We recently published a list of 10 Best Innovative Stocks to Invest in According to Hedge Funds. In this article, we are going to take a look at where Uber Technologies, Inc. (NYSE:UBER) stands against other best innovative stocks to invest in according to hedge funds.
Technology is a Big Deal, Strategist Highlights
The Magnificent Seven continues to grasp a sizeable market share of the market gains over the past few years. That said, investors and analysts are excited to see what this earnings period has to offer for the magnificent seven and how much of an influence they have on the market. On October 31, Christian Dery, head of macro strategy at Capital Fund Management, appeared in an interview on Yahoo Finance to discuss the impact of the magnificent seven on the market.
Dery suggested that these companies have grown to become large entities and their market capitalization often fluctuates by $2 billion to $400 billion on earnings events. Looking at the dispersion of the index, Dery adds that individual stocks within the S&P are very diverse and more independent, hinting towards a very low correlation in the index.
He adds that generative AI and LLMs are very different from the traditional software business. Therefore, the hyperscaling model that is conventionally taken from software can not be applied here. For every new customer in the software business, the marginal cost often goes down to nearly zero. However, if you look at the “tech incumbents”, they have to increase their capital expenditures to develop compute clusters and scale their operations, suggests Dery.
In 2023, the chips industry generated revenue of about $3 billion, reflecting that we are yet to find a killer use case or see results of generous AI spending. Dery adds that the market is more likely to be “discerning” on the path to profitability since companies are going to focus more on capital expenditures and projections for capital expenditures. He is particularly interested in the CapEx projections of the Magnificent Seven and shares that if they miss there could be a negative reaction among those stocks.
Dery reiterated that the market is yet to see the investments pay off multiple times but maintains his interest in capital expenditures by these companies playing out. While he is bullish on technological innovation and believes artificial intelligence is disruptive and a “big deal”, he fails to see viable results as of now. Dery also emphasizes that these companies are directing their investments to AI because they do not want to fall behind competitors, with no proper timeline for AI monetization.
That said, some companies are investing heavily in innovation and are at the forefront of a technological revolution.
Our Methodology
To come up with the 10 best innovative stocks to invest in according to hedge funds, we went over multiple similar rankings on the internet from credible financial websites. We then examined the hedge fund sentiment of each stock and picked the most popular ones. Our list is in ascending order of the number of hedge fund holders as of the end of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close up view of a hand holding a smartphone, using a ride sharing app.
Uber Technologies, Inc. (NYSE:UBER)
Number of Hedge Fund Holders: 145
Ride-hailing company Uber Technologies, Inc. (NYSE:UBER) is one of the best innovative stocks to invest in according to hedge funds. The ride-hailing company is expected to become a completely electric and zero-emission platform by 2040, a major reason for its growing fanbase across the globe.
In Q3 2024, Uber (NYSE:UBER) grew its gross bookings by 16% year-over-year, the fourth quarter of logging in at least 20% growth. Last year the company partnered with Waymo to bring autonomous driving technology to UBER and has extended its partnership to offer ride-hailing services to Atlanta and Austin by early 2025. During the quarter, the company launched all-electric Uber Green, an EV-only ride option across 40 cities across the globe supported by an EV preference feature in various other markets.
For drivers, Uber (NYSE:UBER) introduced an AI assistant that helps answer EV-related questions along with an EV mentorship program. More recently, on October 3, Uber (NYSE:UBER) formed a partnership with ENSO, The Earthshot Prize Finalist, to launch a range of low-emission electric vehicle tires across the United Kingdom and the United States. Additionally, the company developed a Clean Air Fund worth £145 million to help drivers go electric.
Despite the uncertainty in the autonomous driving industry, Uber Technologies, Inc. (NYSE:UBER) is continuing to make strides in EV, contributing to its ranking on our list. Analysts are also bullish on the stock, and their 1-year median price target of $90 points to a 23% upside from current levels.
RiverPark Advisors stated the following regarding Uber Technologies, Inc. (NYSE:UBER) in its first quarter 2024 investor letter:
“Uber Technologies, Inc. (NYSE:UBER): UBER was a top contributor in the quarter following better than expected 4Q23 earnings and 1Q24 guidance. Gross bookings of $37.6 billion were up 22% year over year. Mobility gross bookings of $19.3 billion grew 29% over last year driven by a combination of product innovation and driver availability. Delivery gross bookings of $17 billion were up 19% from last year and continued to be strong throughout the quarter. 4Q Adjusted EBITDA of $1.3 billion, up $618 million year over year, was better than management’s guidance of $1.2 billion, and the company generated $768 million of free cash flow, up from a cash loss of $303 million last year. Management guided to continuing growth in 1Q Gross Bookings (20% growth) and Adjusted EBITDA (of $1.3 billion). The company hosted a well-received analyst day in February during which it guided to three year compounded annual growth rates for gross bookings of mid-to-high single digits and EBITDA of 30-40%, both above investor expectations. The company also guided to free cash flow conversion of 90% of EBITDA.
UBER remains the undisputed global leader in ride sharing, with a greater than 50% share in every major region in which it operates. The company is also a leader in food delivery, where it is number one or two in the more than 25 countries in which it operates. Moreover, after a history of losses, the company is now profitable, delivering expanding margins and substantial free cash flow. We view UBER as more than a ride sharing and food delivery service; we also see it as a global mobility platform with 142 million users (by comparison, Amazon Prime has 200 million members) and the ability to penetrate new markets of on-demand services, such as package and grocery delivery, travel, and hourly worker staffing. Given its $5.4 billion of unrestricted cash and $4.8 billion of investments, the company today has an enterprise value of $165 billion, indicating that UBER trades at 21x our estimates of next year’s free cash flow.”
Overall, UBER ranks 5th on our list of best innovative stocks to invest in according to hedge funds. While we acknowledge the potential of UBER to grow, our conviction lies in the belief that certain AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than UBER but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
