Delivering Growth
In this edition of the Smart Investor newsletter, we examine the stock of an undisputed global leader in ride-hailing and deliveries. But first, let’s dive into the latest Portfolio news and updates.
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Portfolio Updates
❖ Amazon’s (AMZN) cloud-computing unit AWS announced the launch of Quantum Embark, a new advisory program designed to assist customers in preparing for quantum computing. Although quantum computing is an emerging field, with most current applications being experimental or research-driven rather than ready for large-scale commercial deployment, Amazon is taking the most proactive business approach among technology firms towards the tech of the future. AWS also highlights its Amazon Braket service, which gives advanced users access to quantum hardware on a pay-as-you-go basis, though at the moment the service is intended primarily for research and experimentation. Quantum Embark is more about future-readiness than immediate large-scale deployment, but it can potentially boost customer engagement and interest in AWS quantum services.
❖ The Consumer Financial Protection Bureau (CFPB) has finalized a rule to supervise large non-bank firms offering digital payment services, including companies like PayPal (PYPL), Alphabet’s (GOOGL) Google, and Amazon (AMZN), as well as Block, Apple, and Zelle. This rule subjects these firms to oversight similar to that of banks, focusing on areas such as consumer privacy, fraud prevention, and illegal account closures. The Financial Technology Association, representing payment providers, criticized the rule as unnecessary, citing low complaint rates and existing regulations. According to analysts, the probability that the incoming administration will keep this rule is low.
❖ Alphabet (GOOGL) continues to be under pressure after the U.S. Department of Justice (DOJ) said Google should have to sell off its Chrome browser as part of a court-ordered remedy to its monopolization of the online search market. In addition, the DOJ said it seeks to prohibit Alphabet from offering payments to Apple or other third-party distributors to make Google the default search engine on devices like iPhones and browsers like Safari.
The company said the DOJ’s proposed remedies are “radical and interventionist,” going far beyond the court’s ruling on the case. Analysts from several leading Wall Street houses expressed their doubts that these remedies will be enacted. Thus, according to Baird analysts, many of the DOJ’s recommendations are “unlikely to be approved by the court, or to survive an appeals process.” Meanwhile, JPMorgan said that Google’s counter proposal, due on December 20th, is likely to be much more modest, and ultimately believes the court’s final decision next year will be more balanced between the DOJ & Google’s remedies. Stifel said it views a breakup as “somewhat unlikely, given precedent,” and that the end result will likely be that of prohibiting Google from paying for exclusive or default status on third party browsers.
DOJ action comes as investors were already fretting about GenAI’s impact on Google’s search engine as OpenAI introduced a search feature in ChatGPT and is now reportedly planning to launch its own web browser sometime in the future. However, analysts believe that Alphabet is up to the task of defending itself, with its own GenAI tool, Gemini, becoming more powerful and catching up with competitors. Alphabet’s stock saw no analyst downgrades following the regulatory onslaught. On the contrary, Robert W. Baird, BMO Capital, J.P. Morgan, and Goldman Sachs lifted their price targets for GOOGL, which on average now imply an upside of about 24% in the next 12 months. Alphabet is rated a “Strong Buy” by top Wall Street brokerages.
❖ Verizon (VZ) conducted a trial in Boston, successfully transmitting 1.6 Tb/s of data on its live fiber network using Ciena’s advanced optical solution. This was achieved on a single-carrier wavelength, showcasing the cutting-edge capabilities of Verizon’s fiber infrastructure. The trial demonstrated the network’s ability to handle massive data volumes over long distances at high speeds without performance degradation. By increasing the speed and capacity of its fiber network, Verizon ensures it can process vast amounts of data in real time, positioning itself as a leader in supporting AI and next-generation digital transformation. This upgrade is part of Verizon’s long-term strategy to meet the growing data demands of emerging technologies, ensuring it remains a preferred provider for businesses deploying AI solutions while remaining competitive in a rapidly evolving technological landscape.
