In a significant development for the ride-hailing giant, Uber has been added to the S&P 500 Index, replacing Sealed Air Corp. This announcement caused Uber’s shares to surge by 5% in after-hours trading on Friday. The inclusion in this prestigious index is expected to have a positive impact on Uber’s stock price and increase its market visibility.
It is common for a company’s stock price to rise when it joins the S&P 500 Index. This is because fund managers, who track the benchmark and need to replicate its composition, are required to acquire shares of the newly added company. As a result, the demand for Uber’s stock is expected to increase, leading to a boost in its share price.
Meeting Requirements for Inclusion
For a company to be included in the S&P 500 Index, it needs to meet specific valuation and profitability criteria. Among these requirements is the need for positive earnings in the most recent quarter and over the prior four quarters in total. Additionally, constituents of the index must have an adjusted market capitalization of at least $14.5 billion. Uber comfortably meets these prerequisites with a market cap of around $118 billion.
When Uber made its debut on the New York Stock Exchange in 2019, it faced challenges associated with burning cash. The company had to ensure competitive driver earnings in a low-margin business, leading it to focus on adjusted earnings before interest, tax, depreciation, and amortization (EBITDA). Uber’s adjusted EBITDA primarily came from its mobility segment.
However, the company’s delivery business became profitable ahead of schedule, attracting investors who were cautious about money-losing enterprises due to recession fears. In addition to this, Uber’s revenue growth from advertising has significantly contributed to its profitability.
Improving Cost Structure
In an effort to optimize its cost structure and enhance profitability, Uber has implemented various initiatives. One notable step was the elimination of over 3,500 jobs in 2020. The company’s executives have continuously worked towards reducing the cost of deliveries, further improving its financial position.
Long-Term Goals
Uber’s CEO, Dara Khosrowshahi, expressed ambition to build a company that demonstrates sustainable growth and margin expansion. By drawing inspiration from renowned companies like Google, Facebook, and Microsoft, Khosrowshahi seeks to create a top-line compounder and margin increaser.
Uber’s inclusion in the S&P 500 Index not only signifies its achievement in meeting key financial benchmarks but also enhances its market visibility and investor confidence. The surge in stock price following the announcement further demonstrates the positive sentiment surrounding the company. As Uber continues to refine its cost structure and explore new revenue streams, it strives to become a long-term compounder and margin increaser, solidifying its position as a leading player in the global transportation and delivery industry.
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