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An Unconventional Addition: Uber Joins the Dow Transports

Uber Technologies (UBER) is poised to make a significant stride by joining the prestigious ranks of the Dow Jones Transportation Average. 

This imminent inclusion signals a strategic realignment within the index, reflecting the evolving landscape of transportation and mobility services.

uber rideshare technology investment


Uber to Replace JetBlue Airways in Dow Jones Transportation Average

In a significant development, it was announced last week that Uber Technologies (UBER) will replace JetBlue Airways (JBLU) in the Dow Jones Transportation Average, marking a strategic adjustment in the index's composition.

This change, which takes effect today, February 26th, reflects a notable shift in the representation of transportation companies within the index.

This alteration aims to provide the index with exposure to the burgeoning ride-sharing industry, reflecting the evolving landscape of transportation and mobility services.

JetBlue's relegation from the index is attributed to its notably low weight, accounting for less than half a percentage point. This diminutive presence is primarily a consequence of JetBlue's relatively modest share price.

An Unconventional Addition: Uber Joins the Dow Transports

Uber's debut in the Dow Transports on Monday marks the first adjustment to the index since December 7, 2021, when Old Dominion supplanted Kansas City Southern. However, unlike its counterpart, the Dow Industrials, the Dow Jones Transport isn't reaching historic highs, with its last peak recorded in November 2021, now trailing nearly 7% below that pinnacle.

Under the Dow Theory, which posits that Transports should affirm new highs in the Dow Industrials, the current scenario raises doubts. The rationale behind this theory lies in the assumption that increased shipping activity, epitomized by the Transports, signifies a positive economic outlook. Yet, amid a predominantly service-oriented economy, the reliability of shipping activity as a leading indicator comes into question.

The addition of Uber to the index raises eyebrows due to its deviation from the conventional profile of index constituents. Unlike many others, Uber isn't a shipping company per se, but rather a provider of ground transportation services. However, the presence of Avis, another ground transportation entity, within the Transports suggests a broad interpretation of what constitutes a transportation company by the Dow Transports index committee.

Uber's Eventful Multi-Month Journey

Uber's journey over the past six months has been eventful, fueled by speculations surrounding its potential inclusion in the S&P 500. Following a robust earnings report on November 7, which paved the way for its entry into the S&P 500 on December 18, Uber's stock witnessed a notable surge of approximately 25%. This surge aligns with the well-documented "S&P inclusion effect," where stocks tend to experience a price rally in anticipation of inclusion, followed by a subsequent downturn post-inclusion.

While Uber initially experienced a post-inclusion slump, the announcement of a $7 billion buyback on February 14 propelled its shares once again. A 2012 study by the Federal Reserve Bank of New York corroborates this phenomenon, affirming the short-term impact of S&P inclusion on stock prices.

Notably, Uber has outperformed every other stock within the Transports index over the past 12 months, boasting an impressive 133% surge. In contrast, the top performer in the Transports, Matson, witnessed a comparatively modest 68% increase, while others such as Union Pacific, Old Dominion (ODFL), CSX (CSX), and Kirby recorded gains ranging from 20% to 30%.

Analyst Update: Uber's Price Target Raised to $90

Adding to the buzz surrounding Uber, BTIG Research has raised its price target for the company to $90 from $80. Analyst Jake Fuller outlined several key factors driving this upward adjustment.

Fuller highlighted recalibrated user growth and mix assumptions, citing recent disclosures indicating a more rapid expansion in Uber One subscribers and cross-platform users. Notable highlights of the update include:

Upward adjustments to bookings and margin estimates to accommodate stronger user growth, projected at a compound annual growth rate (CAGR) of 9% to 10% from 2023 to 2026.

Emphasis on the increasing prevalence of Uber One and cross-platform users, who exhibit significantly higher spending patterns compared to non-members and single-product users. Projections indicating a robust growth trajectory, with estimated bookings reaching $219 billion and EBITDA of approximately $10.6 billion by 2026.

With these revised estimates, BTIG Research has lifted its price target for Uber, reflecting a bullish outlook on the company's growth prospects. The firm maintains its Buy rating on Uber, underscoring confidence in its long-term trajectory.

Conclusion

As Uber prepares to step into the spotlight of the Dow Jones Transportation Average, its inclusion marks a noteworthy chapter in the company's trajectory. Positioned at the intersection of technology and transportation, Uber's ascent underscores its pivotal role in reshaping how individuals and goods move within urban landscapes. With this strategic move, Uber solidifies its standing as a key player in the ever-evolving realm of mobility services, poised to navigate the road ahead with confidence and resilience.


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