Tags: uber | stock | growth | dividends

Buy Uber Stock for Growth, Not Dividends

Buy Uber Stock for Growth, Not Dividends
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By Wednesday, 31 July 2019 01:33 PM Current | Bio | Archive

Uber was one of the most widely-anticipated initial public offerings (or IPOs) in quite some time when it debuted in May. Like many high growth technology companies, Uber is spending heavily in order to grow its business.

The goal is to use this capital infusion to help produce profits and free cash flow at a later date. Uber may very well be successful in generating high growth rates, meaning investors who bought the stock at the IPO could be handsomely rewarded. However, income investors who are attracted to the business should question whether Uber stock will ever pay a dividend.

Business Overview

Uber is a ride-sharing platform that provides technology applications which allow independent contractors to offer rides, meal preparation and delivery services to customers around the world. The company partners with drivers who have their own vehicles, and with a wide range of restaurants that offer delivery services under the company’s Uber Eats brand.

Uber operates in more than 700 cities and 60 countries worldwide. The company’s rival Lyft (LYFT) reported that roughly 300,000 people have sold their cars in order to upgrade their vehicles to increase their revenue through ridesharing. Uber aims to capitalize on this trend and provide improved transportation-as-a-service.

The company released its first quarterly earnings results in May. Uber’s gross booking climbed by 34%. On a constant-currency basis, bookings increased 41%. Gross bookings in dollars have more than doubled since the first quarter of 2017. Monthly active user base has improved 33% year-over-year to 93 million customers. In two years, this figure has nearly doubled.

One area of concern is that the average monthly trips per user has remained steady at 5.5 for the last four quarters. With average number of trips remaining flat, Uber will have to grow its active consumer base in order to achieve future growth.

Fortunately, the company eyes enormous growth potential. Only 2% of the population of the geographies that Uber operates in are active customers. The value of this total addressable market is estimated at $12 trillion per year.

Lack of Profitability Prohibits A Dividend

In order to reach new potential customers, Uber has had to invest additional capital into its business. This strategy has it downfalls as Uber has reported a loss in every single quarter. Making matters worse is that gap has widened over the past two quarters.

Uber has launched a rewards program in the U.S. for its loyal customers. At the same time, Uber has partnered with vehicle subscription service Fair to help its drivers reduce the cost of ownership. Uber pays drivers as long as they complete approximately 70 Uber trips per week over a given period of time. Uber also faces stiff competition from Lyft that will require additional capital.

Management has already stated that this year will be a year of investment for the company, so the company will likely post a significant loss in 2019. This makes it even more unlikely that Uber will become profitable in the near future.

Because the company has lost money, it has not been able to post positive free cash flows for any extended period of time. Costs of revenue grew from 45% to 54% in the most recent quarter, while marketing expenses increased from 26% to 36%.

This type of capital spend may decrease in future quarters, but Uber will likely always have to invest in its business at a fairly high rate in order to grow its user base and compete with other companies in the space. With negative free cash flow and the likelihood of continued capital expenditures, it doubtful that Uber will be in a position to pay shareholders a dividend for the foreseeable future.

Final Thoughts

Uber is not profitable or able to generate positive free cash flow at this time. Bookings are increasing at a high rate, but this is due to the company spending to grow its business.

Advertising costs, as well as incentives to drivers, have required Uber to invest more capital. This has caused losses to widen in recent quarters.

For these reasons, investors should not expect Uber to pay a dividend anytime in the near future. While the stock could still be a rewarding investment for its growth potential, investors should not buy the stock in anticipation of a dividend payout.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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Uber was one of the most widely-anticipated initial public offerings (or IPOs) in quite some time when it debuted in May. Like many high growth technology companies, Uber is spending heavily in order to grow its business.
uber, stock, growth, dividends
Wednesday, 31 July 2019 01:33 PM
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