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Why To Avoid Uber Stock At All Costs

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

To help you figure this out, today I show you Why To Avoid Uber Stock At All Costs.

Uber (UBER) is the worlds largest ride sharing company with operations in more than 63 countries.  Its serves more than 110 million people every month worldwide with either rides or food deliveries to their homes.

Its based in San Francisco California.  It has a $99.4 billion market cap. And its massively unprofitable.

Uber’s Never Earned A Profit

Over the last 5 years since it IPO’d in 2016 it earned an average operating income margin of negative 51.2% per year.  

I look for anything above 10% consistently. 

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its negative 46.8% per year on average.  

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business.

However, Uber’s operations have never been profitable on an operating profit or free cash flow basis.

Why?

Because it plows back all – and every year so far more than all – of its profits and free cash flow back into growth.

This is good for fast growth companies… But at some point, it needs to earn a profit. 

Because up to this point the only way its stayed alive and continued growing is by issuing a ton of stock.

Think of this like inflation and how this constantly lowers the worth of the US dollar over time.  In the short term and specific cases, dilution is fine… And it can be even good.

But over the long term its generally horrible and lowers the value of Uber shares drastically.

Another major problem for Uber… Its enormous valuation.

Uber IS NOT Cheap

With the markets at or near all-time highs you’d expect a fast growth stock like Uber to be selling at an enormous valuation.

Unfortunately, it is.

As of this writing its P/E is 2,583.

Its P/CF is unreadable due to negative cash flows.

Its forward P/E is unreadable due to its expected negative profits going forward.

And its enterprise value to operating income – EV/EBIT is 37.3.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These show that Uber is massively overvalued right now.

And this means owning its stock gives you no margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning it going forward.

With Uber being overvalued, this makes it riskier.  Especially considering its ride sharing traffic is down 53% due to Covid.

And with new cases and deaths still exploding, this will hurt Uber for a while.

Conclusion

If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy – avoid Uber and consider investing in one of the stocks I recommend below.

Until then, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above

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