2021 was a good year for US stock markets and the S&P 500 had its third consecutive year of double-digit returns. It was among the best years in terms of risk-adjusted returns. However, it was also one of the rare years where tech stocks underperformed. Uber was among the tech stocks that had a terrible 2021.
Uber stock hit a 52-week low in December but recovered from those levels. The stock fell in the first trading week of 2022 amid the sell-off in tech names. The US Federal Reserve is expected to raise rates faster than what markets were expecting. Rate hikes are negative for growth names. Companies like Uber, which have their profitability skewed to the future are negatively impacted as future cash flows get discounted at a higher rate. Meanwhile, after a weak 2021, many brokerages have listed Uber as a top pick for 2022. What’s the forecast for Uber stock and is it a good buy in 2022?
Uber is a play on ride-hailing and food delivery
Uber has two main businesses; one is the ride-hailing business which is a reopening play. The second business vertical is the food delivery Uber Eats business which shined during the lockdowns in 2020. Over the last few years, the company has been streamlining the business. It has exited several markets. For instance, it sold the Indian food delivery business to Zomato while the China ride-hailing business was sold to SoftBank-backed DiDi.
As part of the transaction with Didi, Uber took a significant stake in the company. Didi listed this year on the US markets but within months, it had to opt for delisting under pressure from China. While Didi’s investors lost billions amid the drama, SoftBank and Uber were the two biggest losers as they are the top two stockholders of the company.
Uber has also exited the air taxi and autonomous driving business. Both these businesses were making massive losses and were a drain in Uber’s cash flows and earnings. By existing these businesses, Uber can now become profitable much sooner than previously envisioned.
What’s been weighing down the stock?
Uber stock has been under pressure over the last year. One reason has been the turmoil in Didi. However, the surging cases of the omicron variant haven’t helped the stock either. Also, the massive labor shortage in the US is impacting Uber. As employers across the US increase wages to attract more workers, Uber would also have to better compensate the partners. Uber along with other gig economy companies has been facing criticism over their contractor policies and drivers in several regions have been pushing for better compensation and working conditions.
Multiple brokerages have rated Uber as a top 2022 pick
Several brokerages including UBS, Wolfe, and RBC have listed Uber stock as a top 2022 pick. “We think shares price in significant underperformance vs. Lyft and DoorDash in both Mobility and Delivery business. We think that as the company drives Mobility margins and continues to expand their Delivery business through share gains, new verticals and advertising, shares could re-rate in a rather large ‘catch up trade,” said UBS analyst Lloyd Walmsley in December.
Wolfe Research is bullish
While markets are apprehensive that ride-hailing companies might have to increase driver incentives, UBS believes that the concerns are overblown. RBS is also bullish on the stock amid the expected uptick in the mobility business as well as the expected rebound in its profitability. Wolfe is bullish on both the ride-hailing and Uber Eats business.
Uber stock forecast
Wall Street analysts are quite bullish on Uber stock. Of the 47 analysts covering the stock, 42 have a buy rating while the remaining five have a hold rating. The stock has a median target price of $70 which is a premium of almost 69% over current prices. The street high target price of $82 is a 98% premium. The stock even trades 15.7% below the street low target price of $48.
Ride-hailing companies have not created wealth
Meanwhile, ride-hailing and food delivery companies have failed to create investor wealth. Both Uber and Lyft were listed in 2019 and trade below their IPO price. DoorDash, which was listed in 2020 has been an exception and the stock is trading above the IPO price. However, Deliveroo’s 2021 London IPO was a big flop. What was expected to test London’s appetite for tech companies went on to become the worst IPO in the country.
As 2021 drew to a close, South Asian ride-hailing company Grab, that listed in a SPAC reverse merger. The stock tumbled following the merger. Didi too joins the ranks of the worst IPOs. But, more than the company’s business, China’s crackdown and the resultant delisting took a toll on the stock.
Should you buy Uber stock?
Uber stock trades at an NTM (next-12 months) EV-to-sales multiple of 3.6x. The multiple has averaged 4.5x since the company was listed and hit a peak of 7.3x. The lowest multiple was 1.3x which the stock hit during the March 2020 sell-off.
Uber looks like a good reopening stock to buy at these prices. The continues topline growth and focus on the bottomline would drive the stock higher in the long term. However, in the short term, it could be volatile amid the rise in bond yields and the developments related to the pandemic.