Uber (UBER 0.36%) shares are driving in the fast lane, having soared 218% since the start of 2023, far outpacing the broader Nasdaq Composite index.
This growth tech stock now trades at a price-to-sales ratio of 4.4. That's not nearly as attractive a valuation as the multiple of 1.5 that the shares carried at the start of 2023. It's accurate to assume that this business is benefiting from strong investor enthusiasm, bolstered by a favorable market environment.
So, should investors still buy Uber stock with $100 now or wait for a better opportunity?
Is this a quality business?
Before buying shares in any business, especially with the hopes of owning it for five years or more, investors need to try to figure out if the company under consideration is high quality. There are many factors to look at when coming to an informed assessment.
I believe Uber fits the bill here. This enterprise dominates its industry, thanks largely to its first-mover advantage. To give you an idea of Uber's massive scale, it operates in more than 10,000 cities across the globe. On a worldwide basis, Uber has 25% of the market for ride-hailing and taxi services. In the U.S., the lead is much greater as the company has 75% market share.
In the fourth quarter of 2023, Uber reported having 150 million monthly active users who completed 2.6 billion trips and spent $38 billion during the three-month span. Operating a multi-sided platform that can put up these kinds of monster figures shows how Uber benefits from a powerful network effect. This moat protects the business from the threat of competitive forces, whether by existing industry rivals or new entrants.
In my opinion, a good company should also have solid growth prospects. In the past, this hasn't been an issue for Uber. Despite the massive disruption that was caused by the coronavirus pandemic, Uber's 2023 revenue totaled $37 billion, up 164% versus 2019.
To further this growth pace, Uber plans to penetrate new verticals like advertising, Uber Health, and Uber for business, in addition to simply adding more users to the platform in general. There's also ample opportunity to drive more Uber One membership sign-ups.
Wall Street believes Uber's revenue will rise at a compound annual rate of 15.7% over the next three years. And given the company's improving profitability, analysts think earnings per share will soar at a 48% average yearly clip during that time.
This is no longer a money-losing operation. Uber produced $3.3 billion of free cash flow in 2023. Now that it has tremendous scale, investors can expect this to be a usual occurrence.
NYSE: UBER
Key Data Points
Threat of disruption
Despite its favorable attributes, it's always a smart idea to understand what could get in the way of Uber's lasting success. I believe there's one important terminal risk factor that just can't be ignored.
It's hard to know if or when this will become a reality, but the possibility of fully autonomous vehicle software poses a serious threat to Uber. Whether it's Tesla, Alphabet's Waymo, or General Motors' Cruise, whoever develops this technology first could launch a driverless taxi service that would rival what Uber currently offers.
From the rider's perspective, this would be a welcome development. The biggest cost contributor of a typical trip is the driver. Eliminating this stakeholder in theory should result in much cheaper rides.
To their credit, Uber executives aren't sitting around casually. They're trying to position the business for whatever technological changes happen in the future. That's why Uber partnered with Waymo to allow the autonomous service to offer trips on the ride-hailing app. It's really anyone's guess what trajectory this technology could take over the next decade.
But if you still view this as a good business in light of this potential risk, then it's time to buy shares.
