Uber Technologies Inc. is cruising toward potential inclusion in the S&P 500 as soon as next year, and that makes its stock “hard to ignore,” according to an analyst.
While the ride-hailing giant struggled in its early days as a public company, it’s turned things around in a big way more recently, such that sustained profitability on a GAAP basis is now a possibility. Uber
checks all but one of the boxes needed to be eligible for S&P 500
consideration, and it would need to sport positive GAAP earnings on a trailing-12-month basis and in its most recent quarter in order to meet the final criteria.
Bernstein’s Nikhil Devnani thinks Uber can hit that goal by the second quarter of 2024, meaning that the second half of 2024 “is a plausible timeframe for inclusion.”
History suggests investors should pay attention to stocks that have the potential to join the S&P 500 in the not-too-distant future. “Changes to the index occur frequently, and stocks tend to outperform strongly in the 6-12 months leading up to S&P inclusion,” Devnani noted.
Bernstein recently examined some of the “largest new entrants” to the index over the course of 2010 to 2023 and found that they outperformed by 68% in the year before their announced inclusion and by 33% in the six months before their announced inclusion. The grouping failed to show a dramatic bump in the months after inclusion.
Of course, Devnani cautioned that simply meeting eligibility criteria doesn’t guarantee companies a place in the index. Uber has some unique factors working in its favor, but also one potentially negative item to watch, in his view.
On the positive side, Uber’s large size makes it a compelling candidate, he wrote. The stock has a market capitalization of more than $95 billion currently. And Uber is classified as an industrials company rather than an information-technology company, which could help its case as the index committee looks at areas like sector balance in making its determinations.
However, Uber also has about $5 billion in equity stakes, and Devnani was “mindful” that items like this “can swing net income as they get marked-to-market regularly.”
“Freeing up these stakes can improve predictability of [earnings per share] and generate capital for buybacks,” he wrote.
Devnani had an outperform rating and $50 target price on Uber shares, though he recently outlined a path to $60.