On Friday, December 1st, Uber technologies (ABOVE 2.06%) has received some exciting news: the stock will be added to the benchmark S&P 500 Index at start of trading on December 18th. This is a great success because approval is subject to strict criteria:
- The company must have a market capitalization of more than $14.5 billion.
- The sum of the earnings from the last four quarters must be positive.
- The profit in the last quarter must be positive.
- At least 50% of the company’s shares must be available for public trading.
- At least 250,000 shares of the company must have been traded in the last six months.
But checking all the boxes does not guarantee admission. The company must be selected by the US Index Committee, which regularly reviews the S&P 500 and its components. A few other things are taken into account, including sector weighting – the S&P 500 is a diversified index, so the committee wouldn’t nominate 400 stocks from the technology sector alone, for example.
Uber’s management team has worked hard to return the company to profitability while maintaining strong growth in its ride-hailing and food delivery businesses. Below, I explain why the stock is worth buying now and what joining the S&P 500 could mean for investors.
Uber’s mobility business has come back to life
Uber’s activities are divided into three segments: mobility (ride-hailing), food delivery and commercial freight transport. Mobility has always been the company’s largest financial contributor, except for a brief period at the height of the pandemic when lockdowns and social restrictions were in effect. During these challenging times, food delivery has taken over, but mobility has truly returned.
In the most recent third quarter of 2023 (ended September 30), customers booked $17.9 billion worth of rides, up 31% year over year. They also spent $16.1 billion on food delivery platform Uber Eats, but that represented a much slower growth rate of 18%.
Uber continues to innovate in the ride-hailing space. The company recently launched group rides in 100 cities worldwide, meaning friends traveling to the same destination can book a ride to pick them up, even if they’re in different locations. In addition, the company has expanded its taxi segment in New York City so that any customer who books an UberX can have a yellow taxi take the ride. When Uber came onto the scene, the company revolutionized the traditional taxi industry and is now capitalizing on what’s left.
In the longer term, Uber is preparing for autonomous, self-driving vehicles to enter the mobility industry on a large scale. It signed a number of partnerships with developers of the technology, including alphabetis Waymo, which already offers autonomous rides via Uber in Phoenix, Arizona. Uber paid its human drivers $16 billion last quarter, so self-driving cars could eliminate that cost and transform the company’s economics.
With 142 million monthly active customers on its platforms, Uber will be the go-to network for autonomous vehicle developers looking to reach the largest possible audience.
Uber is finally profitable
Losing money is often a feature of modern technology companies, not a bug. Investors encourage them to burn cash to fuel growth, even if it means big bottom-line losses. The idea is to quickly acquire many customers and ultimately reduce costs to make the business profitable.
Uber has consistently lost money since its founding in 2009 until the fourth quarter of 2022, when the company reported net income (profit) of $595 million. This momentum continued into 2023, recording another $458 million in net profits in the first nine months.
Revitalizing its mobility business was an important factor as it allowed Uber to generate more revenue, but the company also carefully managed costs this year to improve its bottom line. In the first three quarters of 2023, Uber’s operating costs were $10.5 billion, down $100 million from the same period last year.
The largest reductions occurred in sales, marketing and administrative expenses.
However, the biggest tailwind for Uber’s bottom line has been the change in the value of its investments. The company has a stake in at least five different startups that saw their value plummet in 2022 amid the tech bear market. It dealt a $9.9 billion hit to Uber’s financial results in the first nine months of the year, which reached a profit of $493 million in 2023.
These fluctuations in stock value only occur on paper unless Uber sells, so they technically have no impact on the company’s financials. However, by law they must be included in the results of Generally Accepted Accounting Principles (GAAP). This is the method the U.S. Index Committee relies on to measure profitability.
Joining the S&P 500 could give Uber stock a boost
Uber stock could still have a lot of upside in the long term, but its inclusion in the S&P 500 could provide some near-term momentum. In fact, the stock is already up 2.4% since Friday’s announcement.
Why? Because any index fund that tracks the performance of the S&P 500 will be forced to buy Uber shares. Wall Street firm Bernstein estimates that these funds will need to purchase about 200 million Uber shares, at a current price of $58.63, worth about $11.7 billion. That’s almost 10% of Uber’s market value!
While this will drive demand for Uber stock in the short term, there is no guarantee that inclusion in the S&P 500 will result in a higher valuation in the long term.
Investors should continue to focus on Uber’s long-term potential as a company, paying particular attention to autonomous self-driving technologies, which could be a key value creator in the coming years.