Uber Stock: Finally Turning Bullish (NYSE:UBER)

Uber car waiting customer

MOZCO Mateusz Szymanski / iStock Editorial via Getty Images

Investment thesis

Uber Technologies, Inc. (NYSE: UBER) shares have fallen close to 50% YTD, with a significantly lower return on the market. We warned in our previous article in late October 2021 that it was weak profitability did not justify its valuation, despite the rapid growth of its revenue. Therefore, the quality of their income growth has been questionable.

However, Uber is expected to release its free cash flow (FCF) profitability for the first time in fiscal year 22 and improve during fiscal 24. It is therefore auspicious to underpin its valuation, which has been justifiably abused.

Our analysis of price action suggests that UBER remains firmly rooted in a bearish bias, with no downside trap to help reverse its downward momentum. However, it appears to be consolidating into a short-term fund.

We review our UBER rating from Hold to Speculative Buy, taking into account much improved valuation metrics. However, the lack of a downside trap remains a critical risk for our thesis, as the market could force another strong sell-off before reversing its bearish bias.

The market gutted UBER because of its weak profitability

Consensus estimates% change in Uber revenue and adjusted EBIT margins

Consensus estimates% change in Uber revenue and adjusted EBIT margins (S&P Cap IQ)

Consensus estimates suggest that Uber is expected to increase its revenue by 70.5% in fiscal year 22, following growth of 56.7% in fiscal year 21. However, its Growth slows sharply to 20.4% in fiscal year 23, though management remains confident in its outlook, although CEO Dara Khosrowshahi prioritizes profitability to move forward.

Wall Street is also optimistic that worsening winds against the macro may affect Uber less than its smaller, less capitalized rivals. Barclays stressed (edited): “Uber could be a big beneficiary if the economy were to shrink, as the supply of drivers could ease and it could lose some of its competition as funding for the industry dries up. private market “.

Needham also recently articulated that bookings are expected to be robust, driven by positive user growth metrics.

However, we believe the market has hit Uber shares to the point. As a result, despite its massive growth, Uber is expected to have negative adjusted EBIT margins in fiscal year 22.

But the improvement in Uber’s FCF margins could support its valuation

Uber FCF margins% consensus estimates

Uber FCF margins% consensus estimates (S&P Cap IQ)

Given Uber’s renewed focus on driving growth in results, we believe the revised consensus estimates that Uber could achieve FCF profitability from fiscal year 22 seem credible.

As seen above, it is estimated that Uber will post an FCF margin of 2.3% in fiscal year 22 and improve to 9.2% in fiscal year 24. As a result, we believe it is constructive help reinforce UBER’s valuation.

Stock UBER
Current market capitalization $ 41.9 million
Obstacle Rate (CAGR) 20%
Projection through CQ4’26
FCF performance required in CQ4’26 4.5%
Assumed margin TTM FCF in CQ4’26 7.5%
Implicit TTM revenues for CQ4’26 $ 57.11 million

UBER reverse cash flow valuation model. Data source: S&P Cap IQ, author

Our reverse cash flow model indicates that UBER could outperform the market with its current valuation.

We applied an over-the-market barrier rate of 20%. Using an average FCF yield of 4.5% (given Uber’s top-line growth slowdown), we assumed a combined TTM FCF margin of 7.5%. We have taken into account an adequate discount of the consensus estimates to derive our FCF margin hypothesis. However, we note that given Uber’s weak FCF profitability, these estimates could be subject to significant uncertainty.

Our $ 57.11 million TTM revenue target for CQ4’26 indicates that Uber seems reasonably valued and could outperform our obstacle rate.

However, if investors are looking for a more considerable margin of safety, they should consider putting layers on it at even lower levels.

UBER – Bearish bias without bear trap

UBER price chart

UBER price chart (TradingView)

UBER has remained in a dominant bearish bias since its October bullish trap (significant rejection of the buying momentum) decisively reversed its downward momentum. In particular, the double-tap trap in February 2021 reversed its upward bias, as the market shrewdly distributed shares until October.

In addition, the series of low-high traps after October corroborated UBER’s downward bias, as the market constantly attracted buyers before forcing it down.

We believe it is likely to be at a short-term low ($ 21), but selling pressure has constantly forced it below its short-term resistance ($ 26). However, since the beginning of May it has tried to consolidate itself together with its short-term support, which is constructive.

However, we have not yet observed a bearish trap (significant rejection of the sell momentum) that could help reverse their bearish momentum. Therefore, it is a critical risk that investors should consider if they choose to add current levels.

Is UBER a purchase, sale or withholding?

We review our Holder rating from Hold to Speculative Buy.

Its valuation has greatly improved. As a result, we believe investors can outperform the market if Uber does so accordingly. But, investors should expand over time, as we believe UBER is not undervalued.

Our price action analysis indicates that UBER has been consolidated in its short-term support since May. However, there is no trap for bears to help maintain their bottom, which remains the most critical risk for our thesis.

In particular, UBER remains wrapped in a bearish bias. Therefore, investors should consider establishing appropriate risk management strategies to protect themselves from sharp reductions.

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