❖ Salesforce (CRM) saw its stock jump following a slate of analyst upgrades. Truist, Wedbush, Deutsche Bank, Wedbush, Mizuho, Barclays, Jefferies, and others significantly lifted their price targets on CRM. Analysts are increasingly optimistic about Salesforce’s ability to churn out consistent earnings and cash flow driven by innovation and new product catalysts, particularly CRM’s AI tools and applications. Scotiabank initiated coverage of Salesforce with a “Buy” rating and the Street’s second-highest price target of $425.
❖ Intuit (INTU) was under pressure post-earnings, despite delivering stellar results in its fiscal Q1 2025, with revenues and earnings strongly surpassing analysts’ expectations. However, investors fretted as the company issued a softer-than-expected guidance for FQ2 revenue due to some timing issues for Consumer segment sales and more aggressive marketing spending. Still, the company reiterated its full fiscal-year guidance, expecting continued double-digit revenue growth and margin expansion, supported by its strategic initiatives in the technology and financial services sectors.
The stock rebounded after analysts issued mostly positive reactions to INTU’s report, with all but one Wall Street firm either reiterating or lifting their price targets. The only top brokerage to slash the PT was Stifel, who still said they would be buyers on weakness, as it believes in Intuit’s ability to post durable double-digit growth over the coming years. Mizuho Securities’ reaffirmation of a “Buy” rating was the most recent positive catalyst. The firm cited strong financial performance and strategic market positioning and said that it sees a significant potential for further robust growth.
❖ Nice Ltd. (NICE) saw its stock jump in the past week, rebounding from the previous week’s decline. As the market optimism recovered from earlier gloom, investors digested the company’s stellar Q3 results, particularly the surge in cloud revenues and a raised full-year EPS guidance.
❖ Texas Pacific Land (TPL) has been the Portfolio’s best performer in the past month, as well as in the past three and six months. In addition to the company’s stellar fundamentals and strong performance, TPL was added to the S&P 500 index, replacing Marathon Oil which was acquired by ConocoPhillips. Despite the post-addition sell-off on profit taking, the stock is up by over 200% year-to-date.
❖ Dell Technologies (DELL) reported mixed results for its fiscal Q3 2025, surpassing analysts’ EPS estimates but missing on revenue. Segment results underscored Dell’s ongoing transition into an AI hardware and infrastructure company, as its Infrastructure Solutions Group revenue was up 34% YoY, driven by a 58% revenue surge in the Servers and Networking subdivision. Notably, even the 58% growth was lower than some analysts estimated. At the same time, Dell’s legacy businesses were practically flat year-on-year. Client Solutions Group revenue declined by 1.2%, though this was still a positive considering much larger YoY declines in previous quarters.
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Portfolio Stocks Under Review
❖ Applied Materials (AMAT) saw its stock drop after it released its fiscal Q4 and full-year results. In FQ4, the chip equipment maker topped revenue and EPS expectations, with top line growth of 5% year-on-year and an EPS increase of 9.4%. Quarterly revenue reached a record, underpinned by AI demand. In the full fiscal year, AMAT achieved record revenue and EPS, marking 2% and 7% year-over-year growth, respectively, and slightly exceeding analyst expectations.
Looking ahead, Applied Materials expects continued growth in the first quarter of fiscal 2025, guiding for above-consensus quarterly EPS. However, FQ1 revenue guidance disappointed, falling below analyst expectations. Analysts were concerned about AMAT’s business performance in areas that are not directly tied to AI. The company’s Foundry Logic segment growth was driven by AI-related demand, while some of its other business lines showed sluggish performance.
Applied Materials supplies equipment for manufacturing chips across all process nodes, including trailing edge, i.e. older semiconductor manufacturing technologies and process nodes that are less advanced compared to the leading edge. While AMAT’s latest report underscores persisting robust demand for trailing edge offerings, it may not be sustainable, specifically in automotive and consumer electronics areas.
