Uber Technologies (UBER) develops platforms that allow for independent ride-sharing and food deliveries.
I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks)
Management’s Upgrade on Outlook
Uber stock has risen significantly over the past month due to management’s upgrade on its earnings outlook for its Q3 and Q4 results. The company expects gross bookings to end up between $22.8 billion and $23.2 billion, versus its previous estimate of $22 to $24 billion.
Management also expects EBITDA to improve by -$25 million to $25 million, versus a previously anticipated loss of $100 million.
“With positive Adjusted EBITDA in July and August, we believe Uber is now tracking towards Adjusted EBITDA breakeven in Q3, well ahead of our prior guidance,” said Nelson Chai, Uber CFO. “We expect to deliver sequential Adjusted EBITDA improvement in Q4, even as we continue to invest in our growth initiatives.”
Earnings Outlook Analysis
The company’s Beneish m-score evaluates the probability of a firm manipulating earnings. The model consists of eight independent variables, which are considered as a collective along with the output of the model to determine the sustainability of a company’s earnings.
The model’s output presents a Beneish m-score of -1.78, which is exactly in line with an acceptable score (anything below -1.78 is acceptable), but the situation remains fragile as companies tend to overstate their earnings in the final quarter of the year.
According to the model, the company’s receivables, gross margins, asset quality, and sales growth are all to be questioned as they’re trading above the model’s threshold.
The sustainability of Uber’s earnings has to be questioned, and even if it does produce stellar earnings, we need to consider that the company’s still trading at a negative cash flow from operations of $2.2 billion.
Lastly, Uber has a negative interest coverage ratio, which means that even if operating earnings do end up reaching the heights predicted, ordinary shareholders will still be faced with the looming debt burden.
The stock’s trading with an RSI (relative strength index) in the low-60s, versus its reading of 34 a month ago. In addition, the stock’s also trading above its 10, 50, and 100-day moving averages.
The technical levels tell us that the stock has picked up a significant amount of steam lately, which could be down to the CFOs comments, or general pullback buys with an anticipation of a better future.
Remember that an RSI of above 70 tells us that the stock’s overbought. However, Uber’s reached the RSI 84 handle before.
Wall Street’s Take
Wall Street thinks the stock is a Strong Buy with an average price target of $68.82, which implies 41.8% upside. There have been 23 Buy ratings on the stock, one Hold rating, and no Sell ratings assigned in the past three months.
There’s evidence that the company may be using aggressive accounting to bolster its year-end financial results.
The RSI has also taken off recently, and the stock looks near overbought, but it seems unlikely that the stock will decline after solid earnings reports.
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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