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Uber Technologies Inc(UBER-N)

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Up 80% in 2023, Here's Why Uber Still Looks Undervalued Right Now

Barchart - Thu Sep 21, 10:26AM CDT

Uber (UBER) stock's impressive year-to-date rally (up more than 80% for the period) has stalled in recent months, partly thanks to the wild market swings of late summer. Despite the cooldown, there's still a lot to like about Uber following its recent swing to a GAAP operating profit as it looks to keep growth going strong. 

Things Are Looking Up for Uber

Moving ahead, margins could have room for further expansion, all while gross bookings continue to grow at an impressive double-digit rate (up 16% to $33.6 billion in the last quarter). Indeed, an increasing number of people are using Uber for more than just ride-hailing (or mobility). The company is reporting strength across the board, with delivery also contributing to the firm's impressive double-digit growth. 

There's no question that Uber is making a solid case for why it should be the transportation app for the masses. The Uber One subscription makes for an incredibly sticky subscription that's tough to kick, especially for the many young people who've grown so used to Uber-ing that they no longer own their own vehicles.

Amid high levels of inflation and waning consumer sentiment, vehicle ownership is bound to take a hit to the chin. And if a recession strikes the U.S. economy, demand for ride-hailing and grocery delivery services could strengthen further. Sure, one may cut back on restaurant orders and grocery deliveries if consumer sentiment sinks further. However, it's not hard to imagine people will hail more Ubers as they question whether they need to own a vehicle and all the hefty expenses they entail.

Even once economic conditions inevitably improve, many young people may lack the desire to purchase a car. Why bother when it's so convenient to just hail an Uber? In this regard, Uber's mobility business seems capable of defensive growth, while its delivery business is more sensitive to the state of the economy.

In the latest quarter, delivery gross bookings rose 12% year over year. Still strong growth, but not nearly as impressive as the 25% pop in mobility bookings. Once the economy gets back to full speed, I'd look for delivery growth to catch up to mobility.

In the meantime, it's hard not to love Uber stock as margins and growth move higher together. Of course, the rise of autonomous vehicles could disrupt Uber's rapidly improving business model. Uber's greatest strength lies in its network. However, there's one thing that's better than an impressive network: lower prices.

Why It Won't Be Curtains for Uber Once Autonomous Driving Lands

Tesla (TSLA) is a credible threat, as its CEO Elon Musk continues pounding the table on the rise of "robotaxis." Indeed, the concept of fully autonomous, ride-hailing Teslas that can make money driving people around while you sleep is every bit as profound as it sounds.

When the time comes, Uber will need to be quick to adapt. I think it will be ready for the moment autonomous driving goes mainstream. The firm may not have the same artificial intelligence (AI) capabilities as the likes of a Tesla or an Alphabet (GOOGL), which also has a stake in autonomous driving through its Waymo division. 

That said, Uber can easily purchase a massive fleet of self-driving cars (perhaps even Teslas) as it looks to conduct business as usual, at least for its customers. In that regard, I view Uber as more than capable of adapting to the autonomous age. The only thing that will really change is that rides will be more affordable, since robot drivers won't ask for payments and tips.

Ark Invest's Cathie Wood may view the autonomous driving market as a "winner takes most" type of market. I'm inclined to disagree with Wood. I think there will be many winners as robots take the driver's seat. When it comes to self-driving, low costs and the most promising safety data are likely to dictate which firm wins a prospective customer's business.

Tesla may have the edge in autonomous driving, according to Wood. However, I see many scenarios where Uber can also keep winning as more driverless cars get the green light to take to the roads.

The Bottom Line on Uber

At this juncture, the technical picture may not look attractive for Uber stock, with a potential double-top pattern that looks to be forming. If the pattern pans out, Uber stock could be well on its way back to $37 per share.

Despite the less than promising technicals, Uber's long-term fundamentals couldn't be stronger. It's growing its margins and revenue. And even a recession may not be enough to stop it in its tracks. Add a "robotaxi" boom to margins into the equation (which I think could hit by 2030), and the stock looks severely underpriced right here.

On the date of publication, Joey Frenette had a position in: GOOGL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.