Uber Stock: The One Thing Stopping Me From Buying It (NYSE:UBER)

Uber Technologies (NYSE:UBER)(NEOE:UBER:CA) has come a long way in the past few years, going from being a cash-burning business to a profitable one while maintaining solid growth. As a result, the stock has proven many bears wrong, nearly tripling in value since the beginning of 2023. Looking forward, Uber still has plenty of growth ahead regarding revenue and profitability, and there have been quite a few positive developments surrounding the company, which I’ll highlight below. Nonetheless, there’s one thing keeping me from buying UBER stock, and it’s the technical chart. Thus, I currently rate it as a Hold.

My thesis for Uber is as follows. I think the stock is well-priced, possibly undervalued, as the valuation is pricing in attainable growth rates. Analysts expect free cash flow to surge, and the firm will be reducing dilution and eventually lowering the share count in the future through buybacks — all positive things.

Additionally, the firm is well-positioned to be a major player in the autonomous vehicle [AV] market despite Tesla’s (TSLA) plans to launch robotaxis in the future.

However, the only thing holding me back from giving the stock a Buy rating is its technical setup. The chart setup isn’t necessarily bearish, but it seems like some short-term consolidation could be in the cards. Of course, I could be wrong. But either way, I’d like to see the chart become more constructive, or for the stock to at least come down to even more undervalued levels, before giving it a Buy rating.

Why UBER Stock Climbed 6% On Friday, Plus Other Recent Developments

Uber Expands Waymo Partnership

On Friday, September 13, UBER stock finished the day 6% higher after announcing an expanded robotaxi deal with Waymo, an AV company owned by Alphabet (GOOGL) (GOOG). As per the news article linked above, the deal will “bring autonomous ride-hailing to Austin and Atlanta next year.” This is good news because previously, Uber only offered these services in Phoenix.

Essentially, Waymo will use the Uber app in Atlanta and Austin to connect riders to its autonomous vehicles, generating revenues for Uber. The fleet consists of all-electric Jaguar I-PACE vehicles, which Uber will manage and dispatch. Over time, there will be hundreds of these vehicles.

Uber To Work With Cruise

The Waymo news comes less than a month after Uber announced that it will work with General Motors’ (GM) Cruise in a multi-year partnership to bring autonomous vehicles onto the Uber platform next year. When this goes live, riders will have the choice to have their ride fulfilled by a Cruise AV. Overall, Uber is working with 10 AV companies, and the firm’s CEO believes that the “software is going to get to a very good place over the next three to five years.”

Uber Improves Tesla API Integration

Another recent development (from September 11) was that Uber expanded its Tesla API integration. Now, Uber can automatically sync ride destinations with Tesla’s navigation system. This makes things a bit smoother for Tesla owners, as Tesla doesn’t offer Apple CarPlay or Android Auto. Before, Tesla drivers on Uber’s platform had to manually input destinations into Tesla’s system, which was more time-consuming. This may seem small, but anything that makes the driver experience better will enhance driver loyalty and likely lift Uber’s financial results.

Uber Is Well-Positioned In The AV Market

I like Uber’s strategy of not building its own AV fleet. As Uber’s CEO, Dara Khosrowshahi, stated in the Goldman Sachs (GS) Communacopia & Technology Conference call, “We want to be capital light as much as possible.” And this strategy allows exactly that. While AV companies spend heavily on CapEx, Uber can just partner with them as a marketplace and make money that way.

Of course, competition from Tesla is the biggest elephant in the room, with its robotaxi ambitions. It’s likely that, in the future, people will have the option to call an Uber — whether autonomous or human-driven — or call an autonomous Tesla robotaxi to pick them up. Undoubtedly, Tesla has many loyal customers (some are outright obsessed with the company), so Tesla fans will probably almost always use Tesla’s services. That’s fine, though, as there’s room for more than one company to thrive.

Uber’s CEO seems to think so as well, stating the following Goldman Sachs conference: “And based on what we see, there are going to be multiple providers and multiple winners in the space, so to speak. It’s not going to be a winner take all market.”

