After an impressive third-quarter performance, Uber celebrates its second consecutive profitable quarter, reporting a free cash flow of $905 million and assets totaling $5.2 billion in cash or the equivalent, not encumbered by a lien or classified as restricted.
The rideshare giant also boasts a 20% growth in bookings from the previous year, reaching $35.3 billion. Its total trip volume also increased 25%.
After driving its market expansion worldwide for years, Uber, America’s largest ride-hailing and delivery platform, has finally reached its destination: S&P 500 eligibility.
Due to the size and fame of Uber, its exclusion from the S&P 500 has been a market anomaly for years, although its transition into the elite ranks has been anticipated for much of this year and has been extensively covered in finance media.
Big brand tickers tend to outperform in the months leading up to joining the S&P 500. Could Uber’s listing be a unique investing opportunity?
We kicked the tires to see what investors who want to order an Uber for their stock investment plan could possibly expect.
Roadblocked No More?
After rerouting its business strategy this year, Uber has turned the earnings corner and is accelerating down profit street fast.
In August, Uber revealed it generated positive cash flow for the first time ever in the second quarter at a forecast-beating sum of $382 million. Office reopenings and a travel boom helped pave the way to bumper profits.
The company’s stock surged 15% on that breakthrough news and remained strong this year. Uber boasts 2023 returns to almost rival Bitcoin, gaining nearly 100% year-to-date.
Size does not matter for Uber. Valued at about $60 billion, Uber long ago sailed past the minimum $12.7 billion market cap threshold needed for firms to join the S&P 500. Instead, it is the profitability criteria that have been a roadblock. The index requires companies to have positive earnings for the most recent quarter and, more critically for Uber, remain profitable for the trailing year.
Like many tech platforms, Uber has long put gaining market share ahead of profitability. Over the past decade, the company poured tens of billions of dollars into global expansion efforts and upgrading its services.
Uber’s shift to prioritizing profitability over rapid market expansion is a significant strategic shift. Stock analyst Jason Helfstein told CNBC that Uber’s Chief Finance Officer is meticulously evaluating next year’s performance targets, keeping the company’s long-term profitability in mind.
“That bottom line,” Helfstein explained, “that gap earnings is what will get you in the S&P, depending on who the other companies are that might be considered that opening… How much do they have to step on the gas to drive margin, to drive gap earnings?”
With such optimistic outlooks, Helfstein’s firm, Oppenheimer & Co., anticipates that Uber’s margins will witness a substantial upswing in the coming year, charting a course for sustained and profitable growth in the foreseeable future. This marks a significant milestone in Uber’s evolution as it seeks to balance expansion with profitability in the dynamic tech landscape.
The S&P 500 is the benchmark that some of the best value exchange-traded funds actively track. Stocks can behave differently when admitted to that prestigious club.
The so-called “S&P Phenomenon,” a short-lived price spike, occurs upon announcing a stock’s inclusion in the S&P 500 Index. This is a knock-on effect of technical reallocations. Since so many funds track the S&P, when a new ticker is added, those funds purchase the stock to keep in sync with the index.
Financial markets expert Michael Morris agrees. “It comes down to economics. Once funds tracking the S&P Index are required to add Uber into their portfolios, there will be an imbalance between normal supply and demand forces.” He continues, “These temporary forces won’t often keep a stock at an ‘unnatural’ price for long, but in the short-term stocks could often get bought up to higher than normal valuations.”
The buy-up by institutional investors can also generate a tailwind among retail investors, who might seek to ride the wave.
The effect could be particularly phenomenal for Uber. The S&P 500 is market-cap-weighted, so the larger the company, the more shares must be added to funds that track the index. At $60 billion, Uber dwarfs most S&P companies. Fund managers will need to buy up an inordinate amount of shares to squeeze Uber into their portfolios.
Uber’s potential inclusion in the S&P 500 is poised to be a transformative event, but it’s likely to bring about some market turbulence. Traders should brace for heightened price volatility, as many may position themselves well in advance of this significant development. However, if a rush of buyers enters the market just to buy for the pump, a price bubble may form and pop once they dump.
Uber’s potential future addition to the S&P 500 cannot be guaranteed, regardless of whether the company meets the necessary criteria. Who gets in is determined by the Index Committee at S&P Dow Jones Indices. The group meets once per quarter, keeping their internal process extremely discreet.
“The purpose of the index is to emulate the U.S. domestic common market,” analyst Howard Silverblatt told CNBC concerning Tesla’s historic inclusion. “When you go to put a company in — to actually select it — it’s got to fit into the algorithm in that it represents the market, it has liquidity, it has size.”
Although Uber’s journey to joining the index is likely underway, investors should craft a well-informed strategy for this tactical move and closely monitor its projected timeline. While positive indicators abound, it’s crucial to acknowledge that, like any investment, there are inherent risks. The company’s inclusion in the benchmark is not guaranteed and may not necessarily translate to enduring gains or losses in its stock price.