Uber Technologies (UBER)

A Deep Value Play with Growing Free Cash Flow

Hedge fund manager Bill Ackman recently revealed that his firm, Pershing Square Capital Management, has taken a significant position in Uber Technologies (NYSE: UBER). While it’s always interesting to see what high-profile investors are buying, what really matters is whether the stock is a compelling opportunity today.

After digging into the numbers, I believe Uber presents a strong buy case, not just because Ackman owns it, but because the stock remains deeply undervalued relative to its improving fundamentals.

Uber’s Fundamentals Are Stronger Than Ever

Uber has transitioned from a cash-burning, high-growth tech company to a profitable, free-cash-flow-generating machine. Over the last three years, its free cash flow has not only become consistently positive, but it has grown significantly—yet the stock’s valuation multiples have actually compressed.

Typically, when a company moves from unprofitable to highly cash-generative, its valuation should expand. That hasn’t happened with Uber, and I believe that presents a major opportunity.

Here’s what stands out:

• Strong Free Cash Flow: Uber generated $3.4 billion in free cash flow in 2023, a sharp turnaround from its years of burning cash.
• Undemanding Valuation: Despite its profitability, Uber’s price-to-free-cash-flow (P/FCF) ratio remains below levels seen for other high-margin platform businesses.
• Dominance in Its Market: Uber continues to hold a commanding position in the ride-hailing and food delivery markets, with limited competition outside of localized players.

The Market May Be Overlooking Uber’s Potential

One reason Uber’s valuation remains muted could be uncertainty around autonomous driving. Alphabet’s Waymo and Tesla’s Robotaxi ambitions have created speculation about whether ride-hailing will eventually become fully automated, cutting human drivers out of the equation.

But here’s the key point: Full-scale commercialization of autonomous vehicles is still years, if not decades, away. And Uber, with its extensive network, could ultimately benefit rather than suffer from these developments. The company has already partnered with self-driving tech firms, signaling that it’s prepared for any shift in the industry.

Ackman’s investment is worth noting, but the real takeaway is that Uber’s business fundamentals are stronger than ever. The company is now generating substantial free cash flow, trades at an attractive valuation, and operates in a market where it has a durable competitive advantage.

With Uber still priced at a discount to its intrinsic value, now looks like an excellent time to follow smart money and buy the stock before the market catches up.