Uber (NYSE:UBER) shares saw a 5% increase in extended trading on Friday following the announcement that it will be joining the S&ampP 500 Index, taking the place of Sealed Air Corp (NYSE:SEE). As stated in a recent press release, this adjustment is scheduled to occur before trading opens on Monday, December 18.

When a company is included in the S&ampP 500, its stock price typically experiences a boost. This is because portfolio managers who align with the index, updated quarterly, are required to purchase its stocks. To be eligible for inclusion, companies must meet specific criteria regarding their valuation and profitability.

 

Uber boosts profitability in recent months

Since its debut on the New York Stock Exchange in 2019, Uber has grappled with high operational costs, particularly in its competitive ride-hailing segment. Initially, the company focused on adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) as its key financial metric.

A significant portion of Uber’s adjusted EBITDA has been derived from its mobility services. However, the company expedited the profitability of its delivery segment, driven by the recession-wary investment climateU+02019s reluctance toward funding loss-making enterprises. 

Additionally, increasing advertising revenue has also bolstered UberU+02019s financial health.

In response to these challenges, Uber undertook significant cost-cutting measures in 2020, including eliminating over 3,500 jobs. 

Subsequent efforts by its executives have focused on refining the company’s cost structure, such as optimizing delivery expenses. In its third quarter, Uber reported a net income of $221 million, with revenues totaling $9.29 billion. Over the past four quarters, the company has accrued a profit exceeding $1 billion.

Uber CEO Dara Khosrowshahi, in a discussion with UBS analyst Lloyd Walmsley at a December 2021 investor meeting, emphasized the goal to develop Uber into a company capable of sustaining impressive top-line growth and progressively enhancing margins over time. 

As per the S&ampP 500U+02019s inclusion criteria, companies must demonstrate positive earnings in the most recent quarter and cumulatively over the past four quarters. Additionally, a minimum adjusted market capitalization of $14.5 billion is required. Uber boasts a market capitalization of approximately $118 billion, significantly higher than the S&ampP 500U+02019s median company market cap of just over $31 billion.

 

Is Uber stock a good buy right now?

Uber, renowned for its ride-sharing services, also runs the popular food delivery platform Uber Eats and a commercial freight service named Uber Freight.

In its latest third-quarter report, ending September 30, Uber witnessed a 25% year-over-year increase in its operations, completing 2.4 billion trips through ride-hailing and food delivery services. The company reported a substantial $35.2 billion in customer bookings across its varied services, encompassing rides, food, and freight deliveries.

However, Uber faces substantial operational costs. The company earns a fraction of each trip its drivers complete, converting $35.2 billion in bookings to $9.2 billion in revenue. After accounting for operational expenses, the net income stood at a modest $221 million for the quarter.

A significant portion of UberU+02019s expenses is attributed to its vast network of 6.5 million drivers, to whom it paid $16 billion in the third quarter alone, nearly half of its total bookings. Significantly reducing this cost could drastically alter UberU+02019s financial dynamics, allowing the company to retain a larger share of revenue from each service booked by customers.

 

Can Uber be valued at $1 trillion?

Uber is projected to achieve a revenue of $35.4 billion for the entire year of 2023. Given its current market cap, UBER stock trades at a price-to-sales (P/S) ratio of approximately 3.3. 

The ratio is significantly lower than its peak P/S ratio of 8.9. However, taking a midpoint between these two figures, a long-term P/S ratio of around 5.8 seems feasible.

To reach a market valuation of $1 trillion by 2033, Uber would need to ramp up its annual revenue to an impressive $173 billion. This ambitious goal requires the company to sustain an average annual revenue growth of 17.2% over the next decade.

 

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