While the market slid last Thursday, which put the recent rally in question, the bulls took the opportunity to buy that dip in a big way on Friday. When it was all said and done it was another strong week for the market as the S&P 500 gained 1.3%, the Dow rallied 0.65%, and the Nasdaq added 2.3%.
The Stock – Uber (UBER)
Why the Strength
Uber is effectively an emerging blue chip, with its two core businesses—ride sharing and delivery—continuing to grow, which, combined with solid cost controls, has revealed huge operating leverage (read: increased profits) in the business.
In Q3, trip growth accelerated to 25% from a year ago, with the top brass saying Asia and Latin America have really picked up and with total drivers (which is really the key to ride sharing growth—more drivers means lower costs and more convenience for users) rising north of 30%. (The momentum continued in October, with the month setting another new high in trips.)
Meanwhile, in the delivery business, revenues grew 18%, and probably most important for investors, EBITDA for both continue to boom—while accounting earnings are relatively tiny, Uber’s EBITDA totaled $1.09 billion in the quarter, up 19% from the prior quarter and up 112% from a year ago, while free cash flow came in at $905 million (around 44 cents per share); over the past four quarters, free cash flow has been $2.1 billion (more than $1 per share).
Even better, the best is almost surely yet to come: Management has repeatedly sounded a confident tone concerning both growth and an expanding bottom line, as it’s in the very early innings in some international markets, has a ton of newer ride sharing offerings that are growing rapidly not to mention some entirely new avenues (the app itself should see $1 billion in ad revenues next year) that have big potential. The bottom line is that sales, EBITDA and free cash flow should continue their rapid ascent for many quarters to come, which should keep big investors involved.
Technical Analysis
UBER began to bottom out in May/June of 2022, had a couple of false starts with the market in the months after and then finally got going after earnings in early May of this year. The run to round-number resistance at 50 was solid, but the market’s retreat in the summer and fall dragged the stock lower—though the damage wasn’t too bad, with shares falling “only” 19% from high to low. And UBER’s action since tagging its 40-week line has been gorgeous, with a straight-up move pre- and post-earnings. Stop — 45
The Covered Call Trade
Buy Uber (UBER) Stock at 53, Sell to Open December 52.5 Strike Calls (exp.12/15) for $2.40, or a Net Price of 50.6 or less
Static Return: $190 per covered call (3.75%)
Breakeven: 50.6
Covered Call Return (if assigned): $190 per covered call (3.75%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 50.6 or less. (In this case 53 minus 2.40 = 50.6. Or another example is you could pay 53.15 for the stock and sell the call for 2.55, which also equals 50.6)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on November 21, 2023.
