Uber Takes a Ride to the Top: A Milestone Journey to the S&P 500

This move places Uber among an exclusive group of companies that have earned this prestigious distinction, with the most recent additions being Tesla in 2020 and Epam Systems in 2021. The significance of Uber’s inclusion is underscored by its staggering $130 billion market capitalisation, a figure which nearly quadruples the average S&P 500 company's capitalisation of about $31 billion. But does getting into the ranks of the 500 largest U.S.- listed companies and meeting all the requirements really signify the opening of a whole new chapter for the company?

What to expect from the 'S&P 500 phenomenon' ?

On Wall Street, the 'S&P 500 phenomenon' has been a well-established content for years. In a nutshell, it revolves around the positive impact of joining this index has on a company’s stock price. This influence stems not only from the greater 'confidence' and prestige associated with the company itself but also from heightened institutional interest. The influence of Exchange-Traded Funds (ETFs) tracking the S&P 500 on these companies' valuations is particularly notable, as these funds are compelled to make immediate purchases upon a company’s index inclusion. It is worth noting that ETFs on the S&P 500 index are the largest funds of their kind in the world. 

As of  early 2023, U.S. funds, including ETFs, tracking the S&P 500 had total assets of an impressive $5.7 trillion. Given the sustained momentum on Wall Street and an 18% surge in the benchmark, it’s reasonable to conclude that these assets have likely experienced double-digit growth since then. Their valuation now accounts for about one-eighth of the entire stock market’s value, with the three largest ETFs tracking the S&P 500 boasting a combined value of about $1.2 trillion. This compelling data shows that Uber stands to benefit significantly from substantial revenue streams, subject to further improvement in stock market sentiment, in the long term.

Historically, joining the S&P 500 index has temporarily supported sentiments, but this in itself does not determine a company's stock market 'success'. Tesla gained nearly 19% since its debut. Epam Systems in its 2021 debut turned out to be exceptionally weak, moments after its initial rally, supply was triggered, dominating the stock to this day. On the chart above, we can see the price change of each company's shares, 365 days after the S & P 500 debut. Source: XTB Research, Bloomberg Finance LP

Please be aware that information and research based on historical data or performance does not guarantee future performance or results. Past performance is not necessarily indicative of future results, and any person acting on this information does so entirely at their own risk.

Concerns about 'S&P 500 phenomenon'

Of course, while the act of joining the index holds significance, especially at a time when indexes are rising and funds are forced to buy shares it is also worth considering the flip side - the possibility of forced selling.  What's more, the fact that the company has already entered the S&P 500 index means that it's hard to expect its stock to benefit once again from speculation around its possible inclusion. Nevertheless, Uber stands out as it will help it attract more investor attention.

It seems rather naïve to expect an automatic boost in Uber's stock value solely due to its S&P 500 inclusion. Oppenheimer & Co. analysts suggest  that while this move will accelerate and improve the overall conditions for its stock to rise through, factors like  a share buyback program and  improved investor sentiment stemming from ongoing efforts to generate  shareholder value play pivotal roles. Evidently, Uber’s success hinges on a variety of factors  beyond the upcoming index inclusion event on Monday 18, including a proficient board of directors and enhanced profit margins. 

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Net margins and higher free cash-flow

Given that the company still operates in a low-margin business, sustained scale and expansion remain crucial aspects. However, the true driver for enhancing returns for shareholders lies in improving margins. So far, the current management has efficiently steered the company’s trajectory, transforming Uber from its 2019 state of ‘cash burn’ and concerns about whether it could ever achieve profitability, with galloping costs and rising competitors. 

Intriguingly, in the aftermath of the Covid-19 pandemic, Uber Eats emerged as a significant revenue generator, outshining the traditional transportation business–an unforeseen shift.  Without the introduction of Uber Eats and the ability to construct an entirely new business within its existing framework, Uber might have faced a less promising fate in the wake of the pandemic, making the prospect of joining the S&P 500 a distant aspiration. The competence and determination exhibited by management have not only altered Uber’s trajectory but have also translated into collective rewards for the company and its shareholders.

Over the past four quarters, the company has generated $1 billion in profits, and in Q3 it reported $221 million on revenues of $9.29 billion. Achieving this entailed difficult decisions, such as the necessity to lay off nearly 3,500 employees. Also, lower delivery costs have contributed to improved margins. Uber’s ambitious aspirations align it with major technology giants like Google and Microsoft, aiming to dominate the transportation and delivery market.

Key to its sustained success in the stock market lies in a gradual improvement in margins, a trend that is already underway.  While Uber’s gross margins have experienced  a decline since 2018, its net margin has risen from close to -80% in Q1 2020 and -40% in mid-2022, to a positive 2.93% today. Notably, with the current margin at around 3% there is considerable upside potential, supporting optimistic expectations for  higher earnings per share.

Uber Technologies stock chart (D1)

Shares of Uber Technology (UBER.US), D1 interval. In the short term, the impact of Uber joining the S&P 500 index on the stock price is not clear, and it seems that a lot will depend on whether market sentiment does not deteriorate by next Monday. If this is the case, joining the S&P 500 may give the market an argument to take profits - 'sell the news' scenario. On the other hand joining the S&P 500 in the long term is beneficial for the company both in the medium and long term. Source: xStation5

Please be aware that information and research based on historical data or performance does not guarantee future performance or results. Past performance is not necessarily indicative of future results, and any person acting on this information does so entirely at their own risk.

Please be aware that information and research based on historical data or performance does not guarantee future performance or results. Past performance is not necessarily indicative of future results, and any person acting on this information does so entirely at their own risk.