Zinger Key Points
- Uber’s latest credit rating puts it back into investment-grade territory.
- The company has been praised by analysts for a conservative approach to spending that is leading to positive revenue margins.
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S&P Global raised Uber Technologies Inc's UBER credit rating to BBB- from BB+ on Friday evening after the market close.
The company's share price is up by 25% in the past two weeks after stronger-than-expected earnings results earlier this month.
For the ride-hailing giant, recent successes may trace back to a series of cost-cutting decisions initiated in mid-2022.
S&P's Upgrade
The upgrade by S&P Global, which is one of the "Big Three" credit rating agencies, puts Uber back in the investment-grade category.
BBB- is the lowest investment-grade rating, up a notch from BB+, which is the highest junk rating.
Shares in the company are up 2.2% at the time of writing on Monday and up 5.5% in the past five trading days.
The credit rating agency said in a release that "Uber’s solid business execution will likely support continued credit metric improvements and free cash flow growth."
The company is on track to generate EBITDA of about $5.9 billion in 2024 and $7.6 billion in 2025, said S&P Global.
Are Cost Cuts Working?
Back in May 2022, Uber CEO Dara Khosrowshahi sent a bombshell memo to management saying that the company would need to adapt to harder times, implementing a rigorous cost-effective strategy by slashing spending on marketing and treating new hiring as a "privilege."
Market conditions reflected rising inflation, the onset of a Fed rate hike cycle, and more conservative capital allocation by venture capital firms.
The cost cuts had yielded positive results by the first months of 2023 and Uber posted its first operating profit ever in the second quarter of that year.
With the cuts, Uber was leading a new trend in the tech space, which was seeing the abundance of capital that defined its previous years beginning to dry up, according to a CNBC analysis.
The last quarter of 2023 saw the lowest VC-backed funding since 2018, according to Crunchbase, followed by the first quarter of 2024. The second quarter of this year saw an uptick of 6% but was still down 20% year-over-year.
But the downwards trend began as early as the first quarter of 2022.
SIlicon Valley VC investor Bill Gurley, who is an early investor in Uber, said in 2022 that start-ups would need to start becoming realistic about the economic environment of the time.
For Uber, this meant reducing costs in discretionary areas like marketing and advertising as a first step, followed by several rounds of layoffs—a practice that became common in the tech sector as access to capital grew more limited.
What's Next?
Analysts from several firms responded positively to Uber's stronger-than-expected second quarter results, generally reiterating Buy or Outperform ratings.
The company boasts a steady consumer base, which RBC Capital Markets analyst Brad Erickson described as “showing no signs of softening for ride-hailing or delivery.”
S&P Global said it expects Uber to support "earnings expansion with economies of scale in its core Mobility and Delivery businesses and newer business strategies such as grocery and higher-margin advertising."
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