The question of trailing edge offerings is also relevant when evaluating AMAT’s sales to China. The company’s exposure to the Asian giant – which, although declining, still stands at 30% of revenue – remains its biggest point of concern. The concern is two-faceted and relates to both Chinese demand and export restrictions. While AMAT’s sales in the U.S. surged by over 43% during FQ4, sales in China dropped by almost 28% year-on-year.
Taking into account the continued short-term headwinds on one hand and AMAT’s strong market position, technological edge, and the ability to capitalize on future semiconductor advancements on the other, we are leaving the stock under review until any major news that could help us decide whether to retain the company in the Portfolio.
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❖ Adobe (ADBE) remains under review, where it was placed following its stock underperformance after underwhelming FQ4 guidance. Despite reporting strong FQ3 results that beat analyst expectations, ADBE’s investors were concerned about signs of decelerating growth. There were also worries about Adobe’s competitiveness in the rapidly evolving AI-powered software market. While Adobe remains a leader in its field with strong financials, these factors combined to create uncertainty about its near-term growth prospects.
However, we began observing a positive trend after the company’s annual Adobe Max conference on October 14th, which was rife with exciting news that created tailwinds for the stock’s rebound. ADBE made several major announcements, highlighting significant advancements across Adobe’s Creative Cloud suite, including the launch of over a hundred new features. Putting a strong emphasis on AI-powered products, the company unveiled new AI-enhanced tools in Illustrator and InDesign, updates to the Substance 3D content creation tool, and a beta version of a new web-based app for in-browser creation and editing of 3D content. Moreover, Adobe introduced an AI video-generation tool and a new AI-infused tool set for editing stock photos.
Adobe’s approach of adding useful AI features to its most popular offerings is viewed by analysts as a path to fortify Adobe’s market position while streamlining its AI monetization process. Wall Street brokerages rate ADBE as a “Buy,” with an average price target implying a ~24% upside in the next 12 months. According to Goldman Sachs, Bank of America, and others, Generative AI tools will be a meaningful component to Adobe’s revenue growth. However, the jury is still out on ADBE, and these assumptions will be put to the test on December 11th when ADBE reports its FQ4 earnings.
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Portfolio Earnings and Dividend Calendar
❖ The Q3 2024 earnings season is winding down, but several Smart Portfolio holdings are still scheduled to release their quarterly results in the next few weeks. Thus, Salesforce (CRM) is scheduled to post its quarterly results on December 3rd.
❖ The ex-dividend date for ITT (ITT) and Interactive Brokers (IBKR) is November 29th, while for Texas Pacific Land (TPL) it is December 2nd.
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New Buy: Uber Technologies (UBER)
Uber Technologies, Inc. is an American multinational company headquartered in San Francisco, California. It develops and operates proprietary technology applications for the provision of transportation services, including ride-hailing, courier services, food delivery, and freight transport.
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History Of Ride-Hailing
Uber was founded in 2009 in San Francisco as “UberCab” with the idea to create a luxury black car service accessed via a mobile app, simplifying the process of booking rides. The company officially launched in 2010, but its initial offering appealed only to a niche audience due to high price point and exclusive positioning.
The first breakthrough moment appeared in 2011, when the company rebranded to “Uber” and started aggressively marketing its service through discounts, free ride promotions, and referral incentives, which helped attract a broader customer base. In 2012, the company launched UberX, allowing drivers to use personal vehicles instead of commercial licenses, which drastically reduced costs and scaled driver availability. This move made Uber accessible to a broader audience and undercut traditional taxi prices, allowing the company to rapidly scale its offerings and expand to additional markets.
In 2013 to 2016, Uber expanded globally to cities like London, Paris, and Sydney, and introduced dynamic pricing (demand-based, or surge pricing), which optimized supply during high-demand periods. In the same period, the company also launched new services like UberPOOL (shared rides) and UberEats (food delivery).
