Possible Inclusion in S&P 500: Why Uber Stock Could Skyrocket to Record Highs
Uber has redefined the ride-sharing and delivery industries, yet the company is still not part of the S&P 500 Index, despite having a huge market capitalization above $60 billion. Although Uber is larger than most companies in the benchmark index, consistent profitability has prevented Uber from satisfying the eligibility requirements for inclusion in the S&P 500.
After Uber recently reported their first positive earnings report, the company is closing in on the conditions necessary for the company to be added to the most tracked index globally.
A new index inclusion for a company of Uber’s size is rare and can cause a significant boost to the company’s stock price for no fundamental reasons. History has proven that markets are not always efficient, and a potential anomaly may lurk in the near future for Uber Technologies.
Uber Shifts Focus From Growth to Profit
Uber has recently shown that the business can indeed generate positive operating income after posting record revenues for the last quarter of 2022. This result comes after years of burning through cash, as the company sacrificed near-term profits in exchange for building scale and market share.
The recent shift in Uber’s strategy has prioritized profits and long-term returns for investors instead of subsidizing ride incentives and investing in a larger workforce. With a new focus on an era of profitability, Uber’s sizeable valuation will open new doors to be included in several of the major market indices for the first time, most notably the S&P 500. Uber’s pending inclusion may lead the company’s stock price to soar to new heights.
The Anomaly of Fund Inclusions
Index funds have grown in popularity over the past decades, and well-established funds often become the largest holders of individual stocks. Portfolio managers whose funds passively track indices do not have trading discretion, but rather they are at the mercy of the index provider to allocate funds to correspond with the designated holdings.
Standard and Poor’s 500 is perhaps the world’s most important and most widely tracked index. The company sets strict criteria governing which U.S. stocks are eligible, requiring positive earnings for the most recent quarter and over the trailing year. Further prerequisites for consideration include achieving a market cap of at least $12.7 billion and having a majority of company shares available for public trading.
Although Uber has easily satisfied most of S&P’s requirements, consistent profits have prevented Uber from joining the index for years. Uber has grown into a behemoth over the past ten years while reinvesting their revenue into the company, but only recently posted their first positive quarter at the end of 2022. New inclusions and rebalances in the S&P 500 occur quarterly, but it is very uncommon for a company of Uber’s size to be included as a new significant holding.
Meeting the index provider’s criteria is never a guarantee of inclusion; however, fulfilling the methodology has historically been a precursor to an addition to the S&P 500 index. As Uber is closing in on its eligibility, the impact of the required shares that will need to be purchased by portfolio managers will be gigantic. The S&P 500 is a market-cap-weighted index, meaning the larger the company, the more shares must be added across all the funds tracking the index. With a total market capitalization currently above $60 billion, Uber will fall comfortably in the top half of the largest companies in the index.
The demand generated by index fund additions is not necessarily transitory, as the shares will be held long-term in these funds, so long as Uber remains a large U.S. listed company.
Tesla Case Study
In 2020, Tesla finally met the requirements for inclusion into the S&P 500. In one day, over $70 billion worth of Tesla shares needed to be purchased by fund managers tracking global index ETFs and mutual funds.
The result of 2020 resulted in a gigantic boost for Tesla with the stock up 66.1% over the year. Because of the magnitude of such a trade, tracking the impact of the inclusion on the stock price requires more complexity than simply looking at a short term move.
In the weeks or months leading up to the rebalance of the index, Wall Street traders had begun a complex web of game theory and positioning to prepare for the anticipated inclusion. The inclusion of a juggernaut into the S&P 500 as a major holding played a significant role in raising the overall demand and valuation of Tesla’s stock.
Uber’s potential future addition to the S&P 500 cannot be guaranteed, regardless of whether the company meets the necessary criteria. A further complexity exists if traders have already begun purchasing significant quantities of Uber shares in anticipation of selling them at a higher price once the event becomes certain. If too many speculators buy shares to sell later, the share price could even drop at the time of the inclusion.
Businesses such as Uber, a $60 billion company, aren’t newly added to indices starting from zero weight very often, and the results will often include increased volatility. The event itself will have no impact on the business’s future earnings or fair valuation but rather will be based purely on the supply and demand within the market microstructure.
What the Future for Uber May Hold
As each quarterly earnings call over the year provides more clarity on Uber’s potential eligibility, expect to hear increased interest and discussion for S&P 500 inclusion. If Uber continues to post profitable earnings over the next several quarters, any increase in market capitalization will only further strengthen the demand for even more shares to be bought, further fulfilling the prophecy.
Uber is currently one of the most commonly held stock positions by many Wall Street hedge funds. With Tesla’s recent stock escalation, many traders and investors freshly remember the lesson learned from the large index inclusion. Expect more participants to be waiting for signs of affirmation that suggest Uber’s stock will be added to the S&P 500, but be warned that such an event may create prolonged volatility in the share price.
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.