Along with Airbnb, Uber Technologies (UBER 1.67%) is the poster child of the gig economy. The company's monumental rise since its founding in 2009 has been incredible to watch, as it has completely changed how people and goods move around. It's rare to see a business's name become a verb, as Uber's has, showcasing how much the brand resonates with people.
Despite a volatile ride, Uber's shares are on a major upswing. They have soared 128% just in the past two years. But as of this writing, they're still 12% off their peak from October last year.
Could buying this growth tech stock today set you up for life?
Network effects
What makes Uber special is that it has developed a durable competitive advantage. In this case, the company benefits from a network effect.
A classic network effect results when a service becomes more valuable and useful to all stakeholders the larger it gets. This is exactly how to explain Uber's situation. As it brings on more drivers, riders benefit from lower wait times and better pricing. And with more riders, drivers gain by having a big pool of demand to keep them generating revenue.
Imagine if there were one rider, one driver, and one restaurant on a competing platform in a major city. This would have virtually zero utility because the network lacks density. With 171 million monthly active users, more than 7 million drivers and couriers, and $163 billion in gross booking value in 2024, Uber has a powerful competitive position that's almost impossible to overthrow.
NYSE: UBER
Key Data Points
Earnings growth
In the past three years, Uber's revenue increased at a yearly clip of 36.1%. The growth playbook is pretty simple. It's all about expanding into new markets, acquiring new customers, and getting these users to frequently engage with the service.
The leadership team says that Uber still has a long way to go when it comes to penetrating key markets. In the U.S., 90% of the population over 18 years old have not taken an Uber ride, a startling statistic that reveals the growth potential.
Uber is able to constantly collect massive amounts of data, whether it's what time of the day you most frequently request a ride, what areas you visit often, or what type of cuisine is your favorite to order. This provides valuable insights that have spawned a new moneymaker: advertising. This segment can introduce a profitable revenue stream.
Strong top-line gains will lead to even better profit growth. That's because Uber is demonstrating its ability to scale up in lucrative fashion. Its expenses are largely fixed, so it should experience leverage as revenue expands. Every additional ride or delivery should produce a high margin, given that the tech infrastructure is already built out.
This is being proven. The operating margin came in at 6.4% in 2024, more than double the 3% reported in 2023.
Fast bottom-line growth is precisely what billionaire Bill Ackman believes will happen. The hedge fund he runs, Pershing Square Capital Management, took a stake in Uber earlier this year. His team sees earnings per share (EPS) growing at an average rate of 30% per year "over the next several years."
Lower expectations
Investors will find it easy to at least appreciate Uber's business. The presence of network effects, coupled with earnings growth potential, make this a high-quality company.
The next thing to consider is the valuation. Shares currently trade at a forward price-to-earnings ratio of 23.2. That's in line with the overall S&P 500.
Investors might want to take a closer look at this opportunity. The valuation looks compelling in light of the forecast for EPS to soar in the years ahead. If you have confidence in this outcome, then the shares look like a smart buy.
While I don't believe the stock will set you up for life, as it's unlikely any single company falls into this category, I think Uber deserves investment consideration right now as a potential long-term holding in your portfolio.
