Uber shocks Wall Street with massive $20 billion buyback: What it means and why companies do it

Time of India

a day ago

On Wednesday,
Uber
reported strong second-quarter results and surpassed analyst expectations with an 18% revenue increase from the previous year. Uber also announced a massive $20 billion stock buyback program, suggesting that growth at its core rideshare and delivery units still has room to pick up steam.
The ride-hailing giant- which include ride hails, delivery orders and driver and merchant earnings but not tips- posted revenue of $12.65 billion, beating the $12.46 billion expected by analysts. Earnings per share matched forecasts at 63 cents. Gross bookings will range from $48.25 billion to $49.75 billion for the three months ending September, Uber said in a statement.
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CEO Dara Khosrowshahi highlighted the company's expanding consumer base, with monthly active platform users growing 15% to 180 million in Q2, and around 3.3 billion trips booked—up 18% year over year.
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What is stock buyout?
According to Investopedia, a buyback is also known as share repurchase and it occurs when a company purchases its own outstanding stock shares to reduce their number on the open market. Generally, companies buyback shares at a price higher than the current market price.
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There are two types of buyback: tender offer and open market offer. Companies can choose either of these methods to buy back shares from their shareholders.
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In tender offer, the company makes an offer to buy back its shares at a particular price (offer price) at which the shareholders can tender, i.e., sell their shares. The amount is credited to the shareholders primary bank account.
As far as open market offer is concerned, the company can buy back its shares by actively buying from sellers on the exchange. The buyback period is mentioned in the buyback offer, and it can last for months. The amount is credited to the shareholders trading account.
Why do companies initiate buybacks?
Companies may initiate buybacks if they believe their shares are undervalued, to reward shareholders, or to prevent hostile takeovers. Share buybacks can boost a company's earnings per share (EPS) and reduce its price-to-earnings (P/E) ratio, potentially increasing investor appeal.
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However, critics contend that buybacks may indicate a shortage of profitable growth opportunities and can drain cash reserves, creating vulnerabilities during economic downturns. Since many companies compensate employees and executives with stock and options, repurchasing shares allows them to reissue these shares to staff without diluting existing shareholders.