Meanwhile, Cathie Wood’s ARK Invest has other thoughts, stating, “As will be the case with most AI (artificial intelligence) projects, Tesla’s data scale advantage is likely to lead to commercial dominance in this winner-takes-most opportunity.”

So, which one is it gonna be? I’m siding with Uber on this one, particularly because Waymo looks promising, and it looks like Uber is keen on expanding its Waymo partnership. Apart from that, Cathie Wood hasn’t had the best investing track record lately, as her flagship ARK Innovation ETF (ARKK) has gained just 2% in the past 5 years.

Overall, studied have shown that Waymo is much safer than human drivers. The company had 22 million miles worth of autonomous driving data as of June 2024, giving it plenty to work with. The image below states, “Compared to a human driver over the same 22M mile distance in Phoenix and San Francisco, the Waymo Driver had 84% fewer airbag deployment crashes, 73% fewer injury-causing crashes, and 48% fewer police-reported crashes.”

Regarding the image below, Waymo states, “The graphs below show how many fewer incidents (crashes) per million miles (IPMM) Waymo had compared to human drivers with the benchmark crash rate if they had driven the same distance in the areas we operate. The error bars represent 95% confidence intervals for the IPMM estimate.” As you can see, Waymo beats human drivers easily. For instance, Waymo had 0.17 airbag deployment crashes per million miles in San Francisco, compared to 1.79 for human drivers.

But Doesn’t Tesla Have More Driver Data?

Yes, it does. It has billions of miles worth of data. However, it’s not fully autonomous driving data, so I would say that it’s lower-quality data compared to Waymo’s. But even if Tesla’s data ends up being superior, I can’t picture the difference being very large. Waymo is already very safe, according to the data, and it should only get safer as more miles are driven. But since the numbers are already good, any improvements won’t be as noticeable. They’ll only be incremental.

Therefore, by the time Uber launches its robotaxis, Waymo will already have built a multi-year track record of safety (assuming all goes well), and many people will be okay with that and stick to the Uber app.

Lots Of Growth And Profits Ahead

Uber already has its base operations (UberX and Uber Eats), which are expanding at a low to mid-teens growth rate, according to the CEO. But on top of that, Uber’s other bets currently contribute about $20 billion in gross bookings, growing at almost 70%. These high-growth bets include grocery delivery, freight, and autonomous vehicles.

As these segments expand, they will account for a larger share of Uber’s total bookings, boosting revenue growth. In fact, Dara Khosrowshahi said the following in the Goldman Sachs conference:

And so you have kind of a higher growth part of the business becoming a higher penetration into the overall bookings mix, which again gives us relative comfort that the top line, we’re going to be able to grow at very, very attractive top line percentages compared to all of their technology companies of similar size and scale.

So, Uber will see growth. Will profits and cash flow increase as well? Analysts certainly think so. For the past 12 months, Uber generated $2.011 billion in adjusted net income and $4.753 billion in free cash flow. These figures are expected to increase to $6.392 billion and $9.759 billion, respectively, by the end of Fiscal 2026 (per simplywall.st).

That’s because the capital-light model of the business allows for high profitability, especially as the company scales. In the Goldman Sachs conference, the CEO recently noted, “We — the business has had free cash flow conversion of, call it, 90% of EBITDA. So the free cash flow conversion of the company is going to be significant.”

UBER Stock’s Valuation Looks Good

I’ll be valuing Uber using a reverse DCF calculator that I’ve created. It calculates an implied growth rate that the market is expecting, and then you can decide if the stock can exceed that implied growth rate (which would make it undervalued) or not (which would make it overvalued). A more comprehensive guide can be found here.

Since Uber’s stock-based compensation of $1.9 billion in the past 12 months makes up a relatively large portion (40%) of the $4.753 billion in free cash flow, I’ll be deducting it from FCF, as I believe SBC is a real expense for shareholders.

