Though some might think recent market volatility warrants staying away from equities for a while, plenty of investors disagree, including some famous names on Wall Street. Take David Tepper, billionaire founder and CEO of Appaloosa Management, a hedge fund.
The successful money manager and his team decreased or closed their positions in several stocks during the first quarter. However, Tepper also made some notable buy decisions, including for Uber Technologies (UBER -0.84%). The hedge fund more than doubled its stake in the ride-hailing leader during the first period.
Should investors follow Tepper's lead?
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Uber has officially turned the page
Uber's stock is up 38% this year for a good reason. The company's business transformation continues, and it's showing up in its financial results.
The ride-sharing leader has dealt with various issues in the past, including regulatory problems and persistent net losses, but things are now looking brighter than ever. Consider Uber's first-quarter results, during which its revenue jumped by 14% year over year to $11.5 billion.
Trips and gross bookings increased by healthy amounts, and the company is now showing a profit on the bottom line. Net income was $1.8 billion, compared to a net loss of $654 million reported in the year-ago period. Free cash flow is also trending up; it soared by 66% in the period to $2.3 billion.
Although Tepper didn't see these numbers before increasing his stake in the company by 113% during the first quarter, Uber has been delivering excellent results for some time now. His move looks smart in that broader context, and it seems even more so when we focus on the company's prospects.
Attractive long-term prospects
Some investors worried for a while whether Uber's model, which relies heavily on freelancers, could ever be profitable. The company has proved that it can, but can it sustain it for a while?
In my view, it is still looking at huge growth opportunities, given the convenience of its services, significant demographic shifts, relatively low penetration rates, and its competitive edge. Let's address each point in turn.
First, the company has disrupted the taxi industry because of its convenience. Getting a ride somewhere has never been easier. The company's food delivery option, Uber Eats, has the same selling points. That's why they are increasingly popular.
Second, the data shows that younger generations, particularly Gen Z, are getting driver's licenses at lower rates than older generations did. So, they are less likely to own cars and drive. While there are likely many reasons for this -- it's hard to attribute this shift to Uber -- it still means there should be continued growth for the services it offers. Even people without cars need to go places, after all.
Third, the company has surprisingly low penetration even in its most mature markets. As of the end of 2023, a little under 20% of people aged 18 and up took at least one trip per month in Australia. That percentage was lower in the U.K. and even lower in the U.S. Perhaps it won't reach 100%, but as management points out, modest growth in relatively advanced markets like the U.S. would lead to a significant increase in its annual gross bookings.
Lastly, the business benefits from a network effect. The more drivers who are in its system, the more value the platform offers riders. The same dynamic applies to Uber Eats and the number of restaurants that are plugged into it.
The network effect grants the company a strong moat. However, it has risks, which include stiff competition and the rise of self-driving vehicles. Management should be able to handle both, though. Having a moat is one of the keys to performing well despite competition. And even though it looks like self-driving cars will eat the company's lunch, we're still some way off from the significant adoption of that technology.
Furthermore, Uber has partnered with major companies in this field and is already adapting to this shift -- one more reason its long-term prospects are attractive. Interested investors should follow Tepper's lead and purchase shares.
