The latest quarterly earnings release was full of ups and downs for the stock market as a whole.of S&P500 The index has declined slightly since the end of March.
One constituent of the S&P 500 has done more than its fair share of pulling down the benchmark index. Uber Technologies (New York Stock Exchange: Uber) It has fallen about 12% since the end of March.
Uber recently announced less-than-stellar quarterly results. Despite this disappointment, analysts following the company suggest it has the potential to outperform. Uber's consensus price target of $87.36 per share implies an upside of about 30% from recent stock prices.
Individual investors need to understand that the battalion of sell-side analysts who set price targets on Wall Street are typically entry-level employees. The handful of fund managers who click “buy” or “sell” would never dream of making decisions based solely on high price targets, and neither should you. Let's take a closer look to see if Uber's prices are worth paying attention to, as they have dropped recently.
Why Uber stock fell after earnings
Uber stock fell sharply on May 8 after the company reported that total bookings for the first quarter were lower than Wall Street expectations. Instead of the $37.9 billion in gross bookings that Wall Street had expected, the company reported $37.6 billion.
Uber also spooked investors with its future outlook. The company expects second-quarter gross bookings to reach $39.2 billion at the midpoint of management's guidance range. Wall Street had expected the company to sell at $40 billion.
Uber also reported a net loss of $654 million in the first quarter. Wall Street had expected a profit of $503 million. Even after adjusting for $721 million in non-cash headwinds caused by the company's revaluation of its equity investments, it missed its target by a mile.
Still buying?
Most analysts following Uber slightly lowered their price targets, but maintained Buy ratings on the industry leader. Increased profitability will boost them.
Operating income increased by $172 million this year, compared to a loss of $262 million in the same period last year. Uber reported a net loss under generally accepted accounting principles (GAAP) in the first quarter, but free cash flow rose 148% to $1.4 billion.
Uber's biggest advantage is its scale, and this advantage appears to be durable. The company completed its 2.6 billion trips in the first quarter, while its strongest competitor Lyft completed only its 188 million trips.
Analysts are right to suggest that Uber has the potential to deliver market-beating returns, but the stock may be riskier than investors realize. It currently trades at about 42 times free cash flow. That's not an unreasonable multiple for a company that has more than doubled its free cash flow over the past 12 months. At the same time, such a high multiple comes with the expectation that rapid earnings growth will continue.
As a preferred partner for drivers and passengers, Uber may have enough pricing power to boost its profits in the coming years. That said, everyday investors who buy at recent prices may be accepting more risk than they realize.
If free cash flow doesn't continue to grow rapidly for at least a few more years, the stock could fall significantly. Uber remains a good stock to buy, but only for investors with moderate to high risk tolerance.
Should you invest $1,000 in Uber Technologies now?
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Cory Renauer has no position in any stocks mentioned. The Motley Fool has a position in and recommends Uber Technologies. The Motley Fool has a disclosure policy.
1 Beaten Growth Stocks That Could Bounce Back, According to Wall Street was originally published by The Motley Fool
