The latest round of quarterly earnings announcements has been full of ups and downs for the overall stock market. The S&P 500 index is down slightly since the end of March.
One component of the S&P 500 has done more than its fair share to pull the benchmark index down. Uber Technologies (UBER +0.93%) has fallen about 12% since the end of March.
NYSE: UBER
Key Data Points
Uber recently announced quarterly results that were less than spectacular. The disappointment hasn't stopped analysts who follow the business closely from suggesting it can outperform. The consensus price target of $87.36 per share for Uber implies a gain of about 30% from recent prices.
Individual investors must understand that the battalions of sell-side analysts who set price targets on Wall Street are generally entry-level employees. The handful of fund managers who click "buy" or "sell" wouldn't dream of making a decision based solely on a lofty price target, and neither should you. Here's a closer look to see if Uber deserves your attention at its recently beaten-down price.
Why Uber stock fell after earnings
Shares of Uber tanked on May 8 after the company reported first-quarter gross bookings that missed Wall Street estimates. Instead of the $37.9 billion in gross bookings that Wall Street was expecting, the company reported $37.6 billion.
Uber also upset investors with its forward outlook. The company expects second-quarter gross bookings to reach $39.2 billion at the midpoint of management's guided range. Wall Street expected the company to forecast $40 billion.
Uber also reported a net loss of $654 million in the first quarter. Wall Street was expecting a gain of $503 million. Even if we adjust for a $721 million non-cash headwind caused by a revaluation of the company's equity investments, it missed the mark by a mile.
Still a buy?
Most analysts who follow Uber lowered their price targets slightly but maintained buy ratings for the industry leader. They're encouraged by improving profitability.
Income from operations swung from a loss of $262 million a year earlier to a gain of $172 million this year. While Uber posted a net loss according to generally accepted accounting principles (GAAP) in the first quarter, free cash flow shot 148% higher to $1.4 billion.
Uber's greatest advantage is its size, and this advantage appears durable. The company completed 2.6 billion trips in the first quarter, while its strongest competitor in the U.S., Lyft, completed just 188 million trips.
Analysts aren't wrong to suggest Uber can provide market-beating gains, but the stock could be riskier than investors realize. It's currently trading for about 42 times trailing free cash flow. This isn't an unreasonable multiple for a business that more than doubled its trailing free cash flow over the past 12 months. At the same time, such a high multiple comes with expectations of continued profit growth at a rapid pace.
As the preferred partner for drivers and riders, Uber could have enough pricing power to boost its bottom line in the years ahead. That said, everyday investors who buy at recent prices might be accepting more risk than they realize.
If free cash flow doesn't continue rising rapidly for at least a couple more years, the stock could fall hard. Uber is still a good stock to buy, but only for investors with a medium-to-high risk tolerance.
