Uber Technologies (UBER 0.96%) helped spearhead the so-called gig economy, allowing anyone with a car to start making money almost instantly. This disruptive internet enterprise wasn't always a great investment, though, as shares were down 45% exactly three years since they started trading.
After really disappointing shareholders during the period after its initial public offering in May 2019, this transportation-as-a-service stock has been crushing it more recently, up a phenomenal 120% in the past year alone. Is now the right time to buy Uber?
Positive factors
Uber's business is exhibiting strong momentum as of late. It ended 2023 reporting $37.3 billion of revenue. That was up 17% year over year, and it was 165% higher than pre-pandemic 2019. The last year's financial results were propelled by $137.9 billion in gross bookings (up 19% year over year), 150 million monthly active users (up 15%), and 9.4 billion trips (up 24%).
I find it encouraging how Uber fared during the worst days of the health crisis. Health restrictions limited consumer mobility, which hurt the ride business. But food deliveries saw robust demand. In the fourth quarter, 45% of the company's gross bookings came from the delivery segment, showing its durability.
After years of investing aggressively in product development and marketing to grow sales and the user base, Uber is starting to turn the financial corner. It posted $1.1 billion of operating income in 2023, with free cash flow totaling $3.4 billion. Investors will want these trends to continue, particularly as Uber keeps increasing its revenue base.
A business of this scale has developed powerful network effects. As it attracts more consumers, drivers, and restaurants, the platform immediately becomes more valuable for all stakeholders. This protects Uber's competitive position.
Negative trends
Even as Uber's business is showing that it's largely on strong footing right now, investors need to know about some less favorable trends. These point to how difficult it can be for a platform company like this to constantly please all of its stakeholders.
According to Gridwise, the average Uber driver earned $1,410 in gross monthly earnings in 2023, which was down 17% year over year. That sum is still significantly higher than what Lyft drivers made although they do work less. Uber Eats saw a similar double-digit decline for monthly earnings. Drivers who feel they aren't getting fairly compensated could stop working for Uber.
On the consumer side, the cost of rides climbed 83% during a 45-month stretch between 2018 and 2022. That's a significant gain that can squeeze individuals at a time when inflationary pressures remain top of mind. If this trend continues, it could result in riders signing up for other ride-hailing apps, or completely abandoning this mode of transportation.
This points to the lack of switching costs that Uber has. Both riders and drivers can easily move between various platforms with the tap of a finger. Uber must constantly find ways of incentivizing these users to stay engaged, often with costly promotions.
Of course, the ultimate goal is to strike the right balance, so that riders, drivers, and restaurants, another big stakeholder, all feel like they are getting a good deal. Uber's rise to get to this point demonstrates that it has so far prospered.
So is Uber a buy?
Investors should closely watch those trends to make sure Uber doesn't alienate its users, who are obviously the lifeblood of the company's success. Nonetheless, I still believe the positive traits, like strong growth, improving profitability, and network effects, hold more weight.
It's important to consider the current valuation before buying shares. The stock is down 15% from its peak price, and it trades at a forward price-to-earnings ratio of 31.8. Given the sizable potential this business has, I believe that's a fair price to pay.
