On Friday, Dec. 1, Uber Technologies (UBER -2.39%) received some exciting news: Its stock will join the benchmark S&P 500 index at the commencement of trading on Dec. 18. It's a major achievement because admission comes with strict criteria:
- The company must have a market capitalization more than $14.5 billion.
- The sum of its earnings over the past four quarters must be positive.
- Its earnings in the most recent quarter must be positive.
- At least 50% of the company's shares must be available for public trading.
- At least 250,000 of the company's shares must have traded hands in the last six months.
But ticking all the boxes doesn't guarantee admission. The company must be selected by the U.S. Index Committee, which reviews the S&P 500 and its components periodically. It takes a few other things into account, including sector weighting -- the S&P 500 is a diversified index, so the committee wouldn't nominate 400 stocks from the technology sector alone, for example.
Uber's management team has worked hard to swing the company into profitability while maintaining strong growth in its ride-hailing and food-delivery businesses. Below, I'll explain why its stock is a buy now and what joining the S&P 500 could mean for investors.
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Uber's mobility business has roared back to life
Uber's operations are split into three segments: Mobility (ride-hailing), food delivery, and commercial freight. Mobility has always been the company's largest financial contributor, except during a brief period at the height of the pandemic when lockdowns and social restrictions were in effect. Food delivery took over during that challenging time, but mobility is now well and truly back.
In the recent third quarter of 2023 (ended Sept. 30), customers booked $17.9 billion in rides, which was a 31% increase year over year. They also spent $16.1 billion on the Uber Eats food delivery platform, but that marked a much slower growth rate of 18%.
Uber continues to innovate in the ride-hailing space. It recently launched Group Rides in 100 cities globally, which means friends traveling to the same destination can book one ride to pick them up, even if they are in different locations. The company also expanded its Taxi segment in New York City, so any customer who books an UberX can have the ride fulfilled by a yellow cab. Uber disrupted the traditional taxi industry when it burst onto the scene, and now it stands to profit from what's left.
In the longer term, Uber is preparing for autonomous self-driving vehicles to enter the mobility industry at scale. It signed a number of partnerships with developers of the technology, including Alphabet's Waymo, which already offers autonomous rides through Uber in Phoenix, Arizona. Uber paid its human drivers $16 billion last quarter, so self-driving cars could eliminate that cost and transform the company's economics.
Since Uber has 142 million monthly active customers on its platforms, it will be the go-to network for developers of autonomous vehicles who want to access the largest possible audience.
Uber is finally profitable
Losing money is often a feature of modern technology companies, not a bug. Investors encourage them to burn cash to drive growth, even if it means suffering steep losses at the bottom line. The idea is to acquire lots of customers fast and eventually cut costs down the road to turn the business profitable.
Uber consistently lost money from its founding in 2009 up until the fourth quarter of 2022, when it delivered a net income (profit) of $595 million. It carried that momentum into 2023, recording a further $458 million in net income through the first nine months.
The resurgence of its mobility business was a huge factor because it gave Uber more revenue to work with, but the company also carefully managed costs this year to shore up its bottom line. Through the first three quarters of 2023, Uber's operating expenses came in at $10.5 billion, which was $100 million less than the year-ago period.
The largest reductions were in sales and marketing and administrative costs.
However, the biggest tailwind for Uber's bottom line was the change in the value of its investments. The company owns an equity stake in at least five different start-ups, and their value plunged in 2022 amid the tech bear market. It dealt a $9.9 billion blow to Uber's financial results in the first nine months of that year, which swung to a $493 million profit in 2023.
Those fluctuations in equity value merely happen on paper unless Uber sells, so they technically don't affect the company's financials. However, they must be included in its generally accepted accounting principles (GAAP) results by law, which is the method the U.S. Index Committee relies upon to measure profitability.
Joining the S&P 500 could boost Uber's stock
Uber stock might have plenty of upside potential over the long term, but its inclusion in the S&P 500 might add some zest in the near term. In fact, its stock has already jumped 2.4% since the announcement on Friday.
Why? Because every index fund that tracks the performance of the S&P 500 will be forced to buy Uber stock. Wall Street firm Bernstein estimates those funds will have to acquire around 200 million Uber shares, worth about $11.7 billion at the current price of $58.63. That translates to almost 10% of Uber's market value!
While that will drive short-term demand for Uber stock, there is no guarantee that S&P 500 inclusion will lead to a higher valuation in the long term.
Investors should remain focused on Uber's long-term potential as a business, and they should pay especially close attention to autonomous self-driving technologies, which could be a major value creator in the coming years.