In the next several years, the company faced multiple headwinds, including lawsuits, pushback from taxi unions and regulators, and fierce competition from local rivals in many international markets. Despite that, Uber continued to grow its offerings and expand to new geographies. Thus, in 2018, it expanded into freight logistics (Uber Freight) and micromobility (Jump bikes and scooters). During the pandemic, Uber adapted by expanding UberEats, which became a key revenue driver during lockdowns and restrictions.
While the concept of ride-hailing (on-demand rides with drivers using their own cars) existed long before Uber’s inception, the company was the first to combine it with a platform-based model, facilitated through smartphone apps and GPS. Uber revolutionized how ride-hailing services were delivered by leveraging technology, offering dynamic pricing, and allowing non-professional drivers to participate in ride offerings, benefiting both drivers and customers. Uber modernized and democratized ride-hailing, making it more accessible, scalable, and widely adopted.
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Partnering To Grow
The company achieved its first-ever operating profit in 2023, signaling maturation in its business model. Despite that, Uber continues to invest in enhancing its services and future-proofing its business model. Thus, the company invests in advanced technologies such as autonomous vehicles, artificial intelligence (AI) and machine learning (ML), and others, whether directly or through partnerships.
Uber officially belongs to the Transportation industry; however, it is a tech company in essence. It has significantly integrated AI and ML into its operations, whether with the help of its partners or by developing in-house technologies to enhance its services. As long ago as in 2015, Uber launched an in-house ML platform Michelangelo, which supports various applications, including predictive modeling and deep learning. In 2022, the company developed DeepETA, a deep learning architecture for predicting estimated time of arrival. Moreover, last summer, the company introduced GenAI Gateway, a unified platform designed to streamline the integration and utilization of Large Language Models (LLMs) across various facets of the company’s operations, including customer support, process automation, and others.
Uber partners with multiple technology providers, such as Oracle (ORCL) and Alphabet (GOOGL), leveraging their cloud-computing infrastructure to manage its data and operations. It also partners with Wayve, a leader in embodied AI for self-driving technology, to integrate Wayve’s AI-driven autonomous vehicles into Uber’s network.
In addition, Uber partners with Alphabet’s Waymo to integrate its autonomous driving technology into the Uber platform. This multi-year strategic partnership – which is starting in Phoenix – aims to combine Waymo’s self-driving capabilities with Uber’s ride-hailing network. Uber has close partnerships with multiple EV producers and companies operating in autonomous vehicle (AV) sphere, including EV manufacturer BYD, a developer of AV and delivery robots Avride, AV technology firm WeRide, GM’s AV tech subsidiary Cruise, and more.
Uber’s in-house technological advancement and its extensive strategic partnerships have helped Uber become what it is today – an undisputed leader in ride-hailing market, holding over 75% U.S. market share. Globally, Uber’s market share is over 25%, making it the largest player in the ride-hailing and taxi market. The company is also a leader in food delivery, where it is number one or two in the more than 25 countries in which it operates.
The company operates in approximately 70 countries and 10,500 cities worldwide. It is the largest ridesharing company in the world with over 160 million monthly active users, facilitating an average of 31 million trips per day. Since its inception in 2010, Uber has facilitated a cumulative total of nearly 50 billion trips.
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Cash Is King
Uber is one of the most growth-focused players in the industry, with heavy investments in cutting-edge tech and expansion into new on-demand services. Despite its focus on growth, it pays uttermost attention to its financial health. Thus, despite an increase in liabilities in the past five years, it remains a very low net debt-to-equity ratio of 15%. Moreover, the company produces vast amounts of cash and maintains significant cash reserves and short-term investments, as part of its financial strategy to ensure liquidity. This cash generates significant income, and Uber earns more interest than it pays on its debt.
In addition to its balance-sheet strength, Uber demonstrates commendable profitability and capital efficiency metrics. It displays a best-in-class ROE and much higher ROA and ROIC than average for its industry. While Uber’s operating margin is just a tad higher than the industry average, it has been steadily expanding in the past five years. Reaching higher-than-average margin just a year after turning in an operating profit is an outstanding achievement. Additionally, Uber’s net profit and FCF margins are in the top 20% of its industry.
