While making a $1,000 investment in any given stock may not sound like a game-changing retirement proposition, I like to view this sum's potential through the eyes of my 8-year-old daughter. By adding $1,000 to a given investment annually -- or roughly $20 a week -- for the next 50 years, her retirement nest egg could grow to over $2.6 million, assuming market-matching returns of 12%.
Should we dream of beating the market by a mere 2 percentage points, this $2.6 million figure would double.
One investment currently offering this combination of outperformance potential alongside a decades-long growth runway is Uber Technologies (UBER -0.38%). Tripling in value since the start of 2023, Uber's stock has been firing on all cylinders.
Understandably, this rapid increase leaves many investors wondering if they missed the buying opportunity. However, the best could still be ahead as Uber's network effects become ever stronger and its growth optionality continues to multiply. Here is what makes the company a tremendous buy-and-hold forever growth stock.
Uber's network is scaling and generating a ton of cash
Moving people and things from point A to point B in more than 70 countries, Uber provided 9.4 billion trips in 2023 while generating $37 billion in revenue -- figures that grew by 24% and 17%, respectively, compared to 2022. Home to a massive two-sided network that pairs roughly 7 million drivers with 150 million monthly active platform consumers, Uber operates through three business segments:
- Mobility (56% of sales in Q4 2023): This segment is ultimately what the "Uber" verb is famous for, consisting of ridesharing, carsharing, micromobility, rentals, public transit, taxis, and more. As the company's most mature business line, it acts as the profit center, generating a 26% adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin in the fourth quarter.
- Delivery (31% of sales): Uber's second-largest unit consists of its grocery, retail, and alcohol delivery sales along with its Uber Eats deliveries for restaurants. It recorded a 15% adjusted EBITDA margin in Q4 and has grown its gross bookings eightfold since 2018.
- Freight (13% of sales): Near breakeven on an adjusted EBITDA basis, Uber's on-demand freight platform aims to reimagine the logistics industry by providing an end-to-end transportation network that matches shippers with carriers. According to Bloomberg, this unit was considered a spin-off candidate in 2023, highlighting the growth optionality present in Uber's platform and all the data within it.
More than tripling its sales since its 2019 initial public offering, Uber's sprawling network helped the company continue its dominant march forward as the industry leader in its niche. Most importantly for investors, this network is beginning to scale, generating boatloads of cash as it reaches consistently higher efficiencies.
UBER Owners' Cash Profits Margin (TTM) data by YCharts
Dropping its sales and marketing expenses as a percentage of revenue from above 30% in 2021 to 9% today, Uber has seen its owners' cash profit margin -- similar to free cash flow (FCF) -- swell to 7%. This turnaround proves that the company's previous cash-burning ways primarily stemmed from spending whatever was needed to attract new users.
While a dramatic shift to positive cash generation like Uber's is usually tied to a slowdown in growth as the company matures, I'd argue that the company's growth story (and its optionality) looks more robust than ever.
Image source: Getty Images.
Uber's abundant growth optionality
Although estimates show that Uber already has about a 75% share of the rideshare market in the U.S., it still has two primary growth areas to continue developing:
1. Specialized product offerings
Uber One, the company's cross-platform membership program, quickly grew to 19 million members after launching in late 2021. Offering special pricing, priority service, and exclusive perks, Uber One now accounts for 30% of the company's gross bookings, with members spending 3.4 times as much as non-members. Meanwhile, Uber Reserve (which lets you schedule future rides) has seen its trip count 10x since 2021, showing how product innovations can drive new sales. Lastly, new features like Record My Ride, intercity travel, multi-merchant pickup in one delivery, and even package returns through Uber Connect show the company's growing list of use cases.
2. Adjacent industry niches
Announcing its "All Taxis on Uber" vision, the company has started adding taxi drivers from specific geographies onto its platform -- a once-unthinkable proposition. These hailable rides have quadrupled their trip total since 2021, adding a precious supply of drivers to its two-sided network. Moreover, Uber's burgeoning advertising unit now accounts for 5% of the company's gross bookings, bringing in high-margin revenue. With many more irons in the fire, such as white-label deliveries, business-to-business shipping, car rentals, and continuous experiments with the "last mile" of shipping, Uber has a myriad of adjacent verticals left to test.
A surprisingly reasonable valuation
Despite Uber's recent share price appreciation, its price-to-FCF ratio of 48 remains reasonable, especially as management expects adjusted EBITDA (and FCF) to grow between 30% and 40% annually over the next three years.
UBER Price to Free Cash Flow data by YCharts
Generating $3.4 billion in FCF over the last year, this total would grow to around $8 billion by 2026 should management be proven right, leaving the company trading at just 20 times today's price. While this includes stock-based compensation, it remains an alluring valuation considering the multitude of growth options ahead of the company, making it my ultimate growth stock to invest $1,000 in right now.
