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C-Suite Issues
Uber’s series of management issues persist. Sukumar Rathnam, the company’s head of engineering, is the latest in a line of management departures since the start of the pandemic. Rathnam was in the job for a little over a year before rising tensions between management forced his exit.
Since listing as a public company, Uber has struggled to find the correct blend in its C-suite, and that has upset investors and caused a deflated stock price.
Struggling for Profitability
Uber managed to beat analysts’ expectations in its Q2 earnings report, with a revenue beat of $167.18 million and an EPS beat of $1.07. The company, however, remains unprofitable, and concerns are building up.
Uber is still trading at a -27.39% EV/EBITDA margin, while the sector’s trading at a margin of 13.41%. Sure, we can argue that it’s an improvement on its 5-year average of -52.60%, but there’s no sign of operational efficiency, with the total operating expense (69.37%) still exceeding that of 2018 (66.78%).
Valuation
One can always downplay the trajectory of a company’s profitability margins during a growth phase. Still, Uber’s growth metrics indicate that it isn’t growing fast enough to justify its stock price.
Unlike Price/Earnings, the Price/Sales metric can be used at any stage of a business’s lifecycle. You would usually like your PS ratio to fall between 1.00 and 2.00 to justify the current stock price; Uber has a ratio of 5.65, which isn’t only significantly higher than the benchmark, but also 255.29% higher than the sector average.
If we are to base the stock price on the future cash flow, it means that it’s significantly overvalued. A good price/cash flow ratio is usually below 15.00, but Uber’s forward ratio of 394.15 exceeds that by a mile. Plus, at a negative free cash flow yield (-3.63%), any claim of future growth would be stale.
Wall Street’s Take
The average Uber price target is $68.52, with an upside of 72.38%.
Wall Street thinks the stock is a Strong Buy, with 23 Buy ratings and 2 Hold ratings. Then again, it’s rated the stock highly since its IPO, but we’re yet to witness any noticeable gains. If you’re going on basic intuition, you will rate the stock as a buy, but the data suggests otherwise. There are also events holding the stock back: C-suite and driver contract issues continue to play a significant role, and Uber has a track record of controversy. I’m not willing to bet against it cooling down.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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