Uber (UBER) shares may be ready to surge higher as the technical charts show some signs of a bottom, while options traders load up on calls. The uptick in options activity comes as a surprise as concerns over a new COVID variant rise.
Uber has always been vulnerable to news surrounding COVID. While the latest round of COVID news may weigh on shares over the short-term, it is not deterring options buyers from betting the shares surge by more than 20% by the middle of June.
I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Massive Bullish Bets
On December 13, the open interest for the UBER June 17, $42.50 calls rose by almost 23,000 contracts. The data from Trade Alert shows the call options were bought on December 10 on the ASK for around $3.20 per contract.
It would imply that the stock is trading above $45.70 if held until expiration, equating to a gain of about 22.4% from its current price of $37.34.
Additionally, open interest for the February 18 $40 calls have seen a massive increase, rising to nearly 80,000 contracts from just 3,100 on November 29.
The data indicates that most of the calls were also bought on the ASK for between $2.30 and $2.90 from November 30 through December 6. This would imply that UBER is trading above $42.30 by the middle of February if the options are held until expiration, a gain of around 13.3%.
Uber’s stock chart also shows some positive trends with a relative strength index that has started to turn higher, suggesting a shift in momentum occurring from bearish to bullish.
The RSI made its first low below 30 on December 1. But on December 13, the stock’s price retested its recent lows of around $36, but the RSI did not retest its lows.
Instead, the RSI made a higher low, a bullish divergence pattern. If the stock can clear resistance around $39, it could climb to $42. That is where a gap was created on November 26.
It seems that the combination of bullish options bets and an improving technical chart is due to a fundamental picture that may be improving. The equity now trades for under three times next-year sales estimates, well below its historical average of almost 3.7.
The only time the stock has been cheaper in the post-COVID environment was during the March 2020 stock market drop.
The ratio has fallen because sales estimates for 2022 and 2023 have been climbing, as the stock has been falling. Analysts now see the company generating about $25.1 billion in 2022 and $31.1 billion in 2023 in revenue.
That is up after nearly a full year of expectations stagnating, which is a significant improvement in the outlook for the business.
The stronger revenue outlook has led to analysts boosting their EBITDA forecasts for 2022 and 2023. The improvement in 2022 is modest, rising to $1.4 billion from $1.3 billion at the beginning of the year.
However, 2023 estimates have increased to $3.6 billion from $3.2 billion, an increase of more than 10%.
If Uber’s business can continue to show signs of improvement, it can become profitable in 2023, as analysts estimates currently forecast. Then, the stock can likely move higher as the chart, and the options betting suggest.
However, if the coronavirus surge worsens and begins to damage Uber’s business leading to weaker than expected results, the bullish options bets are likely to fall flat, with a break of technical support at $33, likely triggering a drop to around $28.60.
A lot still needs to go right for Uber to succeed, perhaps making 2022 a pivotal year.
Disclosure: At the time of publication, Michael Kramer did not have a position in any of the securities mentioned in this article.
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