Pershing Square Capital Management, a hedge fund founded and led by the billionaire Bill Ackman, has underperformed the S&P 500 year to date.
Its returns look much better when we zoom out and look at the past couple of decades, but right now, it is being dragged down by several underperforming stocks, including Uber Technologies (NYSE:UBER).
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The ride-hailing giant is the largest holding in Pershing Square Capital Management’s public equity portfolio, accounting for roughly 12.7% of the fund as of the second quarter.
Is Ackman right to stick with Uber despite its recent challenges?
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What’s going on with Uber?
Uber’s financial results have been mixed. Consider the company’s second-quarter update. Revenue increased by 12% year over year to $14.19 billion, missing analyst estimates.
Management says that accounting adjustments were partly responsible for the unimpressive year-over-year revenue growth. Still, the market wasn’t too thrilled about that. However, Uber’s operating income increased by a healthy 30% year over year to $1.9 billion, while adjusted earnings per share came in at $0.81, 35% higher than the year-ago period. Uber’s gross bookings for the period were fairly strong, too, growing 24% year over year to $58 billion. But the company’s third-quarter gross bookings guidance came in short of analyst estimates.
It wasn’t the cleanest quarterly performance for Uber. It’s one of the reasons why its share price has declined this year. There may be an even bigger problem for Uber. Many investors are worried that the company’s business will suffer amid the rise of self-driving vehicles. It won’t happen overnight, but if self-driving cars become more widespread and the public embraces the technology, Uber will find itself in a much more competitive environment. So, the company’s long-term outlook appears uncertain for that reason.
Can Uber navigate its challenges?
Any company can miss revenue or earnings projections and post lower-than-expected guidance, leading to a poor stock market performance over a short period. For long-term investors, the question is whether these developments indicate structural problems within the business that could change its long-term outlook. In Uber’s case, there are certainly reasons to be worried. However, there is also a case to be made that Uber could turn its threats into opportunities.
Consider that the company has already partnered with leaders in the self-driving industry, including Waymo. In some cities, people can use the Uber app to request rides from Waymo. This is great for Uber because it allows it to keep these paid rides within its ecosystem, while Waymo can access a large pool of potential customers through the Uber app, something it might struggle to do otherwise. There is always the possibility that Waymo will build its own app.
In fact, some self-driving companies have already done that. But Uber’s brand name, which is intimately associated with these kinds of services, grants it an advantage. Further, the company is also looking to launch its own fleet of autonomous vehicles. Uber signed a deal with Rivian (NASDAQ:RIVN), an electric-vehicle (EV) maker, for up to 50,000 autonomous cars (10,000 initially, with the option to negotiate up to 40,000 more), which it will launch as robotaxis across several U.S. cities starting in 2028.
Note that Uber is bypassing the significant investment required to design and manufacture these vehicles, not to mention the time, effort, and risk involved in training the self-driving software that runs them. Uber will invest up to $1.25 billion in Rivian as part of this deal. Uber isn’t sitting on its laurels and waiting for the self-driving revolution to disrupt its business. It is actively looking to profit from it.
Further, these efforts could improve the economics of the company’s operations. Autonomous vehicles eliminate human drivers and the need to compensate them, potentially allowing Uber to capture higher profits from each trip. Exactly how much Uber benefits will depend on several factors, including vehicle ownership and agreements with self-driving partners.
But that’s still an important factor to consider in our analysis. For all those reasons, investors should be cautiously optimistic about Uber’s future. And with the stock down 14% this year — and 29% over the past 12 months — now may be a great time to buy it on the dip.
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.
