It's been a reversal of fortunes for Uber (UBER -1.34%) shareholders. The stock is up 80% in 2023 after crashing 41% last year. Rising interest rates crushed growth tech stocks in 2022. Maybe this is the start of a positive stretch for investors in the ride-hailing service.
If Uber shares rise 100% in the next five years, that would translate to an annualized gain of about 15%. This is certainly something that investors would want to see, given that the stock is currently at just about the same level compared to its price at the initial public offering in May 2019.
I don't think this is an unrealistic outlook. In fact, there's a clear path for Uber to produce this type of return. However, there are also some risks to pay attention to as well. Let's take a closer look at this transportation-as-a-service stock.
Becoming a more dominant platform
Uber's growth since even before the onset of the pandemic has been noteworthy. In the most recent quarter (Q2 2023, ended June 30), revenue of $9.2 billion and total gross bookings of $33.6 billion were up 188% and 113%, respectively, versus the same period in 2019, indicative of a business that has weathered the health crisis and gotten even more dominant.
A key part of management's strategy has been to enter new markets and add additional services to the platform. In fact, the goal is to bring on more users, cross-sell different products, and then drive greater loyalty. It looks to be working as Uber had 137 million monthly active customers in Q2, completed 2.3 billion trips, and is now in 70 different countries across the globe.
Of course, for Uber shares to double between now and 2028, this outsized growth will definitely need to continue. There's no way around it. Investors view this as an earlier-stage business, as opposed to a mature one, so it's critical that Uber keep boosting its key metrics going forward.
It's hard to wrap one's head around just how big Uber's opportunity is. In the company's S-1 filing at its IPO, the leadership team said that its total addressable market opportunity was $5.7 trillion. That's only on the mobility side. On the food side, in the company's 2022 investor day presentation, it was shown that combined, global restaurant and grocery spend is $4.3 trillion. Gross bookings totaled $115 billion in 2022, so Uber is still a tiny operation in the grand scheme of things.
To be clear, it's not realistic to assume that Uber is going to command a sizable share of these markets, but it gives you an idea of how massive these industries are. Uber's ability to scale was on full display last quarter, too. The business posted its first GAAP (generally accepted accounting principles) operating profit of $326 million, and positive free cash flow of $1.1 billion.
If the company can not only rapidly increase gross bookings and revenue over the next five years, but also show progress at expanding profitability, there's a high likelihood that the shares will double. After all, they trade at a price-to-sales multiple of 2.6 right now, substantially below their historical average of 4.5.
Risks and opportunities ahead
Analysis of a company isn't complete without looking at important risks. In Uber's case, regulatory headaches are always something to keep in mind. The business has gone to battle with legislators in numerous jurisdictions about how to classify its drivers, and this will likely continue.
More recently, Uber has threatened to pull its service out of Europe over this same issue. If drivers are classified as workers, it could raise costs for Uber. That could have a negative financial effect on operations, while at the same time hurting people with less driver availability.
There's also the possibility of autonomous vehicles becoming a more mainstream technology. If this is the case, it could be a boon for Uber because it would eliminate its largest cost: drivers.
However, leaders in that space, like Alphabet's Waymo and Tesla, could simply create their own direct-to-consumer mobile apps, bypassing Uber altogether. For what it's worth, Uber has a partnership in place with Waymo that will bring Waymo cars to the ride-sharing app in Phoenix, Arizona.
It's difficult to accurately predict how this will play out, but there could be potential threats ahead for Uber's entire business -- reducing the chances that the stock will double in five years.
