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There's one dominant company that's doing a great job winning over investors. Despite their high level of volatility, shares have rocketed 128% higher in the past two years. The S&P 500 has only produced a total return of 53% during the same time.
Interested in buying this supercharged growth stock right now? Here are three things investors need to know before adding it to their portfolios.
1. Financial strength
Over the past decade, many tech companies were able to register tremendous growth thanks to the availability of cheap capital and the market shrugging off their ongoing losses. Uber (NYSE: UBER) certainly fit that description. For years, its primary objective was to scale its service by adding new users quickly.
However, the company is now proving that its model can work in a sustainable fashion. Uber is consistently profitable, which some bears probably thought might never happen.
Through the first nine months of 2024, Uber's operating income increased by 343% year over year to $2 billion. The company is demonstrating leverage with its top expense categories, particularly sales and marketing costs.
This leads to cash production. Free cash flow (FCF) totaled $2.1 billion in the third quarter. Executives are so confident in Uber's financial position that they have instituted a stock buyback program as a method of returning capital to investors.
Investors should keep an eye on Uber's net income and FCF to see if the company is able to keep those metrics rising. If those trends continue and the company can keep its balance sheet healthy, Uber will prove that it's financially sound.
2. Economic moat
Brilliant investors appreciate companies that have economic moats. These durable competitive advantages separate great businesses from mediocre ones, and help them fight off competition and technological disruption.
Uber's ride-hailing service is available in more than 10,000 cities across the globe. Its drivers completed 2.9 billion trips in Q3. And it counted 161 million monthly active users. What's more, there was nearly $41 billion in gross booking activity in the third quarter.
It's strikingly clear that Uber benefits from a major network effect. As more riders use the platform, the service becomes more valuable to drivers because they have more opportunities to make money with minimal idle time. And with more drivers working on Uber, riders have better experiences, with lower fares and shorter wait times. The larger networks improve the service for all stakeholders in a virtuous cycle. The same concept applies with Uber's delivery segment.