Uber Shifts Gears to Profitability: Time to Buy?

Liam Gibson

Uber

After leaving investors waiting for years, Uber is finally at the door, with profits in hand. 

The mega app's pivot to profit and its approach to the S&P 500 have shifted the outlook for this one-of-a-kind tech stock. This shift in gears may open up a timely opportunity for an Uber play.

In the Black 

Uber's latest earnings call generated some impressive numbers. With total revenue up 11 percent from a year earlier, the platform generated $221 million in net income. In addition, the firm reported a free cash flow of $905 million and unrestricted liquidity assets totaling $5.2 billion. 

This marks Uber's second straight quarterly profit from its own business operations. 

In August, Uber revealed it generated positive cash flow for the first time ever. It brought in a hefty sum of $382 million, beating analysts' expectations by more than $100 million. Management claimed office reopenings and surging travel bumper profits. The company's stock surged 15% on the news, reaching over $28 apiece. 

It contributed to an upward trajectory that Uber has been riding throughout the year. The company is currently trading at just under $50, up 100 percent year-to-date, beating market averages by many multiples.

The development is a major milestone for a platform that many doubted would ever reach profitability. Yet there is possibly even more price pump to come as to be squeezed profit Uber rounds the corner into profit street.

S&P Phenomenon

Buzz is building around Uber's admission to the S&P 500 – the most tracked index globally – as it nears officially reporting sufficient positive earnings to qualify to join the benchmark.

Despite being larger in market cap than most S&P 500 companies, membership in the prestigious index has remained elusive for Uber. That is because, like so many tech companies, it has long prioritized expansion over profits and has reinvested its revenues in building its global ride-hailing and food-delivery empire. To qualify for entry, S&P 500 candidates must have positive earnings for the most recent quarter and the trailing year. Uber is now drawing close to entry. 

If and when this happens, the so-called “S&P Phenomenon” could create significant price upswing. Many firms experience a short-lived price spike when they join the index driven by the sudden purchasing of their stock of the many funds that track the S&P. Yet the effect could be particularly pronounced in the case of Uber, thanks to its enormous market cap – $100 billion. 

For a precedent, consider Tesla. When Elon Musk's car company finally got admitted to the index in 2020, S&P 500 tracking funds suddenly needed to buy up over $70 billion worth of Tesla shares. While it is difficult to measure the precise impact of this event on Tesla's overall price action, it certainly aided the stock's dramatic 66 percent surge that year.  

Yet Uber still has some road ahead of it before it finds a parking space in the S&P. Even if it does meet all the criteria, admission is not automatically guaranteed and must be granted by an index committee. 

Momentum seems to be building for Uber, but risks remain. Even though it did report repeat profits, its revenue from its most recent quarter nonetheless fell short of analysts' average estimates. 

Its ongoing price war with Lyft may also take its toll. There is no certainty that Uber will make it to the S&P 500 or that that event will lead to significant or lasting price gains.  

Nonetheless, curious investors will want to keep an eye out for updates on this unique tactical play. 

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