Last week, the stock of Uber Technologies went on a wild ride, falling hard after Uber reported earnings on Feb. 5, only to rocket higher toward the end of the week.
On earnings, while revenue and earnings per share actually beat expectations, a somewhat muted growth outlook relative to expectations and overarching long-term concerns over autonomy caused investors to sell shares.
However, the stock climbed the next day and then again on Friday, after hedge fund manager Bill Ackman announced on X his fund Pershing Square Holdings (PSHZ.F +1.84%) had accumulated a 30.3 million-share stake in the company, worth $2.26 billion. In his post, he called Uber, "one of the best managed and highest quality businesses in the world," which can "still be purchased at a massive discount to its intrinsic value."
The buy is notable as Ackman runs a concentrated portfolio of only 10 to 12 stocks. And for sure, Uber is definitely a market leader. However, there are three points of caution investors should heed before buying Uber's stock. Taken together, they're enough to keep this investor on the sidelines today.
NYSE: UBER
Key Data Points
Concern No. 1: The stock isn't as cheap as it seems
First, investors should make sure they're valuing Uber's stock appropriately. It's unclear how Ackman is valuing the company, but there are enough curveballs in Uber's financials to throw anyone off. In 2024, there was a big difference between the company's underlying earnings power and other metrics given by the company, such as net income, adjusted EBITDA, and free cash flow.
Here's are some of Uber's reported full-year 2024 profit metrics:
|
Metric |
Full Year 2024 |
Growth Rate |
|---|---|---|
|
Operating income |
$2.799 billion |
152% |
|
Net income |
$9.846 billion |
N/A |
|
Adjusted EBITDA |
$6.484 billion |
60% |
|
Free cash flow |
$6.895 billion |
105% |
Data source: Q4 earnings report.
At first glance, Uber looks stunningly cheap, at roughly a 16 times P/E ratio, a 21.8 times enterprise value-to-EBITDA ratio, and a 20.5 EV-to-free cash flow ratio.
Unfortunately, the valuation is much higher when one uses the number investors should probably use when trying to value the company. That's after-tax income from operations, which is the lowest number above, by far.
Why are the other figures misleading? Starting with net income, Uber recognized a massive $5.8 billion tax benefit from a prior valuation allowance -- essentially recognizing a lot of the tax benefits from prior years when the company was unprofitable. That obviously won't recur. Without that benefit, Uber's pre-tax income for 2024 falls to $4.13 billion.
Additionally, thanks to higher short-term interest rates today, Uber earns a significant amount of interest income on its restricted and unrestricted cash, to the tune of $1.85 billion in 2024.
It's certainly not a bad thing to have so much cash that you earn a lot of interest; however, investors should be aware of it, since interest income made up 45% of pre-tax revenue last year. Additionally, if interest rates were to fall, that figure would likely decrease. Finally, if one is stripping out Uber's cash when valuing the company on an enterprise value basis, investors should take away this interest income from the profit calculations, too.
Turning to adjusted EBITDA and free cash flow, Uber adds back two significant items that are real costs for the company. One is stock-based compensation, which totaled $1.8 billion last year, and is a real cost to shareholders.
The second is an insurance reserve charge, which can get to be significant for Uber. According to its annual report, Uber uses both external insurance and an internal insurance subsidiary, as regulations force Uber to reserve for a lot of different liabilities across its business. So, that is an ongoing cost of doing business for Uber.
In 2024, the company added back an insurance reserve and settlement charge of $1.1 billion to adjusted EBITDA. Meanwhile, the company set aside $2.82 billion in insurance reserves total, which boosted operating and free cash flow. However, both charges are real costs of doing business, and the cash reserves aren't eligible to go back to shareholders. So while these costs are added back to EBITDA and free cash flow, shareholders should probably discount them.
This investor's preferred method of valuation is EV-to-earnings. For the EV, investors should give Uber credit for its $7 billion in unrestricted cash, as well as its $8.5 billion in minority investments. That would give Uber an EV of $141.6 billion, lower than its market cap of $157.1 billion as of this writing.
On the other hand, using the $2.8 billion in income from operations as the real barometer of the company's earnings power, then factoring a tax rate of say, 20%, that would bring the true run-rate earnings for Uber to about $2.24 billion.
Therefore, I'd currently value Uber's operations at about 63 times earnings -- a far cry from the current GAAP 16 P/E ratio of 20-21 EV-to-EBITDA or free cash flow measures.
