There's one dominant company that's doing a great job winning over investors. Despite their high level of volatility, shares have rocketed 128% higher in the past two years. The S&P 500 has only produced a total return of 53% during the same time.
Interested in buying this supercharged growth stock right now? Here are three things investors need to know before adding it to their portfolios.
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1. Financial strength
Over the past decade, many tech companies were able to register tremendous growth thanks to the availability of cheap capital and the market shrugging off their ongoing losses. Uber (NYSE: UBER) certainly fit that description. For years, its primary objective was to scale its service by adding new users quickly.
However, the company is now proving that its model can work in a sustainable fashion. Uber is consistently profitable, which some bears probably thought might never happen.
Through the first nine months of 2024, Uber's operating income increased by 343% year over year to $2 billion. The company is demonstrating leverage with its top expense categories, particularly sales and marketing costs.
This leads to cash production. Free cash flow (FCF) totaled $2.1 billion in the third quarter. Executives are so confident in Uber's financial position that they have instituted a stock buyback program as a method of returning capital to investors.
Investors should keep an eye on Uber's net income and FCF to see if the company is able to keep those metrics rising. If those trends continue and the company can keep its balance sheet healthy, Uber will prove that it's financially sound.
2. Economic moat
Brilliant investors appreciate companies that have economic moats. These durable competitive advantages separate great businesses from mediocre ones, and help them fight off competition and technological disruption.
Uber's ride-hailing service is available in more than 10,000 cities across the globe. Its drivers completed 2.9 billion trips in Q3. And it counted 161 million monthly active users. What's more, there was nearly $41 billion in gross booking activity in the third quarter.
It's strikingly clear that Uber benefits from a major network effect. As more riders use the platform, the service becomes more valuable to drivers because they have more opportunities to make money with minimal idle time. And with more drivers working on Uber, riders have better experiences, with lower fares and shorter wait times. The larger networks improve the service for all stakeholders in a virtuous cycle. The same concept applies with Uber's delivery segment.
Another competitive advantage Uber has comes from its brand. Because Uber has direct relationships with all of its key stakeholders (riders, drivers, restaurants), it has high visibility and increasing mindshare. Despite critics pointing to its surge pricing for riders, low pay for drivers, and the high fees it charges to restaurants, Uber has become a reliable platform that does provide value, and one that would be difficult to disrupt.
3. A discounted valuation
Some investors will feel hesitant about buying into a business whose shares are up by 128% just in the past 24 months. They'll naturally wonder if they're chasing momentum due to a fear of missing out, and risking buying in at an excessive price. But Uber's valuation metrics tell a different story.
As of this writing, the stock trades at a forward P/E ratio of 21.5. For comparison, the S&P 500's forward earnings multiple is 22.3, which means Uber trades at a slight discount to the market right now.
This deal is difficult to pass up. Uber is a leading tech enterprise with an incredibly popular ride-hailing and delivery business that's producing growing profits and that benefits from powerful network effects.
Should you invest $1,000 in Uber Technologies right now?
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Uber Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
