Uber‘s (NYSE: UBER) latest move to bolster its food delivery business is getting positive attention from Wall Street. The titan of ridesharing and delivery services recently announced an agreement to acquire Delivery Hero‘s Foodpanda delivery service in Taiwan for $950 million in cash plus a $300 million equity investment in Delivery Hero.
Uber Eats already has a strong presence in Taiwan, so there’s a good chance the $1.25 billion investment can cement its lead position on the densely populated island. Encouraged by the upcoming acquisition, Morgan Stanley analyst Brian Nowak reiterated his firm’s overweight rating and $90 per-share price target.
Shares of Uber are about 20% below the high water mark the stock set in March, but Nowak expects them to bounce back. At recent prices, a $90 price target for Uber implies a gain of about 36% over the next 12 months.
Uber reported trailing-12-month free cash flow that shot from deeply negative in 2021 to a positive $4.2 billion during the period that ended on March 31. If we project forward the company’s performance over the past couple of years, Morgan Stanley’s expectations for this stock seem perfectly reasonable.
Throughout most of its history, Uber invested heaps of money to achieve a network effect that it benefits from now. This could allow the company to make opportunistic acquisitions of smaller competitors and simultaneously return profits to shareholders through an aggressive $7 billion stock buyback plan.
Before rushing out to buy Uber, investors without a strong tolerance for risk want to think twice before filling their portfolios with the stock. It’s been trading for about 32.9 times trailing free cash flow.
A lofty valuation means folks buying Uber at recent prices could suffer from significant losses if profit growth doesn’t continue rising steadily over the next couple of years. Making Uber a small part of a diverse portfolio looks like a smart move now, but only for investors with a strong risk tolerance.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Uber Technologies. The Motley Fool has a disclosure policy.
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