Is Uber stock really undervalued? Image source: Getty Images.
Concern No. 2: Pricing and insurance risks
Of course, a 63 P/E may not be inappropriate for a company growing revenue and earnings in the way that Uber has over the past few years. After all, Uber grew its gross bookings over 20% annually between 2021 and 2023, and just added another 18% bookings growth in 2024.
However, a lot of that bookings growth before 2023 came from increased pricing. According to Forbes, between 2018 and 2022, Uber increased prices about 83%, or 18% per year, which was over four times the rate of inflation. Those increases were for two main reasons: one, to turn Uber from a loss-making business into a profitable one ahead of and after its IPO in 2019, and two, to keep up with skyrocketing insurance costs.
Now, price increases have moderated in 2023 and 2024, as trips growth has generally lined up with bookings growth. That's encouraging, as the last couple years have seen "real" growth in the sense that revenue growth didn't totally rely on price increases.
However, management still sees insurance costs rising at a high-single-digit rate. While that would be a moderation from the recent past, Uber will still have to either eat those costs or continue raising prices to cover them. After the price increases of the past six years, there could come a point when customers seek alternatives, like driving more or taking public transportation.
On the subject of insurance, as mentioned before, Uber self-insures to a larger extent than other large companies. While it's probable the company has reserved appropriately for liabilities, there is always the chance insurance losses come in higher-than-expected, leading to large payouts or an increase in reserves in future years. So, that's an added risk other large tech companies don't necessarily have.
Concern No. 3: Autonomy still poses risks, despite new partnerships
Finally, Uber's drop in share price last year came as the threat of autonomous ride-hailing rivals emerged. Alphabet's (GOOG +2.66%) (GOOGL +2.81%) Waymo service expanded coverage in San Francisco and began service in Los Angeles in 2024, adding to its existing service in Phoenix. Meanwhile, Tesla has pledged to introduce its own autonomous ride-hailing service in Austin this year.
Waymo already has its own app, and there is the prospect of Waymo, Tesla, and others eventually bypassing Uber's platform altogether in the future. That threat could affect Uber's terminal value.
Uber sold its autonomous unit to Aurora in 2020, and continues to hold a minority stake in the company, which seeks to partner with auto OEMs for autonomous trucking. Still, the fact that Waymo is already on the road with a consumer-facing service means it has a big lead. According to a LinkedIn post from Andreessen-Horowitz partner Alex Immelman back in December, Waymo rose to achieve a 22% market share in the areas of San Francisco where it offers service -- already on par with Lyft.
Now, Uber is obviously aware of all of this and makes the following counter-arguments: First, Uber says that autonomous robotaxis will take a very long time to become mass-adopted. Second, Uber says it can offer autonomous rides within its platform as an option.
Third, Uber is actually partnering with Waymo already. In Phoenix, Waymo partners with Uber, and its fleet is management by Moove, in which Uber holds a minority stake. And for the upcoming 2025 launches of Waymo in Atlanta and Austin, Waymo will partner directly with Uber and will only be available exclusively in the Uber app, while Uber will also handle Waymo's fleet management in those cities.
As of now, Uber is saying it will benefit from AVs by offering technology platforms like Waymo access to its huge customer base and earning revenue for fleet management.
Still, the financial split between the two companies on a per-ride basis is not known. Moreover, fleet management is a capital-intensive business that's different from a low-capital technology business. Ultimately, if self-driving tech takes over, Uber should survive, but it's unclear exactly what kind of economics it will bring in, and how much benefit will go to the technology partner.
Waymo has, after all, spent an absolute ton of money on its technology over a decade-plus, and will likely look to recoup that and more as it seeks profitability. Furthermore, since there is already a Waymo app in Waymo's current cities, eventually it may be cheaper for customers to go directly to the Waymo app, since Waymo will likely have to pay a commission fee to Uber for rides sourced there.
Of course, Uber may survive and thrive in the age of autonomy; however, the financial details are still pretty murky. That adds a lot of uncertainty to Uber's economics in, say, the 2030s. And those long-term economics will affect its valuation today.
Uber may be reasonably priced, but it's no bargain
Given the higher "core" valuation for the business than it first appears, uncertainty over pricing power and insurance costs, and the uncertainty around disruption from autonomous driving, Uber may be a reasonably priced market leader, but it's not quite the bargain Ackman believes.
