Uber (NYSE:UBER) has generated extremely strong returns for its investors over the last year, rising by nearly 40% in just 12 months.
The stock has also made its way into the portfolios of some of Wall Street’s top investors, most notably Bill Ackman of Pershing Square Capital.
This begs the question of how much further Uber shares can rise and how much compounding potential the business still has in it. Can Uber shares 5X, and if so, how long will it take?
Uber’s Recent Earnings Report
Uber’s report for Q4 showed bookings growth of 18%, a number which was consistent across both Uber’s ridesharing and delivery business lines.
Revenue for the quarter rose 20% to $12 billion, while income from operations rose $118 million over the year-ago quarter. Net income, meanwhile, came to $6.9 billion.
Perhaps the most important improvement in Uber’s business, however, was a radical increase in free cash flow. FCF rose to $1.71 billion in Q4, up more than 120% compared to the year-ago quarter.
A similar trend developed in the amount of net cash provided by operating activities, which rose 113% over the same period.
Uber’s Turn to Strong Profitability
Although Uber operated without profits for many years, the company has become quite profitable and now generates excellent returns for its shareholders. In the last 12 reported months, Uber has delivered a net margin of 27.1%, a return on invested capital of 44.8% and a return on equity of 69.7%.
It has also been able to keep its revenue growth streak up and revenues have now been rising for 16 consecutive quarters. Top line growth rate hasn’t dipped below 10% year-over-year during that time.
Given the strength of sales growth in Q4, Uber is in a good spot to grow sales as more and more people take advantage of its ride-sharing and delivery services.
Does Uber Still Have a Solid Moat?
One of the weights on UBER’s share prices last year was the fear that it would lose its competitive advantage to Tesla’s new autonomous cabs. Fears of Uber’s decline, however, seem to have been considerably overstated.
The industry leader still has a roughly 75% market share in the rideshare market, making it very likely that it will continue to capture consumer spending.
A Look at 12-Month Expectations for Uber
While Uber may have plenty of long-term potential, analysts aren’t expecting any gigantic upward moves from it in the next year.
The 12-month consensus price target for UBER shares is $94.78, only 3.3% above the last trading price of $91.72.
The highest price target of $115 would see the stock gain a bit over 25%, but Uber shares may take a while to deliver outsized returns from their current position.
What About Long-term Earnings Growth?
As Peter Lynch famously observed, stock prices over the long run tend to follow earnings growth. As such, we can reasonably expect that for Uber to 5X, its earnings will have to follow a more or less similar growth trend. Over the coming five years, Uber’s EPS is expected to grow at a compounded rate of 28.2% annually.
Using Uber’s trailing 12-month earnings, this would result in EPS of $19.77 in five years, or about 3.5 times what Uber is earning today. Assuming shares moved upward at a comparable rate, share prices would be a bit over $300 five years from now.
Is Uber Under Threat From Autonomous Cars?
Many investors were temporarily concerned about Uber’s prospects when Tesla unveiled its Cybercab last year. While autonomous vehicles could eventually challenge Uber’s ridesharing model, the obstacles in the way of Tesla creating a viable robotaxi business are massive.
Uber has also partnered with Waymo to pioneer its own line of robotaxis, putting it on a more or less even footing with Tesla when it comes to developing the next generation of taxi services.
A more realistic obstacle to Uber’s growth in the short run could be a cutback in spending by consumers. Q1 saw consumer spending drop for the first time in about two years, potentially signaling worries about the state of the economy and strains on personal budgets.
These problems could be exacerbated by higher tariffs and resurgent inflation, potentially causing consumers to hold onto more of their money instead of using it for rides or food deliveries.
With that said, such a pullback would likely have only a temporary effect on Uber. It has become firmly entrenched as the leading force in the ridesharing market, and many consumers use it on a regular basis.
While Uber certainly could see its number of rides drop in the event of a general spending downturn, it would also likely see a rebound when the economic conditions improve and consumers begin spending more freely again.
So, Will Uber 5X?
While it’s never possible to make exact predictions about stock prices years in the future, it seems more likely than not that Uber shares will eventually reach five times their current price. Following expected earnings growth, Uber could more than 3X by the turn of the decade.
Even if growth leveled off after that point, UBER shares could reach 5 times their present levels sometime next decade, vastly outpacing the general market rule that stocks as a whole double roughly every seven years.
Even if Uber doesn’t quite make it to 5-bagger territory, the stock could still be a good investment to make today. Uber shares are trading at just 16.1 times earnings, well below the market average and certainly on the low side for a tech company with high growth expectations.
As such, the stock could have considerable room for upward mobility as earnings improve, even if it takes some time to hit the 5X mark. Right now, Uber looks like it could be an attractive buy for long-investors looking for strong compounding businesses.
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.