When people look for a home-run investment, they tend to look at the lottery ticket types -- a high-risk stock with an unproven business, hoping to get lucky and hit big. It's great if a speculative investment works out, but you might be better off heading to the nearest casino and betting it all on red or black.
I think it's better to go against the crowd and identify a fantastic business the market has doubts about. Look at what Warren Buffett's investment in Apple became.
Contrary to popular belief, you can strike it rich on established, high-quality companies. Today, a well-known supercharged growth stock trades at a compelling valuation due to concerns about technological threats. It seems the market has gotten overly pessimistic, creating a fat pitch that could be a multibagger over the long term.
Here is what you need to know about the opportunity in Uber Technologies (UBER 3.36%).
The market believes autonomous vehicles will wipe out Uber Technologies
Technological innovation has seemingly accelerated since artificial intelligence (AI) emerged in early 2023. The idea of autonomous (self-driving) vehicles isn't new. Tesla and Waymo (Alphabet), the perceived leaders in vehicle autonomy, have worked on the technology for years. That said, AI seems to have greased the wheels of progress.
Tesla CEO Elon Musk noted in late 2023 that Tesla was converting approximately 300,000 lines of programming logic used for vehicle decision-making to a neural network, using AI and machine learning to interpret data. Tesla held a Robotaxi unveiling in October 2024 and has set goals to launch a fully autonomous ride-hailing service in Texas and California this year.
Waymo is even further along than Tesla. The Alphabet-owned company has launched autonomous fleets in a handful of U.S. cities. It's already operating in Phoenix, San Francisco, and Los Angeles, with plans to launch in Austin, Texas; Atlanta; and Miami next.
Investors worry Uber won't be able to compete with autonomous fleet competitors that don't have to pay a human driver. Uber's cost of revenue (primarily driver compensation) represented 60% of total revenue through three quarters of 2024, making it the company's biggest expense by a wide margin.
The argument doesn't hold up well under scrutiny
The reasoning behind these concerns initially makes sense, but becomes flawed as you dive deeper.
Investors could be dramatically overestimating how imminent widespread autonomous fleets are. First, the technology itself isn't close to perfected yet. Waymo has achieved SAE level 4, which qualifies for autonomous driving in some (not all) situations. Tesla's self-driving technology is still SAE level 2, requiring human supervision from the driver's seat. In addition, there are regulatory and liability issues, plus extensive testing for every state or market these companies hope to launch.
Next, the market does not appreciate Uber's home field advantages. Uber's brand is synonymous with ride-hailing. It has a global footprint and dominates the U.S. market, with a 76% share. This involves millions of rides' worth of user data and an established network effect -- you can summon an Uber from almost anywhere in minutes. There's no guarantee someone will wait longer for a ride to save some money. Convenience is valuable to many people.
I'll admit, even if it takes a while, autonomous vehicles could easily be the future. Fortunately, Uber has time to prepare. The company has struck numerous partnerships with autonomous vehicle companies and recently announced it will collaborate with Nvidia to develop self-driving technology. Someday, Uber may not use human drivers either.
Could every single one of these what-ifs go against Uber? Sure, but I wouldn't bet on it.
Uber's growth and valuation could translate to tremendous investment returns
Uber has tumbled over 20% from its peak, but the business is flourishing. In Q3 2024, the company had 161 million monthly active users, a 13% increase year over year. Engagement is up, too; total rides outpaced user growth with a 17% increase. Total revenue grew 22% year over year in the quarter.
The business has also become increasingly profitable in recent years, driving (no pun intended) even faster earnings growth. Analysts estimate Uber will grow earnings by an average of almost 42% annually over the long term.
Due to all the fear over autonomous competition, Uber stock only trades at a price-to-earnings ratio of 33. At a fractional PEG ratio (0.8), Uber is mind-bogglingly cheap for how fast the business grows.
The stock's valuation could stay where it is, and Uber's growth alone justifies buying it. If Uber can dispel the concerns over autonomous fleets, the stock looks poised to multiply your investment over the next five to 10 years, enriching those willing to be a little greedy when others are fearful.