Uber is praised by analysts for its ability to generate substantial cash flows. This ability stems from global presence and market leadership, allowing Uber to capitalize on economies of scale and brand recognition, as well as from revenue stream diversification. In addition, Uber’s financial performance is supported by its high operational efficiency, fast technology integration that optimizes operations, strategic partnerships and investments, conservative financial management, etc. Moreover, the shift to subscription-based revenue model and additional revenue sources such as advertising, significantly strengthen the company’s financial standing.
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Built To Deliver
Uber operates through three key business divisions: Mobility, Delivery, and Freight. The Freight segment, responsible for just over 14% of annual revenues, manages transportation and logistics network, connecting shippers and carriers in the digital marketplace.
The Delivery division, aka Uber Eats, which provides about 33% of total revenue, allows Uber users to order restaurant meals, groceries, convenience items, and more. This segment also oversees Uber Direct, a white-label Delivery-as-a-Service for retailers and restaurants. The Mobility segment, responsible for over 53% of total annual revenue, connects the company’s customers with a range of transportation modalities, such as ride-hailing, carsharing, micromobility, rentals, public transit, taxis, and more.
In addition, Uber makes money from advertising, utilizing first-party data from millions of users to offer targeted advertising solutions. Uber Advertising segment is integrated across its Mobility and Delivery divisions, reaching users during rides and food deliveries. Uber has also formed partnerships with various brands and agencies to expand its advertising offerings across its services. For instance, the partnership with Omnicom provides agencies access to Uber’s data for targeted advertising campaigns via various Uber apps.
Uber is always looking for ways to grow its revenue by providing additional value and reaching larger audiences. Thus, in 2021, it introduced a comprehensive membership program called Uber One, which is based on an app unifying the company’s ride-hailing, delivery, and grocery services, offering member-only perks.
By the end of Q3 2024, Uber One reached 25 million members, significantly contributing to revenue growth. Moreover, members are more likely to remain loyal to Uber’s ecosystem to maximize the value of their subscription. As a result, retention for Uber One members is 15% higher than for regular customers, and spending per member is up to three times more, according to the company, than for non-members. Uber One not only boosts the company’s income but provides it with a steady stream of recurring revenues from subscriptions. Most service providers strive to build recurring revenue models, since those provide predictable and sustainable income streams.
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The Future Is Riding In
In the past three years, Uber’s revenues have grown at a CAGR of over 41%. Since first becoming profitable (in terms of both operating profit and net income) in Q2 2023, Uber’s quarterly earnings-per-share grew year-over-year by triple digits, except a one-time drop in Q1 2024 due to the revaluation of its equity investments, and a four-digit surge in Q3 2024.
In the last quarter, Uber reported record-breaking profitability and revenue growth, shattering analyst estimates. It reported a net income of $2.6 billion, which included a $1.7 billion benefit from net unrealized gains related to the reevaluation of Uber’s equity investments, which led to a whopping 1,100% jump in its YoY EPS growth. Even without the $1.7 billion unrealized gain, Uber’s adjusted net income for Q3 2024 would still have been $0.9 billion, translating to a 340% EPS growth year-over-year.
The company reported strong growth in its Mobility and Delivery revenues for the quarter, as well as an eye-popping 55% adjusted EBITDA expansion. Moreover, at the end of quarter, Uber had $9.1 billion in unrestricted cash and cash equivalents, $2 billion of which it said will be used during Q4 to repay debt.
Notably, in Q3, Uber reported a 20% increase in gross bookings on a constant currency basis, in line with growth rates for this metric in the past eight quarters. Gross bookings is a critical metric in Uber’s financial reporting as it provides a comprehensive measure of the total value of transactions facilitated through Uber’s platform. It is not only another income measure, but also represents a leading indicator of future growth, as it captures the direct impact of customer usage.
