Uber (NYSE:UBER) has been a market leader in disrupting taxi services with ride-hailing. Uber’s core model is gig-based on-demand transport, whether for people, food (Uber Eats), or packages (Uber Connect). Uber provides the platform to connect clients and drivers, as well as a system of ratings for both. Uber’s platform also establishes fares and handles payments. From an economic perspective, the Uber gig platform is an elegant and efficient auction-based model to match customers and transportation service providers in real time. The real world is more complicated, however, and Uber is struggling with some potentially existential issues. The first is how to set rates and driver payments so that drivers will stick with the platform and passengers are satisfied. The revenue model is constantly evolving, but many drivers are quitting because the flexibility of the gig model is not sufficient compensation for low and unpredictable hourly income. The second major issue with Uber’s gig model is the challenges from organized labor, and related legal, and regulatory setbacks. Uber is an amalgam of a tech business, which scales at low marginal cost, and a low-wage service business (like a fast food chain, etc.), which is highly sensitive to wage inflation and faces substantial risks from changing labor regulations (minimum wage, benefits, employees vs. contractors, etc.).
The long-term economic viability of ride-hailing services is not clear. The business model has staying power but the prospects for investor returns are in question and this is evident in the stagnant share price. Since Uber went public on May 9, 2019, the stock has made little headway. Shares closed at $46.38 on June 24, 2019. In early 2020, before the pandemic shut down the economy, the shares were trading between $40 and $41. Today, at $46.92, the shares are barely above their peak in June 2019. The price briefly exceeded $60 in February, March, and April of 2021, driven by optimism as to Uber’s prospects as the economy reopened.
Price history and basic stats for Uber (Source: Seeking Alpha)
To form my opinion on UBER, I look at two different forms of consensus outlooks for the stock. The first is the well-known Wall Street analyst consensus. The second is the market-implied outlook derived from the prices of options trading on UBER. The prices of options represent the market’s consensus estimate of the probability that the share price will rise above (calls) or fall below (puts) a specific level (the strike price) for the period from now until the option expiration date. By analyzing the prices of put and call options at a range of strikes and a common expiration date, it is possible to derive the market’s consensus probabilistic outlook for price returns until the expiration date. For those who are unfamiliar with this approach, I have written an overview post, including links to the academic literature. I have also written a body of Seeking Alpha posts using this approach.
I believe that the consensus of Wall Street analysts, combined with the implicit consensus outlook represented by the market prices of options, provides a better basis for evaluating a stock than I will be able to come up with on my own, especially for a young and rapidly-evolving industry like ride-hailing.
The Wall Street consensus outlook compiled by eTrade combines the views of 25 ranked analysts who have set price targets and ratings for UBER in the past 90 days. The consensus rating is bullish and the consensus 12-month price target is $72.36, almost 55% above the current price. Even the lowest price target from among the 25 analysts is 17.5% above the current price.
Wall Street analyst consensus rating and 12-month price target for UBER (Source: eTrade)
Seeking Alpha’s calculation of the Wall Street consensus combines the views of 41 analysts who have set price targets and ratings for Uber in the past 90 days. The consensus rating is bullish and the consensus price target is $69.65, slightly lower than calculated by eTrade, but still 48% above the current price. A remarkable 26 of the 41 analysts give UBER a rating of “very bullish”, only 1 is “bearish”, and none are “very bearish.”
Wall Street analyst consensus rating and price target for UBER (Source: Seeking Alpha)
I am intrigued to see the consensus opinion of the analysts so disconnected from the current share price. We know that the consensus price targets tend to have predictive value as to future returns when the analysts broadly agree. In this case, there is quite a range in expected price, but there is uniform agreement that UBER is substantially below fair value.
I have analyzed options on UBER that expire on January 21, 2022 to build the market-implied price return outlook for the next 6.2 months (from today until the options expire). I chose these options to form an outlook to around the start of 2022 and because this option expiration date is widely followed and tends to be very active. There is a high level of open interest in UBER options for this expiration date. The standard form of the market-implied outlook is a probability distribution of price returns, with probability on the vertical axis and price return on the horizontal (going from most negative on the far left to most positive on the far right).
Market-implied probabilities of price return for UBER for the next 6.2 months, from today until January 21, 2022 (Source: author’s calculations using options quotes from eTrade)
The market-implied price return outlook is skewed towards negative returns, with the highest probability corresponding to a return of -14.9% over the next 6.2 months. This is a somewhat bearish outlook from the options market. The median return (50% of returns are estimated to be above, and 50% below this level) is -2.5% for the period. The confluence of buyers and sellers of calls and puts (which are coupled by put-call parity) shows that the market assigns a higher probability of declines than gains, with the peak probability meaningfully below zero.
The annualized volatility derived from the market-implied outlook is 44.7%, which is high for an individual stock in current market conditions. For context, I recently calculated annualized volatility of 48% for Teladoc (TDOC) using the same procedure and option expiration.
To make it easier to see the relative probabilities of positive and negative returns of the same magnitude, I typically rotate the negative return side of the market-implied outlook about the vertical axis (see below).
Market-implied probabilities of price return for UBER for the next 6.2 months, from today until January 21, 2022. The negative return side of the distribution has been rotated about the vertical axis (Source: author’s calculations using options quotes from eTrade)
The asymmetry in the market-implied probabilities of loss (negative return) vs. gain is quite striking. There is a higher probability of very large positive gains (>50% or so) than for declines of the same magnitude, and this makes sense. There is an ‘embedded lottery ticket’ in young innovative companies if everything goes right.
The market-implied outlook for UBER, for the period from today until January 21, 2022, is bearish and the expected volatility is high.
Going forward, I expect that platform-driven on-demand gig work will be a substantial part of the economy, but Uber has not yet figured out how to make this business work satisfactorily for investors and drivers. The market has assigned a substantial valuation to Uber to reflect the company’s effective execution of the platform and rapid growth into many markets. There are substantial network effects that work to the company’s benefit as it expands. The Wall Street analyst consensus outlook is bullish and that the shares are substantially undervalued. The consistency of this belief, even from the less-optimistic analysts, is notable. By contrast, the market-implied outlook derived from options prices is bearish from now until early 2022. The annualized volatility outlook for this period is high, as one would expect. In balancing the bullish consensus outlook from Wall Street and the bearish consensus outlook from the options market, my final rating is neutral.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.