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When Will It Be Safe to Buy Uber Stock?

At the beginning of the month, it looked like the coast was finally clear to buy Uber (NYSE:UBER) stock. Then — even with the S&P 500 hitting new highs — the breakout  collapsed and Uber stock tumbled. So when will it be safe to buy Uber stock?

Exec departures provide a clean slate for Uber stock
Exec departures provide a clean slate for Uber stock

Source: Shutterstock

Simply put, before buying Uber stock, investors need it to start trading in a more healthy technical manner or it has to get so cheap that its fundamentals justify a long position. Unfortunately, the shares of  newly public companies tend to trade mostly based on supply and demand trends at first. Given the Uber news and the price action of Uber stock, it’s clear there’s not a ton of demand for Uber stock.

While it’s true the whole market functions based on a supply/demand dynamic, it’s even more true for new IPOs. There’s  limited supply of new stocks because insiders are restricted from selling their shares. Uber stock also has very little trading history to go on. As a result, Uber stock doesn’t have any long-term trends, moving averages or retracement levels.

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Over time, investors will get more earnings results from Uber and a better understanding of its fundamentals and Uber news. We will also get a better sense of how the stock is setting up on a technical basis.

With almost two months in the books, let’s see how Uber stock is setting up.

Valuing Uber Stock

I can’t help but draw connections between Facebook’s (NASDAQ:FB) IPO and Uber IPO. The stage was set for Uber IPO when Lyft (NASDAQ:LYFT) made its highly disappointing debut in the public markets.

Although Lyft stock opened notably higher than its IPO price, the shares went on to sink significantly after that. The lack of buyers for Lyft prompted Uber to price its IPO more conservatively. Uber IPO priced at $45 per share, but it ended its first day of trading down almost 8% near $41.50. It was not a good start for the Uber IPO.

The next day, the shares closed just over $37, giving Uber stock a two-day loss of almost 18%. Thankfully, Uber, currently near $43.50, subsequently rebounded,.

Where does Facebook fit into all of this? Well, it, too, was a large-cap tech company that went public in a disappointing fashion. In its first few months as a public company, FB stock shed 50% of its value, falling from a $38 IPO price to sub-$20 levels. The only difference is that Facebook was immensely profitable and was growing meaningfully.

Uber is growing significantly, but it loses a lot of money.

In 2018, Uber’s revenue grew 43% to $11.3 billion. This year, analysts’ average estimate calls for revenue of $14.2 billion, which would represent growth of “just” 25.6%. The average estimate calls for more than $18.8 billion in sales in 2020, which would represent an acceleration to 32.3% growth.

The top line isn’t the main worry, though,; it’s the bottom line that the owners of Uber stock should be worried about. Profits remain elusive as Uber continues to track its losses in the billions. Analysts, on average, expect it to lose more than $6 per share this year and another $3.30 per share in 2020.

Trading Uber Stock

chart of Uber stock
chart of Uber stock

Click to Enlarge

Investors are unsure about how the firm will become profitable, and I think that uncertainty is affecting the chart of Uber stock. The stock just can’t seem to gain any positive momentum.

Uber put a strong bullish stamp on the month of June, as its shares burst through resistance and hit new highs on the last day of the month. That resistance level happens to be the stock’s $45 IPO price. On the first day of July, the shares opened near their highs at $47, with bulls excited about a potential run to $50 and above.

Those hopes and expectations were quickly cut down, though. Uber stock fell more than 5% from those highs in a single session, closing below $45 and completely crushing the breakout setup.

The action on July 5 was discouraging as well. Uber fell below both its 21-day and 8-day moving averages, although it’s now teetering on uptrend support (depicted by the blue line).

Honestly, I’m not interested in trading the moving averages or trend lines. My focus sits squarely on $45. Above it, bulls can be long Uber stock. The first target afterwards is $47, where the shares ran out of gas in June. Above it and $50+ becomes possible. Below $45 and Uber stock is a no-go for me. In this case, the simpler, the better.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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