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Growth At a Reasonable Price
The company’s guidance for gross bookings in Q4 2024 in the range of 16-20% spooked investors, leading to a decline in its share price, despite strong guidance on other metrics (such as adjusted EBITDA growth of 39-47% YoY). Management attributed the expected slowdown in gross bookings mostly due to macroeconomic conditions and currency fluctuations.
Some analysts view the guidance as overly cautious, given the economic and political uncertainty at the time of reporting. Others believe that deceleration is a positive sign, reflecting the transition from a growth-at-all-costs mentality to an approach geared towards delivering more sustainable profits.
Meanwhile, due to the stock’s decline over the past month and a half, it now trades at much more reasonable valuations. While the comparison of Uber’s multiples to its sector (Industrials) or industry (Transportation) is meaningless due to the very different nature of its business, the comparison to its global peers reveals a modestly priced company with PE ratio at the middle of the scale. Moreover, based on future cash flows, Uber appears undervalued by about 50%.
Despite a drop from its all-time-high in the beginning of October, Uber’s stock still delivered a gain of 23% over the past year. Several leading Wall Street analysts raised their price targets on Uber’s stock, with the average target reflecting a potential upside of over 30% in the next 12 months.
Uber’s price-appreciation potential is extended by the company’s entry into the buyback cohort. In February 2024, Uber announced its inaugural share repurchase program, authorizing the buyback of up to $7 billion of its common stock. By the third quarter of 2024, Uber had repurchased $375 million worth of its common stock under this authorization. This share repurchase initiative reflects Uber’s confidence in its financial performance and commitment to returning value to shareholders. The company has indicated plans to continue repurchasing shares, aiming to achieve a consistent reduction in share count over time.
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Investing Takeaway
Uber, a global leader in mobility and delivery solutions, continues to redefine urban transportation through innovation and strategic partnerships. With a diversified revenue base across ride-hailing, food delivery, and logistics, Uber leverages its advanced AI platforms and collaborations in autonomous and electric vehicles to drive operational efficiency and scalability. The company’s strong cash flow generation, disciplined financial management, and high-margin recurring revenues from its Uber One membership program reinforce its financial stability and profitability. Supported by record-breaking earnings growth, expanding market share, and a focus on sustainable profitability, Uber is well-positioned to capitalize on the evolving demands of mobility and digital commerce. As such, we view Uber as a compelling long-term investment opportunity and a valuable addition to the Smart Investor Portfolio.
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New Sell: General Dynamics (GD)
General Dynamics Corporation is one of the leading American aerospace and defense companies, specializing in the design, manufacture, and integration of innovative technologies for military and commercial applications. The company is recognized for its diverse portfolio that includes Gulfstream business jets, nuclear-powered submarines, and advanced IT systems.
GD maintains robust financial health, characterized by consistent cash generation, disciplined capital allocation, and a balanced debt structure. Its profitability and operational efficiency metrics – such as ROE, ROA, and margins – are mostly stronger than averages for its industry. However, they have deteriorated versus GD’s own historical ratios.
In recent quarters, the company has struggled to grow its revenues, despite the positive global backdrop for the Aerospace & Defense business. This weak growth, which translated into four straight quarterly misses on analysts’ EPS estimates, is especially notable when compared to another Aerospace & Defense company we hold in Smart Portfolio, Howmet Aerospace (HWM). Looking forward, the latter is expected to grow its earnings much faster than GD in the next couple of years.
General Dynamics is a robust and stable company with a stellar balance sheet and global recognition for its outstanding offerings. We certainly plan to revisit the stock if and when it is able to find a catalyst for a return to consistent earnings-growth trend. But for now, we believe it is time to cash out on the gains on GD, while retaining its fast-growing industry peer HWM.
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
After we’ve sold CHKP last week and GD today, our exclusive club lists 16 stocks: GE, ANET, TPL, AVGO, EME, ORCL, TSM, HWM, PH, APH, IBKR, ITT, PNR, KKR, CRM, and PYPL.
The first contender is still AMAT with 26.82% gain since purchase. Will it close the gap, or will another stock outrun it to the finish line?
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
