Ride-hailing company Uber Technologies (UBER -0.38%), founded 15 years ago, took a long time to make money. But it's not for a lack of success. The company's name has become synonymous with its product: Do you call an Uber, or do you hail a ride? I've never heard anyone say the latter.
The good news is that Uber has finally reached a point where revenue has outgrown its expenses, and money is flowing to the bottom line. Wall Street has shown Uber love. Shares have more than tripled since the market bottomed in October 2022.
Yet investors can still ride Uber to great investment returns. Here's why.
From cash guzzler to cash cow, and profits to follow
The height of the pandemic was brutal for Uber, which saw its business implode when people avoided face-to-face contact. But as you can see, it has since enjoyed rapid growth over the past few years.
Uber's digital marketplace matches drivers with customers looking for rides, deliveries, or shipping services. It makes money by taking a percentage of each transaction. Uber's gross booking volume was roughly $131 billion over the past four quarters, translating to $36 billion in revenue.
Uber must collect enough revenue on enough bookings to cover the company's overhead expenses like sales and marketing, research and development, and corporate wages. It hit that threshold in 2023, generating consistently positive free cash flow.
UBER revenue (TTM) data by YCharts; TTM = trailing 12 months.
Generally, a company turns cash-flow-positive first, and bottom-line earnings follow. That's because free cash flow excludes non-cash expenses like stock-based compensation. Uber will soon wrap up its 2023 with a fourth-quarter earnings report, and analysts believe earnings per share will come in at $0.38 for the whole year.
Uber's two massive competitive advantages could drive long-term value
With Uber profitable, investors should look for rapid earnings growth over the coming years as two key factors create value in the business.
First is its loyalty program, Uber One. It's a monthly subscription that gives customers perks and discounts on services. Companies like subscription programs because they create recurring, high-margin revenue for the business and lock in customers. Someone subscribing to Uber One is far less likely to call a taxi or use a competitor. To date, Uber One has over 15 million subscribers.
Second, Uber has a massive data advantage with a 75% market share in the United States, three times that of Lyft, its only domestic ride-sharing competitor. Meanwhile, traditional taxis are fragmented and not nearly as high-tech as Uber, which collects data, including trends, payment information, customer demographics, and trip information via its app.
If Uber can leverage its data and continue building an increasingly significant Uber One membership, it should translate to more positive outcomes for shareholders. More data and size create a better user experience, which attracts more customers, and the cycle repeats itself.
The case that Uber is still undervalued
Since Uber is newly profitable, I don't think its competitive advantages have gotten enough time to shine and become evident. That's not to say that Wall Street hasn't begun loving the company again. The stock has tripled from its lows in October 2022. Now, ideally, investors would have bought shares before then.
However, Uber's long-term investment potential still looks compelling today.
Using analysts' 2024 estimates, and Uber will formally close out 2023 in the coming days, the stock trades at a forward price-to-earnings (P/E) ratio of 34. Investors should follow fourth-quarter earnings to see management's guidance for this year and how it stacks up to what analysts are anticipating.
Over the long term, analysts foresee earnings growth averaging 51% annually. The resulting price/earnings-to-growth (PEG) ratio (below 1) signals that Uber's stock is still attractive, assuming it grows at that pace.
Nothing is promised in investing, so indeed, the stock is riskier now than at $20 in 2022. However, Uber dominates U.S. ride-hailing, and its business might shine more brightly looking ahead.
