On Friday, Feb. 7, hedge fund manager Bill Ackman took to social media platform X (formerly Twitter) to reveal his firm's newest stock position. This is quite unusual, as investors typically need to wait until institutional investors publish a Form 13F following the end of a quarter to see which stocks they recently bought and sold.
Below, I'm going to analyze Ackman's latest position and make the case for why I think this particular stock is one to buy hand over fist right now.
What stock did Bill Ackman just buy?
According to Ackman's remarks, his hedge fund, Pershing Square Capital Management, started accumulating shares of Uber Technologies (UBER 0.36%) in the beginning of January. As of this writing, Pershing Square holds 30.3 million shares of Uber.
Unlike other money managers, Pershing Square generally holds stock in a small cohort of companies. In other words, its portfolio generally only holds 10 or so stocks at any given time. Moreover, Ackman noted in his X post that he invested in Uber during a venture round many years ago when the company was still private.
To me, Ackman's continued investment in Uber now that it's a public company, combined with the stock earning a spot in his otherwise limited portfolio, signals that he has strong conviction in its potential.
Image source: Getty Images.
Why does Ackman like Uber?
One of Ackman's investment traits is that he looks for value stocks. He shared this sentiment on social media, writing that Uber stock "can still be purchased at a massive discount to its intrinsic value."
As of this writing, shares of Uber are trading around $75. However, savvy investors understand that a stock price alone doesn't determine the intrinsic value of the business.
Below, I'll explore some valuation metrics that should help paint a better picture of what Uber is actually worth, and why I see now as a great opportunity to scoop up some shares.
NYSE: UBER
Key Data Points
Uber stock is a bargain that's too good to pass up
The charts below illustrate Uber's free-cash-flow trends over the last few years, in addition to the company's price-to-earnings (P/E) and price-to-free-cash-flow (P/FCF) multiples. It's important to note that the lines for the company's P/E and P/FCF begin at the time when the company started generating consistent profits -- hence, the purple lines do not go as far back for certain time periods.
UBER Free Cash Flow (Quarterly) data by YCharts
Here's the convoluted thing about the metrics above. Over the last three years, Uber's free cash flow has not only been consistent, but it's also grown significantly. However, during this same time, the company's P/E and P/FCF multiples have compressed. This means that as Uber evolved into a more profitable enterprise, the stock actually became cheaper relative to its earnings power.
This is a bit odd, as you'd think valuation multiples would expand once a company transitions from a cash-burning business to one that is minting money. So what's going on with Uber?
One thing that's a given about the stock market is that investors do not like uncertainty. And when it comes to Uber, there is one glaring opportunity that remains a bit polarizing in the eyes of investors. I'm talking about autonomous driving. On one hand, a bull might argue that self-driving vehicles are a tailwind for Uber -- as the company could theoretically save money by replacing its human drivers with robotic-controlled cars.
But on the flip side, it's well known that Alphabet is building an autonomous car fleet of its own through a subsidiary called Waymo, and Tesla is doing the same through its Robotaxi division. At this point in time, there are a lot of unknown details surrounding Waymo and Robotaxi, and whether or not they represent legitimate headwinds to Uber's survival or if they could actually be lucrative partners down the road.
Whether or not Alphabet or Tesla decide to take on Uber, I see the ongoing sell-off and valuation compression in Uber as a bit shortsighted. Autonomous driving is still many years away from being completely commercialized domestically, let alone around the world. And let's remember, Uber's serviceable market spans dozens of countries -- not just the U.S.
To me, Ackman's position in Uber underscores his ability to identify well-managed businesses that trade for discounts that are simply too hard to ignore. In my eyes, Uber is an incredible opportunity to buy and hold and I see now as a great time to follow Ackman's lead.
