Ride-sharing giant Uber (NYSE:UBER) made its long awaited debut on Wall Street in May, and it was one of the worst tech IPOs ever. The IPO was priced at $45 per share of Uber stock, at the low end of a reduced target range.
Uber stock price opened up at $42, and closed around $41 and change, making it just the third $10 billion-plus tech company to have its stock close below its IPO price on the first day of trading.
That’s not great news. Further, the Uber IPO dud came on the heels of an IPO dud by Uber’s ride-sharing peer, Lyft (NASDAQ:LYFT). Thus, within a few months, the ride-sharing market took two big hits, with the broad implication being that investors should stay away from this space due to its lack of long-term growth clarity and its profitability challenges.
A possible takeaway is that investors should avoid Uber stock.
But that takeaway is too simple and misses the big picture. Overall, Uber is an innovative company that’s expanding its share of a huge market, while its core business is profitable and getting more profitable. The IPO was a dud only because of bad timing.
So concerns about Uber stock related to the growth and profitability of Uber are overstated. Worries that the disappointing Uber IPO will permanently keep Uber stock price down are also overdone. Playing contrarian with Uber stock here and now will pay off over the long-term.
Concerns Are Overstated
When it comes to Uber, investors have three major concerns. All three aren’t significant, and don’t hold water.
First, some investors are concerned about the poor performance of Uber IPO. But a bad IPO doesn’t equal a bad stock. The other two tech IPOs which closed lower on their first day of trading were First Data (NYSE:FDC) and iQiyi (NASDAQ:IQ).
Today, FDC stock is up more than 50% from its IPO price, while IQ is up more than 10%, and would be up a lot more if it weren’t for the trade war (iQiyi is a Chinese streaming company). Meanwhile, Facebook (NASDAQ:FB) had a rough first few weeks on Wall Street, too. That stock has surged about 500% from its IPO price.
Thus, over he long-term, concerns about bad IPOs aren’t valid.
Second, some investors are concerned about the uncertainty of Uber’s long-term growth outlook due to competition and autonomous vehicles (AVs).
But Uber is based on a network that can easily grow. Its network consists of recruiting more drivers who lower wait times, leading to more riders, which leads to higher earnings, and more drivers. Its size is a sustainable moat in this market. Plus, because ride sharing is all about logistics and Uber is the king of logistics in this market, the introduction of AVs won’t replace Uber; instead, AV producers will partner with Uber on ride sharing.
Thus, over the long-term,concerns about Uber’s growth will prove to be unfounded.
Third, investors are worried that this company will never be comfortably profitable. There’s one big problem with this thesis. Uber’s core ride-sharing business is already profitable, as it generates adjusted operating margins of nearly 10%. Further, those margins are rising, and will continue to increase as Uber grows, while UberEats starts to move into profitable territory.
Thus, profitability concerns won’t be valid over the longer term.
Uber’s Growth Potential Is Enormous
The core thesis on Uber’s growth outlook is quite compelling.
This is an innovative company that is the undisputed king of the ride-sharing market. That market is still very small relative to its long-term potential. Ride sharing represents just a few percent of total global vehicle miles traveled. Eventually, it should represent the majority of vehicle miles traveled because roads are becoming too crowded and car ownership is becoming too expensive.
Thus, the ride-sharing market should grow by leaps and bounds over the next several years. Uber, thanks to its network and ability to innovate into new, tangential ride-sharing markets, should remain the top dog in this industry. Its margins, which are already improving, should continue to rise as it grows. Its high losses will turn into high profits, boosting Uber stock price.
Uber will leverage non-cyclical growth tailwinds and its large size to one day become an immensely profitable company at the epicenter of an enormous market. That sounds a lot like Amazon (NASDAQ:AMZN). That’s why calling Uber the Amazon of transportation makes sense.
It’s also why Uber stock price will head way higher over the long-run.
The Bottom Line on Uber Stock
Uber stock had a tough start on Wall Street because the company went public in the worst week possible, amid escalating trade tensions between the U.S. and China. Those trade tensions have cooled ever since, and Uber stock is a growth name that’s worth holding onto for the long run.
As of this writing, Luke Lango was long UBER, LYFT, FB, and AMZN.
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