Bill Ackman, known for managing a concentrated portfolio of high-quality businesses at Pershing Square, currently has more than 20 percent of his fund’s total holdings in Uber Technologies (NYSE:UBER). Ackman bought his entire stake in Uber in Q1 of this year, snapping up over 30 million shares. Why did Bill Ackman buy Uber stock in such massive quantities, and could UBER still be worth a look at today’s prices?
Uber’s Dominant Moat and High Barriers to Entry
One of the most obvious advantages to Uber for Bill Ackman’s investing style is its essentially absolute dominance in the ridesharing market. Although Lyft, Uber’s only meaningful competitor, has managed to grow its market share to about 30 percent, the other 70 percent of the US rideshare market is still firmly under Uber’s control.
Likewise, both Uber and Lyft benefit from the extremely high barriers to entry that are natural features of the ridesharing market. A new ridesharing business, if it were to emerge, would have to spend enormous sums to enter markets where the two majors already have strong presences.
Although some investors have worried that Tesla’s planned robotaxi fleet could present a threat to Uber’s dominance, the EV giant is likely still years away from deploying a meaningful number of autonomous taxis due to regulatory constraints. Even then, Uber is also in the process of developing its own autonomous taxis that could allow it to keep pace with Tesla if and when AV technology begins to replace human rideshare drivers.
Uber’s Financial Characteristics
Uber also fits Ackman’s longstanding requirements that a business be simple and predictable. Uber’s model of arranging rideshares through its platform is, on the whole, a simple and scalable business that has delivered exceptional results over time. Uber has successfully delivered 17 consecutive quarters of revenue growth and five quarters of earnings growth, showing the ability of its business to keep growing even amid inflationary pressures and rising economic uncertainty.
Uber’s growth rates remain quite high, with revenue rising 18 percent year-over-year in Q2 to a total of $12.7 billion. This was mirrored by an 18 percent increase in total trips and a 17 percent increase in gross bookings. Free cash flow, however, massively outpaced these other metrics, rising 44 percent to $1.7 billion. On a trailing 12-month basis, Uber has generated an impressive $8.5 billion in FCF.
Return on invested capital, a financial metric Ackman is known to focus on, is another very strong suit of Uber’s. Over the last 12 months, Uber’s ROIC has been 39.7 percent. Uber has also delivered strong returns on both assets and equity at 25.4 percent and 63.5 percent, respectively. By comparison, average ROICs, ROEs and ROAs across the sector are all in the single-digit range.
Finally, Uber has the kind of strong balance sheet that Ackman typically likes to see in his stocks. As of the end of Q2, Uber has $6.4 billion in cash and cash equivalents, another $932 million in short-term investments and total assets of $56.0 billion. Total liabilities, meanwhile, amounted to just $32.3 billion, with only $9.6 billion of that being in long-term debt.
Put together, these factors closely align Uber with Ackman’s so-called investing commandments, a list of characteristics he and his team look for when considering an addition to the Pershing Square portfolio. Ackman was also able to buy Uber at an attractive price early in the year and has seen significant gains from his UBER position since buying it. While Ackman didn’t choose to add more UBER shares to his portfolio in Q2, focusing instead on buying Alphabet and Amazon, he also has yet to sell any of the shares he bought in Q1.
Is Uber Still a Buy Today?
Although Uber’s current price of $92.51 is significantly higher than the average cost basis of $71.97 that Ackman was able to lock in earlier this year, there’s still a strong argument to be made for the stock’s value. To begin with, shares of UBER trade at just 15.7 times trailing 12-month earnings, a relatively modest multiple for a high-growth technology company in today’s market. While the price-to-operating-cash-flow ratio is significantly higher at 23.1, the rapid rate of cash flow growth at Uber could justify a higher multiple than many other stocks could normally support.
Analysts also expect significantly more upside from Uber in the future. The 12-month consensus price target of $108.52 implies a gain of almost 18 percent, coming on top of a trailing 12-month return of roughly 13 percent. The consensus rating for UBER remains a fairly strong buy, with 34 analysts rating it as a buy and 12 rating it as a hold. At this time, Uber has no outstanding sell ratings.
Even more importantly, Uber could still have a significant growth runway left in front of it. Management expects gross booking to rise by 17-21 percent on a year-over-year basis in Q3, maintaining the strong momentum shown in Q2. Over the next 3-5 years, analysts also expect earnings per share to grow at an annualized rate of more than 20 percent. If this proves to be the case, Uber could be trading at an attractive price not only when compared to its current earnings but also when weighed against its long-term earnings growth.
Uber is also deploying cash heavily into share buybacks, an effort that could significantly benefit long-term shareholders. In Q2, for instance, Uber bought back about $1.4 billion worth of its own stock and announced a new $20 billion buyback authorization. With a current market cap of roughly $193 billion, this new buyback would account for more than 10 percent of Uber’s total present valuation.
Between its many positive characteristics as a business, its strong potential for future growth and a possibly undervalued price, Uber could have quite a lot to offer investors. Uber could still have many years of compounding growth left in front of it, and its valuation leaves room for considerable appreciation as earnings and cash flows keep rising. As such, Uber may be a good candidate to buy and hold for long-term returns.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.