Uber Stock Is a Buy: But You'll Have to Watch It Closely

Uber (NYSE: UBER) stock looks attractive based on its recent financial performance. Not only is its growth accelerating, but the company is generating heaps of cash and is buying back tons of its stock. Even more, the tech stock's valuation looks borderline cheap in relation to its stellar growth profile.

Understanding the investment case for Uber is easy. The company matches riders and couriers with drivers and merchants across its mobility (rides) and delivery (food and grocery) marketplaces. Scale in this lucrative platform-based business model brings cost leverage and a growing stream of cash that management reinvests in its business, while also leaving plenty left over for share repurchases.

But there is a catch that investors cannot ignore: There are some significant threats to its business in the autonomous vehicle space, including Alphabet's Waymo and electric-car maker Tesla (NASDAQ: TSLA). Both companies have autonomous vehicle initiatives that, if scaled quickly, could disrupt Uber's business.

Image source: Getty Images.

Momentum and cash

Uber's latest quarterly results highlight the company's staggering momentum. Trips booked on its platform during the quarter grew 22% year over year -- an acceleration from 18% growth in the second quarter. This helped gross bookings increase 21% and revenue rise 20% -- both faster than the prior quarter's 17% to 18% pace, respectively.

Best of all, the company's cash-cow business generated free cash flow of $2.2 billion for the quarter, with trailing-twelve-month free cash flow reaching $8.7 billion, https://app.tikr.com/stock/financials?cid=144524848&tid=610379350&tab=cf&ref=ckr6tl, capturing the platform's ability to convert gross bookings into cash.

Management expects the company's business trajectory and profitability to remain healthy in the holiday period. Fourth-quarter guidance calls for 17% to 21% gross bookings growth and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) between $2.41 billion and $2.51 billion, implying continued margin improvement versus last year.

And the company is putting cash to work. In August, Uber boosted its share repurchase program by $20 billion -- a move that management said reflects its confidence in its business. Since then, repurchases have ramped up, with $4.6 billion of repurchases year to date compared with about $700 million for the same period last year.

Uber's beautiful combination of rapid growth and substantial cash generation makes the stock look extremely attractive.

Autonomy risk

However, there's one significant risk investors must constantly monitor -- and, frankly, one that likely deters many investors: autonomy.

Both Alphabet's driverless vehicle business, Waymo, and Tesla's Robotaxi service pose risks to Uber.

Yes, Uber does partner with Waymo's limited driverless car program for now, allowing its customer base to book Waymo cars in the app. But there's no guarantee that Waymo won't bypass the Uber app at some point in the future and create its own end-to-end ride-sharing network.

Meanwhile, Tesla is pushing forward into its own autonomous ride-sharing network, and it doesn't seem interested in partnering with Uber. Tesla's limited driverless taxi network, which is still in a limited pilot mode, is called Robotaxi. Tesla CEO Elon Musk has a big vision for it, noting in the company's most recent earnings call that he believes it will scale to a significant size faster than many people think and will fundamentally change "the nature of transport."

Of course, Uber recognizes these threats and is not standing still. The company has integrated more than a dozen autonomous partners globally and is building app features to manage hybrid fleets -- human drivers and autonomous vehicles -- inside the same marketplace. That positioning could let Uber participate in autonomy rather than be displaced by it.

Based on the stock's conservative valuation of just 23 times forward earnings, investors clearly recognize the significant risks of someone like Tesla disrupting Uber. Still, this valuation could prove to be too high if Tesla or some other deep-pocketed peer morphs into a more significant threat. For this reason, I believe shares are attractive today, but only for investors with a high risk tolerance -- and only if they are willing to watch developments closely. Uber could extend its lead in the segment and use autonomous vehicle technology to its advantage. But this same technology could also be Uber's demise.

The truth, of course, probably lies somewhere in the middle. And this is why I think shares are a buy today. But any purchases should be kept small, given the risks.

Daniel Sparks and/or his clients have positions in Tesla. The Motley Fool has positions in and recommends Alphabet, Tesla, and Uber Technologies. The Motley Fool has a disclosure policy.