Billionaires Are Deciding to Sell Shares of This Well-Known Stock

Uber (UBER 0.37%) achieved impressive financial results for the past few quarters, but several billionaire investors have been unloading shares of the ride-hailing service. That group of high-profile sellers includes Larry Robbins, Lee Ainslie, Roberto Mignone, Steven Tananbaum, Daniel Loeb, and George Soros.

High-profile stocks often have billionaires buying and selling in large quantities over any given quarter, but recent transitions could point to major concerns about Uber’s industry moving forward.

Financial results have generally been strong

Uber’s most recent quarterly report was a mixed bag. The company exceeded analysts’ forecasts, with 15% revenue growth over the prior year.

The company’s quarterly earnings per share fell short of analyst estimates, though this was mostly attributable to a non-operating, non-recurring expense related to a change in valuation of several the company’s equity investments in other companies.

Its adjusted operating profits increased more than 80% over the prior year, while free cash flow increased nearly 150%.

Uber’s revenue growth rate spiked in 2021 and 2022 as its operations normalized following disruptions related to the COVID-19 pandemic. Since then, the company’s annual sales have steadily expanded between 10% to 15% per year.

UBER Revenue (Quarterly YoY Growth) data by YCharts

Uber’s gross profit margin has been consistent over the past year, hovering around 40%. Its operating expenses have grown at a slower rate over that period, allowing the company to achieve positive operating profits. The recent swing to profitability means that Uber’s EPS and free cash flow growth are set to outpace the top line. That’s a great trend for shareholders.

UBER Free Cash Flow data by YCharts

Uber’s valuation isn’t a problem

Sometimes, billionaires and hedge fund managers shrewdly exit or reduce positions after achieving their expected investment goals. If a stock’s valuation gets too high relative to expected revenue or cash flows, professional investors often consider selling. It could represent an opportunity to realize gains and take risk off the table by deploying that capital elsewhere.

That dynamic could be at play with Uber. The stock has strongly outperformed the S&P 500 and Nasdaq Composite over the past 12 months — its 61% return over that period more than doubles the popular indexes. However, Uber has lagged the S&P and the Nasdaq year to date, and its valuation ratios haven’t ballooned to an unreasonable level.

The stock’s forward P/E and price-to-free cash flow ratios are both around 35. Those are higher than you’d expect to see from a mature value stock, but both are reasonable relative to Uber’s growth rate.

UBER PE Ratio (Forward) data by YCharts

Perhaps the billionaire shareholders are simply taking some gains after a strong year.

Concerns about a sustainable business model

There are concerns swirling in some investor circles about the sustainability of Uber’s business model. DoorDash and Grubhub’s parent company, Just Eat Takeaway.com are Uber’s largest rivals in the food delivery industry, and both companies struggle with profitability. Uber’s rideshare foe, Lyft, similarly reports net losses every quarter.

JTKWY Operating Income (TTM) data by YCharts

That clearly hasn’t prevented Uber from attaining profitability with scale, but it highlights the challenges of the business model in a competitive marketplace. Unfortunately for Uber and its peers, things might get more complicated over the next few years.

There are mounting concerns about the compensation for drivers. New studies suggest that drivers often earn significantly below minimum wage. That’s hasn’t been Uber’s problem, due to its drivers’ status as contractors rather than employees, but that might change soon.

The company has been battling regulators on the topic of driver compensation and benefits for several years, and those issues seem likely to get even more troublesome. A driver-friendly law in California recently received support from a federal ruling, opening the door to similar legislation in other states.

Labor costs could increase materially if Uber has to treat its drivers as employees or meet minimum wage requirements. That would drastically alter the company’s economics, and consumers may be unwilling to pay higher prices to offset those increased expenses.

Billionaires could be selling their shares in order to stay ahead of a market that’s been justifiably pleased with Uber’s financial results. There’s a chance that upcoming legislation could be a huge challenge for rideshare and food delivery businesses in their current format.

Of note, Lee Ainslie, Paul Tudor Jones, and Ken Fisher all recently sold large quantities of Lyft shares. Jones’ and Ainslie’s funds also unloaded a large portion of their DoorDash holdings,  too. That lends support to the theory that this is an industry-wide move, rather than an Uber-specific one.

Concerns about further regulatory issues are purely speculation at this point, but active investors often try to make decisions ahead of the news. Numerous professional investors seem to be acknowledging risk by selling Uber shares after the stock delivered impressive returns over the past year.