This growth stock is being sold due to fear of competition from large technology companies such as Tesla and Alphabet. It may be time to be greedy and buy stocks.
Uber Technologies (UBER 0.86%) has defined the ride-hailing industry. The company is the dominant taxi company in the United States and operates in 70 countries around the world. But people don’t take rides; they take Ubers. The fact that Uber’s name has become synonymous with ride-hailing speaks to the power of the brand. Last December, Uber’s success earned it a place in the S&P500.
But today the stock is down 30% from its all-time high on fears that autonomous driving technology from companies like Tesla And Alphabet‘s Waymo will pose an existential threat to Uber.
It’s a frightening thought for investors, but it may be overstated. This is why Uber’s decline presents an attractive buying opportunity in a prime growth stock that investors can buy and hold, possibly forever.
Uber’s climb to the S&P 500
Maybe you already know Uber. People, after all Ubered 9.4 billion times last year across the company’s 70 markets. The company operates a smartphone app that connects people to a network of participating drivers for transportation services. Uber started with rides to a specific destination but has expanded its business to include food delivery, car rentals and courier services.
Uber’s business has grown large enough after the pandemic to become highly profitable. The company has generated approximately $42 billion in revenue over the past four quarters, including approximately $6 billion in revenue free cash flow. Earnings were consistently profitable under generally accepted accounting principles (GAAP), which vaulted Uber into the S&P 500, and analysts expect earnings to grow at an average annual rate of 42.5% over the next three to five years.
So why has the stock fallen?
Technology companies are developing autonomous vehicle technology, which would essentially eliminate the need for human drivers. Tesla recently outlined plans for its highly anticipated Robotaxi business, and Alphabet’s Waymo has already sold autonomous rides in parts of San Francisco, Phoenix, Los Angeles and Austin.
Tesla will use its own Robotaxi app. Waymo has partnered with Uber in existing markets, but the company’s recent announcement about plans to expand into Miami highlighted the Waymo One app, potentially leaving Uber out of the picture.
Uber’s revenue costs (paying drivers for giving rides) were about 60% of revenue through nine months of 2024. The fear is that eliminating a significant portion of those costs with autonomy would allow autonomous competitors to undercut Uber’s prices and put pressure on the company.
Why Uber’s selloff may not be justified
Investors shouldn’t discredit autonomous competition, but there are some reasons why the stock sell-off may be an overreaction, at least for now.
- New autonomy markets need to be tested, which means that a large-scale autonomous threat could be many years away.
- Despite Tesla’s goal to launch its Robotaxi service in California and Texas next yearautonomous technology is still only certified as SAE Level 2, which requires driver intervention.
- Uber has defensive advantages, including the network effects of a vast driver network, first-party data and Uber’s brand value as synonymous with ride-hailing.
- Uber could form partnerships to gain access to autonomous technology. It teamed up with Cruise this summer.
- Autonomous vehicle companies may have to spend billions of dollars on fleet vehicles, while Uber’s operations largely shift these costs onto drivers. Therefore, it is uncertain what the economic benefits of an autonomous fleet will be compared to Uber.
These factors don’t negate the long-term risks autonomous vehicles may pose, but it appears the market is getting ahead of itself.
Is it time to be greedy when others are afraid?
Meanwhile, Uber’s profits are rising despite its declining stock price. Today the share is trading at a price of future price-earnings ratio (P/E). of 32, a bargain for a company expected to bring earnings to 42%. That’s a price/earnings-to-growth rate (PEG) ratio from just 0.75, making Uber perhaps one of the best deals on the market.
Investors today fear Uber, but as the great Warren Buffett said: be greedy when others are afraid. Remember, this is a dominant and highly profitable company, at least for now and likely for years to come (if not longer). The market may not value Uber’s competitive advantages enough, meaning the stock could deliver lucrative long-term returns if autonomous fears prove overblown. Even if autonomous fleets ultimately prove dangerous, this won’t happen overnight.
Therefore, investors should view Uber’s decline as a long-term buying opportunity. You can change your mind later if necessary, because a company this good (and at such a cheap valuation) will likely make you a lot of money by then.
Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Tesla and Uber Technologies. The Motley Fool has one disclosure policy.