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Uber Accelerates Towards S&P 500 Index Inclusion After Recent Earnings

After driving its market expansion worldwide for years, Uber, America’s largest ride-hailing and delivery platform, has finally reached its destination: S&P 500 eligibility, a significant milestone for the company.

Uber has officially reported enough positive earnings to qualify the ride-sharing company to join the S&P 500 – the most tracked index globally.

In an impressive third-quarter performance, Uber secured its second consecutive profitable quarter, reporting a free cash flow of $905 million and unrestricted liquidity assets totaling $5.2 billion. The firm’s gross bookings grew 20% YoY, reaching $35.3 billion. Its total trip volume also increased 25% year-on-year.

Due to the size and fame of Uber, its exclusion from the index has been a market anomaly for years. For this reason, its transition into the S&P’s ranks has been anticipated for much of this year and has been extensively covered in finance media.

According to Nikhil Devnani, Analyst at Bernstein Private Wealth Management, big brand tickers tend to outperform in the months leading up to joining the S&P 500. Could Uber’s listing be a unique investing opportunity?

Taking a closer look at the stock and what its inclusion in the index may bring can better inform investors who want to order an Uber for their stock investment plan.

Roadblocked No More?

After rerouting its business strategy this year, Uber has turned the earnings corner and is accelerating down profit street fast.

In August, Uber revealed it generated positive cash flow for the first time ever in the second quarter at a forecast-beating sum of $382 million. Office reopenings and a travel boom helped pave the way to bumper profits.

The company’s stock surged 15% on that breakthrough news and has remained strong this year. Uber boasts 2023 returns to almost rival Bitcoin, having gained nearly 100% year-to-date.

As if its price performance wasn’t strong enough already, the stock may soon join the S&P 500.

Size does not matter for Uber. Valued at around $60 billion, Uber long ago sailed past the minimum $12.7 billion market cap threshold needed for firms to join the index. Instead, it is the profitability criteria that have been a roadblock. The index requires companies to have positive earnings for the most recent quarter and, more critically for Uber, remain profitable for the trailing year.

Like many tech platforms, Uber has long put gaining market share ahead of profitability. Over the past decade, the company poured tens of billions into global expansion efforts and upgrading its services.

In a significant strategic shift, Uber is now prioritizing profitability over rapid market expansion. Renowned stock analyst Jason Helfstein emphasized that Uber’s Chief Finance Officer is meticulously evaluating next year’s performance targets, keeping the company’s long-term profitability in mind.

“That bottom line,” Helfstein said, “that gap earnings is what will get you in the S&P, depending on who the other companies are that might be considered that opening… How much do they have to step on the gas to drive margin, to drive gap earnings?”

With optimistic outlooks, Helfstein’s firm, Oppenheimer & Co., anticipates that Uber’s margins will witness a substantial upswing in the coming year, charting a course for sustained and profitable growth in the foreseeable future. This strategic shift marks a significant milestone in Uber’s evolution as it seeks to balance expansion with profitability in the dynamic tech landscape.

Price Action

The S&P 500 is the benchmark that some of the best exchange-traded funds to buy actively track. Stocks can behave differently when admitted to the prestigious club.

The so-called “S&P Phenomenon” occurs upon announcing a stock’s inclusion in the S&P 500 Index, causing a short-lived price spike. This is a knock-on effect of technical reallocations. Since so many funds track the S&P, when a new ticker is added, those funds purchase the stock to keep in sync with the index.

The buy-up by institutional investors can also generate a tailwind among retail investors, who might seek to ride the wave.

The effect could be particularly phenomenal for Uber. The S&P 500 is market-cap-weighted, so the larger the company, the more shares must be added to funds that track the index. At $60 billion, Uber dwarfs most S&P companies. Fund managers will need to buy up an inordinate amount of shares to squeeze Uber into their portfolios.

Uber’s potential inclusion in the S&P 500 is poised to be a transformative event, but it’s likely to bring about some market turbulence. Traders should brace for heightened price volatility, as many may position themselves well in advance of this significant development. However, if a rush of buyers enters the market just to buy for the pump, a price bubble may form and pop once they dump.

Uber’s potential future addition to the S&P 500 cannot be guaranteed, regardless of whether the company meets the necessary criteria. Who gets in is determined by the Index Committee at S&P Dow Jones Indices. The group meets once per quarter, keeping their internal process extremely discrete.

“The purpose of the index is to emulate the U.S. domestic common market,” analyst Howard Silverblatt told CNBC concerning Tesla’s historic inclusion. “When you go to put a company in — to actually select it — it’s got to fit into the algorithm in that it represents the market, it has liquidity, it has size.”

Although Uber’s journey to joining the index is underway, investors should craft a well-informed strategy for this tactical move and closely monitor its projected timeline. While positive indicators abound, it’s crucial to acknowledge that, like any investment, there are inherent risks. The company’s inclusion in the benchmark is not guaranteed and may not necessarily translate to enduring gains or losses in its stock price.

Josh Dudick

Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.

Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.

Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.

Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.