Uber (NYSE:UBER) had been among the top-performing Industrials-sector stocks in the initial months following its inclusion into the S&P 500. Shares topped out in the low $80s, though, as the shine came off the Industrial Select Sector SPDR ETF (XLI) as the first quarter drew to a close. The last three-plus months have featured relative strength, primarily out of the Information Technology and Communication Services sectors.

But Uber fits those molds to an extent. What's more, if the company pounces on the opportunity to earn increased revenue from advertising, then there could be a new growth story to be told in the quarters ahead.

With a reasonable valuation given the earnings trajectory and a generally healthy technical backdrop, I am upgrading shares from a hold to a buy. Since I last analyzed the stock, UBER has indeed underperformed the S&P 500 and a significant 24% drawdown took place from March through late May. During that stretch, the company missed on its Q1 earnings report, which also emboldened the bears.

Industrials Lose Relative Strength, UBER Shares Pare YTD Gains

The $149 billion market cap company issued a mixed set of quarterly results two months ago. First-quarter operating EPS of -$0.32 was a significant miss, but adjusted EBITDA of $1.38 billion was above the Wall Street consensus estimate of $1.32 billion. Revenue of $10.13 billion, up 15% from year-ago levels, was a modest $40 million beat.

Gross Bookings grew 20% from Q1 2023 to $37.7 billion, a 21% jump on a constant-currency basis, while its Mobility Gross Bookings metrics jumped 25% year-on-year. The management offered Q2 guidance – Gross Bookings as of early May were seen in the $38.75 billion to $40.25 billion range, which was slightly below expectations, but adjusted EBITDA for the current quarter was above estimates, in the $1.45 billion to $1.53 billion range.

There were challenges in its Latin America segment, but that was the only significant blemish. Free cash flow verified at $1.36 billion in Q1, while its EBITDA margin improved to 9.9%. Shares fell 6% in the session that followed, perhaps driven also in part by higher competition from Lyft.

Q1 Summary and Q2 Guidance

Longer-term, I was encouraged to hear that Uber has included more advertising in its app as the ride-sharing company tests new ways of driving high-margin sales. More promotional space in the app could frustrate customers, though, so there are risks with the endeavor. But Uber expects more than $1 billion in ad revenue this year, so if we see continued growth in that project, then analysts’ forecasts could be increased in the quarters ahead. This is a key area to get color on in the upcoming earnings report.

We'll see if the firm can garner some positive PR and social media exposure during the upcoming Olympic Games. Furthermore, at Uber's Go-Get 2024 event in May, the company unveiled new products, including Uber Shuttle, scheduled UberX shared rides, discounted Uber One student pricing, and a partnership with Costco. Before the Q1 report, Uber announced a large $7 billion stock buyback program in yet another bullish move by its executive team.

Key risks for the company include lower margins should the macroeconomic situation deteriorate. That would also likely result in slower user adoption and usage, along with softer revenue gains. Competition from full self-driving services is a longer-term risk. As always, regulatory and political changes could adversely affect Uber.

On earnings, analysts at BofA see operating EPS rising 30% this year with stronger growth in the out year. By 2026, Uber could do more than $3 in non-GAAP EPS. The current Seeking Alpha consensus figures show slightly less sanguine profits in the years ahead, but also a consistently high 15% to 16% revenue growth rate through 2026.

No dividends are expected to be paid out from this high-growth new entrant in the S&P 500, but the firm is solidly free cash flow positive while its valuation has retreated amid a fall in the stock price and as earnings have jumped from previous periods.

Uber: Earnings, Valuation, Free Cash Flow Yield Forecasts

Taking a PEG ratio approach, if we assume a normalized EPS growth rate of 25%, below the 41% consensus EPS growth percentage for 2026 but significantly above the S&P 500’s long-term EPS growth rate, and assume a sector median PEG ratio of 1.65x, then that implied a P/E in the low 40s. Assuming $2.10 of consensus EPS in FY 2025, we arrive at an intrinsic value target in the mid-$80s.

Last time, I described that the PEG ratio was not expensive on the stock. Also, a 3.44x price-to-sales ratio is by no means egregious given Uber’s healthy growth trajectory.

UBER: A Compelling PEG Ratio

Compared to its peers, Uber has a weak valuation rating, but as I detailed earlier, the company’s rapid growth rate justifies a high non-GAAP forward P/E. Moreover, profitability trends are favorable with the high-growth transportation stock, given where free cash flow is and where it’s headed.

Share-price momentum has softened in the last few months, but the broader trend, which I will give color to later, remains higher. Finally, the sellside turned decisively bearish on Uber in the past 90 days, evidenced by a high 29 EPS downgrades compared with just four upgrades.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon shows an unconfirmed Q2, 2024 earnings date of Tuesday, August 6 BMO. No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

With a reasonable valuation and a pullback in the stock, I am encouraged by the chart today. Notice in the graph below that shares held key support in the mid-$60s during the latest pullback. The previous high from early 2021 was a spot I noted last December. I expected some consolidation at that level, but a longer-term target of about $80 was definitely in play.

Amid those favorable technicals, UBER indeed rallied, briefly exceeding my technical target. Today, a needed correction has taken place. With a rising long-term 200-day moving average around the point of polarity in the mid-$60s, long here with a stop under $60 makes sense. There was a bullish RSI momentum divergence in late May as well.

Overall, the trend remains positive despite the corrective move in Q2. I see support at $65 while the all-time high is resistance.

UBER: Shares Hold Key Support, Rising 200dma

The Bottom Line

I have a buy rating on Uber stock. I see the valuation as somewhat attractive given the growth profile and continued earnings advance in the past few quarters. With a robust technical trend, momentum is on the side of the bulls in my view.