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4 Reasons to Buy Uber Stock on Weakness

Luke Lango

Earlier this month, I wrote a bullish article on Uber (NYSE:UBER) stock. My thesis was simple. The Uber IPO was a dud because of short-term timing issues.

Seriously, Uber May Never Actually Turn a Profit

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Those timing issues won’t hang around forever. Once they pass – and they will pass quickly – investors will shift their focus to the long-term growth outlook of Uber. That long-term growth outlook is quite robust. As a result, once the Street begins focusing on the company’s fundamentals, Uber stock will become a winner.

That has already happened. Uber stock dropped 20% below the Uber IPO price just a few days after the IPO. But, over the past ten days, Uber stock has rallied back to levels not far below the Uber IPO price.

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Uber stock has rallied as  timing issues faded and investors became more interested in growth stocks again.

For several reasons, the strength of Uber stock will continue. Those reasons are outlined below.

The Growth Trade Is Back

From a macro perspective, growth stocks are back in favor, and that will help Uber stock price head higher.

The Uber IPO occurred at a bad time. Investors were shying away from growth stocks amid rising international trade tensions. Their concern was that new tariffs, if in place for a long time, would simultaneously slow U.S. economic growth and raise prices and inflation. Higher prices would force the Fed to come off the sidelines and hike rates. In a slowing economy with rising rates, growth stocks don’t do well.

But the market has quickly moved past those issues. Concerns about trade were overstated, as many of the tariffs imposed by President Trump have grace periods and delays, implying that both sides still want to get a deal done soon. Meanwhile, the U.S. economy really isn’t slowing by much, as first-quarter sales and earnings have been way stronger than expected. Additionally, inflation remains muted, so the Fed will stay on the sidelines.

In other words, we are still in the midst of a strong economy with muted inflation. That environment is a dream combination for growth stocks. As a result, growth stocks will remain in favor, and that will help Uber stock price.

Employees Won’t Sell Uber Stock

An important determinant of the performance of  stocks that have recently gone public is insider sentiment. Specifically, skeptics often think that insiders use IPOs to unload shares to public investors, so that the insiders can sell their shares at favorable prices. Insider selling, in turn,  pressures stocks, ultimately causing them to head lower.

That may have happened to Uber stock during its  first few days of trading. It’s tough to tell. But the important thing is that the phenomenon probably won’t last much longer.

According to a survey by Blind, nearly 80% of Uber’s employees believe that Uber stock is undervalued, while only 8% think it is overvalued. Employees own a great deal of Uber stock. There are lock-up periods and other restrictions which will prevent them from selling some of their shares anytime soon. But the fact that only 8% of employees think Uber stock is overvalued implies that, at these levels, there won’t be much insider selling pressure.

Without that insider selling pressure, buyers should remain in control of Uber stock price.

Profitability Concerns Are Overstated

The biggest knock against Uber stock is the amount of red on the company’s income statement. The company generates billions of dollars in net losses every year, and its cash burn rate hasn’t really improved all that much. Plus, it’s facing big-time competition in the ride-sharing market, and that competition ultimately caps how high Uber’s margins can go.

But these profitability concerns are overstated.

Here’s a long list of stocks from the past few years which were all unprofitable at the time of their IPOs: Shopify (NYSE:SHOP), Square (NYSE:SQ), Roku (NASDAQ:ROKU), MongoDB (NASDAQ:MDB), and Okta (NASDAQ:OKTA). All of those stocks are up by tremendous amounts since their IPOs, mostly because their margins have risen as their businesses have grown, and, as a result, they are either already producing or are on the verge of producing sizable profits.

Uber will be no different. Its gross margins are positive and climbing. Its operating-spending rate is falling and will continue to drop as its business grows. Thus, as Uber’s gross margin rate rises and its operating-spending rate falls, it’s only a matter of time before Uber becomes profitable.

Uber’s Long-Term Growth Opportunity Is Tremendous

The biggest reason to buy and hold Uber stock for the long run is that this company is just scratching the surface of its global-growth potential.

Uber is the global ride-sharing king. But ride-sharing currently accounts for only a few percentage points of global vehicle-based transportation. Current trends imply that ride-sharing should eventually become at least 20%- 30% of the global vehicle-based transportation market. A few of those current trends are as follows:

  • The coordinated economy. Read more about it here.
  • There are simply too many cars on the road. Population growth and urbanization will only aggravate traffic headaches. Lowering the volume of cars on the road through ride-sharing services simply makes sense, and will make transportation more convenient.
  • Ride-sharing can expand into new vertical markets, including transportation of goods and food.
  • The goods and food transportation verticals are primed for tremendous growth, thanks to the increased popularity of ordering food and clothes from home.

All in all, the ride-sharing economy should grow by leaps and bounds over the next several years. Uber is the leader of multiple vertical markets within the global ride-sharing economy. As long as the company maintains this leadership position (and it should because of its unparalleled liquidity network effects), then Uber should continue to grow rapidly over the longer term, boosting Uber stock price in the process.

The Bottom Line on Uber Stock

The Uber IPO was a dud because of macro economic worries. Those concerns have faded. Now Uber stock is in the early stages of a long-term uptrend. If you bought the dip of Uber stock, hold onto it. If you didn’t buy the dip previously, look to purchase the shares on any further weakness. This stock will be a long-term winner.

As of this writing, Luke Lango was long UBER, SHOP, SQ, ROKU, MDB, and OKTA. 

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