Billionaire Bill Ackman is the CEO of Pershing Square Capital Management, a hedge fund that returned 191% in the last five years. Comparatively, the S&P 500 (^GSPC 0.61%) returned 102% over the same period. That outperformance makes Ackman a good source of inspiration for individual investors.
Last week, Ackman revealed Pershing Square began purchasing stock in Uber Technologies (UBER +0.51%) in early January. The hedge fund has accumulated more than 30 million shares, meaning its stake is currently worth more than $2 billion.
Thomas Champion at Piper Sandler has referred to Uber as a "sleeping giant" because the strength of its core businesses creates adjacent opportunities in autonomous driving and advertising. The stock produced a monster return of 115% in the last two years, but there is more upside ahead for patient investors. Here's why.
NYSE: UBER
Key Data Points
Uber is a market leader in ride-sharing and food-delivery services
Uber has a strong presence in the mobility and food-delivery markets. Specifically, it is the largest ride-sharing service and the second largest restaurant food-delivery service in the U.S. as measured by revenue. More broadly, Uber is the largest ride-sharing platform in a total of 10 global markets, and it's the largest food-delivery platform in seven markets.
That scale makes the inherent network effect -- where each user adds value for drivers and vice versa -- particularly powerful. That dynamic was on display in the recent quarter. Monthly active platform consumers increased 14% to 171 million, and trip count increased 18% to 3 billion. That means more people used Uber, and they engaged the platform more often.
Scale has other benefits, too. Uber has a data advantage that lets it continuously improve dispatching, routing, and pricing. Uber is also ideally positioned to connect autonomous-vehicle providers like Alphabet's Waymo with consumers since it has more users than any other ride-sharing platform. Finally, Uber has the data brands need to deliver personalized advertising and a popular mobile platform brands can use to reach consumers.
Image source: Getty Images.
Opportunities in advertising and autonomous driving make Uber a sleeping giant
Building a ride-sharing service is costly and time consuming. Consequently, Alphabet's autonomous-driving subsidiary Waymo partnered with Uber in 2023 to widen its reach in Phoenix. The companies will extend that partnership in 2025 as Waymo enters Austin and Atlanta. Shreya Gheewala at CFRA wrote in a recent note, "The expansion into AVs via the Waymo collaboration positions Uber as the dominant platform for AV monetization."
Uber CEO Dara Khosrowshahi sees autonomous-driving technology as a $1 trillion-plus opportunity for the company in the U.S. alone. He also told analysts on the fourth-quarter earnings call, "We have conviction that Uber will be the indispensable go-to-market partner for AV players." Indeed, if the company proves to be a valuable partner for Waymo in Austin and Atlanta, they may collaborate in additional U.S. cities in the future.
Uber also has an underappreciated opportunity in advertising. Scale affords the company a data advantage that lets brands target advertising based on user preferences implied by their travel and delivery history. Thomas Champion says the situation is analogous to how Amazon uses shopper data to help advertisers target content on its marketplace. Champion thinks Uber's advertising sales can reach $5 billion by 2027.
Uber stock looks cheap at its current price
Uber reported generally accepted accounting principles (GAAP) earnings that quadrupled in Q4, but that was due to a tax-valuation release and unrealized gains in equity investments. For that reason, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) gives a more accurate picture of operational performance. That metric rose 44% to $1.8 billion, and management expects annual adjusted EBITDA growth in the high-30% range over the next three years.
Investors can also consider free cash flow, which rose 122% to $1.7 billion in Q4. The stock currently trades at 23 times free cash flow, a discount to the one-year average of 32 times free cash flow. In fact, the present valuation is only slightly higher than the record low of 19 times free cash flow Uber stock hit in December.
Here is the bottom line: Uber's strong presence in the mobility and food-delivery markets should not only result in strong sales growth in its core businesses but also create adjacent opportunities in autonomous vehicles and advertising. And with Uber shares trading at a historically cheap valuation, now is a great time to follow Bill Ackman's lead and start building a position in the stock
