific pricing optionality, it's no wonder it has become a meteoric success at the e-commerce giant. In a similar vein, Sheridan believes that as Uber One builds its subscriber base, the company's recurring revenue stream will increase, which can lead to expanding margins and a path to profitability.
Image source: Getty Images.
Keep an eye on valuation
Valuation is a tricky thing. Typically, investors should pay close attention to whether or not a company is growing its revenue, and the pace at which this growth occurs. However, investors should also be keen on a company's ability to control costs, expand margins, and generate consistent profits.
Although Uber has done a stellar job growing its revenue, the company has continued to lose money. For the nine months ended Sept. 30, Uber's revenue was $23.3 billion compared to $11.7 billion during the same period in 2021. However, the company's net loss was $9.7 billion; by comparison, Uber's net loss during the same period a year prior was $1.4 billion.
It is also important to note that Uber's net losses also include unrealized losses related to the revaluations of Uber's equity investments as well as stock-based compensation expense. Companies like Uber are still very much in growth mode. For this reason, Uber offers employees generous stock option packages as part of their compensation, and will also make strategic investments in other companies from time to time. Just like a stock, these equity investments have a value and Uber needs to declare gains and losses on them.
For the quarter ended Sept. 30, Uber's net loss was $1.2 billion compared to $2.4 billion in September 2021. So while the company is still burning cash, management has done a decent job of keeping an eye on costs without sacrificing growth. As a result, losses appear to be moving in the right direction and should encourage investors that a path to profitability is in Uber's future. Moreover, investors should keep in mind that some items like stock-based compensation and equity investments are unrealized losses, meaning they are non-cash impacts to the P&L.
Should you invest?
Uber is not a blue-chip company that pays a steady dividend. Uber definitely has a long, arduous path before it reaches profitability. However, the nod of approval from two reputable Wall Street banks should not be discounted. The underlying thesis is that Uber has done what it needs to do in order to lay the groundwork for a bright future. More specifically, as subscriptions increase, revenue should become more predictable.
With more predictable revenue comes maturity aspects such as expanding margins and positive cash flow. Despite its losses, Uber does appear well poised for a nice run-up. For long-term investors, owning a market leader is seldom a poor choice. Now could be an opportune time to add Uber to your portfolio.
