Uber Technologies Is Driving Cash Flow: Ride It Higher for Life

Key Points

• Uber Technologies' August price pullback is a buying opportunity for long-term investors.
• The company's cash flow allows for significant share buybacks and is only getting stronger.
• Business growth is forecasted to sustain a double-digit CAGR, putting this stock at a deep value relative to forward estimates.

Uber Technologies NYSE: UBER started as a risky new technology and has developed into a blue-chip quality stock whose business is entrenched in society. The single factor that most summarizes that quality is its capital return, which has been robust and is getting richer by the year.

The company’s business, operational quality, and growth trajectory led the board to authorize another, larger-than-before share repurchase authorization worth $20 billion or roughly 10% of the early August market cap. The takeaway is that Uber Technologies is no longer a risky tech start-up but now a buy-and-hold quality tech stock whose stock price has significant room to run. 

Buybacks and Growth to Lift Uber Stock by Triple Digits

Uber’s share buybacks are not trivial. While not aggressively reducing the count, the Q2 activity resulted in a 1.1% reduction compared to the prior year and is expected to continue offsetting share-based compensation moving forward.

The question is whether the company will accelerate its buying or maintain a steady pace, and when a dividend payment may be forthcoming. Comparable stocks that turn cash flow into buybacks and dividends tend to see their share prices trend higher over time. 

The valuation metrics suggest this stock could rise by 400% to 600% over the next 10 years. The stock trades at 32x its current year's earnings outlook, aligning with blue-chip peers, but its growth forecasts are much more robust.

The forecast is for a sustained high-20% to high-30% earnings CAGR for at least the next decade, which puts the business near 5x earnings by 2035.

Assuming that Uber continues to build on its technological advantages, outperforming consensus estimates for quarterly results, the long-term forecasts are too low, and the value is deeper than it appears. 

Although some caution has crept into the analyst's outlook, the sentiment trends remain positive and align with an uptrending share price. The activity leading into the Q2 release includes several downgrades to Hold-equivalent ratings offset by price target increases that lead to the high-end range.

The consensus of 38 analysts is a high conviction Moderate Buy rating, with more than 70% rating it as a Buy. The price target forecasts a 10% upside. The high-end range puts this market near $120, another 20% upside, and both the consensus and high-end are sufficient to set fresh all-time highs. 

Uber Skids on Mixed Results

Uber’s share price slipped following the Q2 release due to the mixed results. The company outperformed on the top line, growing revenue by nearly 19% to outpace MarketBeat’s reported consensus by 185 basis points, but missed targets on the bottom line.

The bottom-line miss is due to increased investment in business acquisition and growth, so it is not a major sticking point for the market. The more critical details include the 18% increase in trips and gross bookings, the 35% increase in adjusted EBITDA, the 35% increase in adjusted earnings, and $2.5 billion in free cash flow.

Regarding the free cash flow and share buybacks, the Q2 results put the payout ratio at a very sustainable near-50%.

Uber’s stock price uptrend is intact despite the post-release price dip. The market retreated but did not fall below a critical support target until early August. The market may consolidate at this level and move sideways in the near term, but it is unlikely to set a new low; if it does set a new low, investors should expect to see it rebound quickly.

Not only are there billions in authorized buyback dollars, but the institutions have been buying robustly and will likely continue to do so. They own more than 80% of the stock and provide a solid support base and tailwind for market action.