Here are the valuation inputs:

• FCF per share minus SBC per share: $1.33 (manually calculated using $2.853 billion in free cash flow after adjusting for SBC)
• Cost of equity (also taken from Finbox, which calculates it using the CAPM model): 9.9%
• Terminal growth rate: 3%
• Share price: $72.48

I generally pick a terminal growth rate between 2-3%, but I used a 3% terminal growth rate here for a few reasons. First, global GDP growth is estimated at around 3% for the next few years, and that seems like a reasonable growth rate in perpetuity. But besides that, Uber operates in high-growth markets, giving it solid long-term growth potential, so I believe that makes 3% an appropriate level.

Looking at the screenshot below, we can see that the market is currently pricing in that UBER will see its FCF per share increase by 20.457% per year for the next 10 years and then grow 3% per year after that in perpetuity.

I believe this growth rate is achievable. If you take the 2026 FCF estimate I mentioned above ($9.759 billion), that implies a 33.34% CAGR from now until then. That’s based on the estimates of 12 analysts. Looking out to 2027, the consensus FCF estimate from four analysts is $11.252 billion, which implies a 3.5-year CAGR of 27.92%. Therefore, at least in the near future, the expected FCF growth rate is higher than that of the valuation.

You also should consider that Uber is looking to reduce its share count over the years via buybacks, according to the CEO, and this should boost FCF per share if the buybacks are done at a good price. The company is also focused on minimizing dilution, and so far, SBC has actually ticked down from $1.935 billion in 2023 to $1.9 billion in the trailing 12 months, while FCF has soared. Plus, SBC growth was already slowing. Therefore, the trend is looking good so far.

The One Thing Keeping Me From Buying UBER Stock — The Chart

Clearly, I think Uber is a good stock. I can definitely see it being higher than its current price in a few years. The only thing that’s stopping me from buying in the short term is the chart and its weak momentum.

Currently, Uber is in a long-term uptrend but a short-term downtrend/consolidation. This can be quantified with Seeking Alpha’s momentum grade tool, as it shows a good grade for longer-term performance, but a C- for shorter-term momentum.

You can also see the downtrend by looking at the arrows I drew. There are lower highs and lower lows, which is the short-term downtrend I’m talking about. There’s also a diagonal trendline resistance at the current price. Now, the green arrow I drew is a scenario in which I’d buy the stock. If it fell to that support around $63 and held the level, I’d likely buy because it would lead me to believe that it’s gearing up to make a higher high.

Another scenario in which I’d buy is the one below. In this scenario, it makes a higher high (breaking the downtrend) pulls back to a good valuation, confirms support (establishing the new uptrend), and that’s where I’d buy.

Here’s one more scenario, although another chart is not necessary. If it drops to the support level around $49 that I’ve outlined on the chart (assuming no decline in fundamentals), I’d likely buy.

The Takeaway

Uber stock has become a much better company in recent years, going from negative free cash flow to billions in free cash flow that’s expected to rapidly grow. I think that there’s lots of growth ahead for Uber, both from its base businesses (UberX and Uber Eats) and its other bets.

The company continues to improve its business, whether that’s through increasing partnerships with AV companies or through improvements regarding things like Tesla API integrations.

When looking at Uber’s robotaxi market potential, I’m not too worried about Tesla’s eventual entry into the market, as there’s room for multiple winners. Waymo, one of Uber’s partners, has already proven itself to be very safe despite its relatively low amount of data compared to Tesla, and that safety reputation will allow customers to be comfortable choosing it over a Tesla robotaxi. Plus, I like Uber’s strategy of partnering with other companies instead of building its own AVs, as it helps keep the company CapEx light.

Looking at the valuation, even after adjusting free cash flow for stock-based compensation, the market-implied growth rate for FCF per share comes to 20.457% per year for the next 10 years and then 3% in perpetuity. I believe Uber can surpass this growth rate, making the stock undervalued.

Finally, the only thing stopping me from calling it a Buy is the chart. But I will be monitoring it closely for potential entry points, leaving me at a Hold rating for now.