While the post-pandemic recovery in the U.S. has been impressive, signs of an overstretched consumer economy pose challenges for ride-sharing firm Uber Technologies (NYSE:UBER). Basically, it’s awfully risky to wager on an enterprise that depends on relatively carefree spending. However, big block options trades imply that at least more than a few institutions love it (because, generally, institutional investors make up most of the options market). I am cautiously bullish on UBER stock.
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Earlier Optimism for UBER Stock Clashes with Harsh Realities
Although UBER stock has been a tricky investment due in part to legality challenges and an ambitious road to consistent profitability, it’s also a symbol of the burgeoning ridesharing economy. More recently, the dynamics associated with the post-pandemic ecosystem served to benefit Uber’s narrative. At the same time, rising pressures imposed on U.S. households make the ridesharing specialist a tough nut to crack.
Of course, the primary upside catalyst for UBER stock at the moment centers on revenge travel. After a prolonged period stuck in quarantine, consumers focused on experiences that the COVID-19 crisis denied. Even better for travel-related businesses, demand for experiences continued to climb a wall of worry. Therefore, even this year, sectors like the airline industry took off.
However, major U.S. retailers have sounded the alarm, warning Wall Street that the days of cheery spending may come to an end. It’s not an unreasonable prognostication. From stubbornly high inflation to Americans’ credit card debt level hitting over $1 trillion, circumstances don’t appear favorable for UBER stock.
To be quite blunt, ridesharing firms occupy the higher rungs of the trade-down effect. In other words, when people want mobility services, they can trade down to cheaper alternatives such as public transportation or even walking. Therefore, rational instinct may compel investors to avoid UBER stock.
There’s just one major wrinkle here: quite a few institutional traders appear bullish on the ridesharing pioneer.
Uber Enjoys Big-Time Supporters
Even with skepticism brewing about the wider economy, UBER stock has performed well so far this year. Since the January opener, shares gained over 85%, and in the trailing six-month period, they’re up around 36%. Arguably, such a result wouldn’t be possible without big-time supporters bidding up the firm. Looking at recent options activity, it seems that institutional investors haven’t lost their confidence in UBER.
For example, TipRanks’ options chain screen reveals that for call options expiring on October 20, 2023, the contracts with a $50 strike price carry the highest level of open interest at 22,258. On August 31, the biggest big block order likely made by institutional investors was for the October 20 $50 calls, with volume reaching 5,928 contracts.
Stated differently, it’s not just regular retail traders that believe UBER stock can hit $50 within about one-and-a-half months from now. Rather, it appears that institutions, with their access to the best resources possible, are confident that UBER can drive higher.
Another interesting dynamic centers on the call options with an expiration date of June 21, 2024. Specifically, the contract with a $52.50 strike price saw a significant volume increase in early August. At the time, institutional traders, via a multi-sweep transaction, bought calls, which natively feature an optimistic framework. Again, it appears that at least some institutions believe UBER stock can continue its rally, even into next year.
Mixed Q2 Still Can’t Dent Optimism
In fairness, UBER stock isn’t without concerns. At the beginning of last month, the company released its results for its second quarter, which came in mixed. While earnings per share of 18 cents exceeded expectations, its revenue of $9.2 billion – despite rising 14% year-over-year – still lagged estimates by $140 million.
Subsequently, UBER stock dipped conspicuously. Still, since roughly the middle of August, shares have started to rise again. Beyond institutional support, Uber benefits from consumers continuing to emphasize experiences over physical product acquisition.
What are Analysts Saying about UBER Stock?
Turning to Wall Street, UBER stock has a Strong Buy consensus rating based on 31 Buys, zero Holds, and no Sell ratings. The average UBER stock price target is $59.23, implying 25.91% upside potential.
The Takeaway: UBER Stock Intrigues Despite the Risks
Undeniably, with pressures rising against the consumer economy, UBER stock carries significant risks. Certainly, the mixed results for the underlying company’s Q2 confirm wider challenges. At the same time, options traders appear willing to give Uber a chance. So long as that remains the case, it may be too early to give up on the ridesharing giant.
