Uber Technologies Inc. (UBER) stock has soared since reporting strong Q1 results on May 7. However, that may mean it is open to profit-taking. Nevertheless, its long-term value is higher based on its strong free cash flow and FCF margins.

UBER is at $92.67 in midday trading on Friday, May 16. That is up from $82.81 on May, just after its May 7 results. That may have been a case of “sell on the news.” The fact is Uber's results were very strong, especially its free cash flow and FCF margins.

It just goes to show that investors should not trade on sentiment, but on a company's fundamentals. Nevertheless, the stock could be open to profit-taking here. One way to play it may be to sell short out-of-the-money (OTM) puts to set a lower buy-in target price.

Strong Q1 Results

Uber reported that revenue rose by +13.8% YoY to $11.533 billion and 17% on a constant currency basis (without foreign currency effects). However, this was non-constant currency revenue was down slightly from Q4 at $11.959 billion (i.e., -3.6%).

Nevertheless, its free cash flow (FCF) was very strong. It rose to $2.25 billion in Q1, up dramatically from prior quarters. This can be seen in the table UBER provided in the supplemental data deck. I also included the FCF margins.

The FCF margin for Q1 was 19.5%, significantly higher than Q4, despite lower revenue. In other words, UBER is now squeezing out significantly more cash flow from its operations.

This is slightly higher than the 19.4% quarterly FCF margin at Lyft. I discussed this in a May 13 Barchart article ("Lyft's Cash Flow Soars - But So Has the Stock - Is it Still a Buy?). I also pointed out that Lyft generated trailing 12-month (TTM) FCF margins of 15.4%. What did UBER do over the last year?

UBER provides information for that figure. Look at the table below, also from page 29 of the supplemental data deck.

It shows that its TTM FCF was almost $7.8 billion. Seeking Alpha shows that the TTM revenue has been $45.38 billion. So, Uber's TTM FCF represents 17.2% of the prior 12 months' revenue.

Lyft's TTM FCF margin was only 15.4%, so UBER has had a better performance. In addition, I used an 18% forward FCF margin estimate to project Lyft's FCF. 

But UBER has had a higher range (between 17.2% and 19.5%), so we can use a higher FCF margin estimate, say 18.5%.

For example, analysts project between $50.55 billion in revenue this year and $58.08 billion next year. That means its average run rate revenue over the next 12 months (NTM) is $54.3 billion. We can use that to project its NTM free cash flow:

  $54.3b NTM revenue x 18.5% FCF margin = $10 billion in FCF over the next 12 months

That will be 28% higher than its $7.8 billion in the last 12 months. This could lead to a much higher stock valuation.

Target Prices for UBER Stock

For example, if we assume the market will value the FCF projections with a 4% FCF yield figure (i.e., equivalent to 25x FCF):

   $10b FCF est / 0.04 = $250 billion market

    $250b / $193.55b market cap today = 1.291 = i.e., +29.1% upside

(Why use a 4% yield metric? Well, for example, the $7.8 billion TTM figure represents 4.0% of its $193.55 billion market cap today).

In other words, UBER stock could be worth 29% more sometime in the next 12 months, assuming its FCF margins average 18.5%. That puts its target price at $119.54 per share (i.e., $92.67 x 1.29).

Just to be conservative, let's use a 5% yield, i.e., 20x FCF:

   $10B x 20 = $200 billion market cap est.

   $200b / $193.55b = 1.033 = +3.3%, or a price target of $95.73 (i.e., 1.033 x $92.67)

So, UBER could be worth between $95 and $119 over the next 12 months, or about $107 on average (i.e., +15%).

Analysts seem to like this lower price target. For example, Yahoo! Finance has a survey of 51 analysts showing an average price target of $94.83. Similarly, Barchart's mean is $95.81.

However, AnaChart.com, which tracks recent analysts' recommendations, shows that the average of 39 analysts is $105.43 per share. That is close to my average price target of $107 above.

The bottom line is that UBER stock looks undervalued, despite having moved up. However, that does not mean it will retreat from here.

How to Play UBER Stock

One way to play the stock is to set a lower buy-in target price. The best way to do this is to short out-of-the-money (OTM) puts.

For example, today, the June 13 expiration period shows that the $88.00 strike price, less than 5% below today's price, has a midpoint premium of $1.69 per put contract.

That means a short seller of these puts can make an immediate yield of 1.92% (i.e., $1.69/$88.00). Moreover, the potential buy-in (if UBER falls to $88.00 over the next month) is $86.31, which is less than 7% below today's price.

The problem is, however, that if UBER stock retreats from today's peak price, these puts will rise in value, and the investor might be better just waiting. 

(In fact, some investors might even short out-of-the-money calls and use the premium to buy puts, if they feel strongly about the direction UBER stock will take).

The bottom line is that UBER stock is at a peak price, but still looks cheap. Look for opportunities to play the stock with options, either shorting out-of-the-money puts or calls, after it has reached what you think is an inflection point.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.