Uber Technologies (NYSE:UBER) reported its third-quarter results on Nov. 4. Although Uber beat analysts’ average top-line and bottom-line estimates, Uber stock dropped on the news.
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The Uber stock price fell some more over the next two days as investors continued to digest the earnings report. More importantly, the 180-day lock-up period expired, allowing insiders to sell Uber stock for the first time since UBER went public in May at $45.
“We believe it will be an avalanche of selling from early investors and insiders as this train wreck since the IPO continues,” Wedbush Securities analyst Dan Ives said, according to CNN Business. “We estimate roughly 763 mm shares will be unlocking with roughly 25% at a big risk of selling over the coming days. It’s been dark days for Uber, but after this week, the lockup overhang will be in the rearview mirror and (Uber) stock should rebound from here.”
Although the ride-sharing app stock’s average daily volume is 13.1 million shares, ten times that amount changed hands on Nov. 6, So, if Wedbush is on the money, the volume of UBER stock will be approximately 191 million shares over the next couple of days.
After that, Wedbush’s analysts expect Uber stock price to climb. Here’s why.
Profitability in 2021
UBER expects to become profitable in 2021. Not everyone is convinced that the company will reach its target.
“Right now, Uber CEO Dara Khosrowshahi is targeting 2021 as the year when his company will finally become profitable. But, with Uber digging billion-dollar holes, some analysts aren’t expecting this milestone until 2025!” InvestorPlace contributor Louis Navellier wrote in an article published on Nov. 6.
To illustrate Uber’s risk, Navellier points to Etsy (NASDAQ:ETSY), another gig-economy stock, as an example of the right way to build a growth business. Etsy is growing its top line by 35% annually, but it’s also generating profits.
Etsy might not have as big a target market as Uber, but its shareholders probably sleep a lot better at night than the owners of Uber stock.
However, if you can accept the above-average risk, Wedbush believes buying Uber stock in the mid-$20s could be a very nice entry point, given Uber’s potential runway for growth.
“We believe…100 million+ consumers on the platform and an unparalleled global monetization engine that is less than 3% penetrated today will translate into improved growth/metrics (and profitability in 2021) with a much higher share price from these levels,” Wedbush’s analysts wrote in a Nov. 5 note to clients.
For the record, Wedbush has an “outperform” rating on Uber stock with a 12-month price target of $45, which is 67% above Uber stock price.
Higher Potential Margins
At the end of September, I wrote about how much analysts like Uber stock. And while I would never recommend Uber stock to anyone but the most aggressive of investors, arguments from Wedbush and others do have merit.
In Wedbush’s Nov. 5 note to clients, another sentence caught my attention.
“Uber also noted that the range of profitability in its most profitable markets ranges from 17% to 62% with nothing structurally different that would hold most markets from reaching those levels,” the analysts wrote.
Forget for a moment that the EBITDA, excluding certain items, of its Eats, Freight, Other Bets, and ATG & Other Technology Platforms was negative $591 million. Instead, focus on the fact that the adjusted EBITDA of Rides, its core business, was positive $631 million in Q3.
Now imagine a Rides business that is generating 62% margins in all of its markets. That would translate into an adjusted EBITDA profit of $1.78 billion.
The losses of its other segments would become a lot more reasonable.
The Bottom Line on Uber Stock
As I said previously, I’m not a big fan of investing in money-losing companies. I can count on one hand the number of times I’ve done so. Tesla (NASDAQ:TSLA) is the most prominent example.
Regular investors have no business risking their hard-earned capital by investing in companies that lose money.
However, if you can afford to lose it all, the risk/reward of Uber stock is finally tilting in the investors’ favor.
Is Uber stock on the comeback trail? I think so.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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