Why Uber Stock is a Buy?

Author: Aditya Raghunath

Estimated read time: 4 minutes

Publication date: 28th Jul 2020 16:56 GMT+1


After a much-talked about IPO in 2019, ride-sharing company Uber Technologies (NYSE: UBER) has been the subject of deeper analysis. The company still has a long road to profitability and the COVID-19 has cast a dark shadow on its core business.

However, there are silver linings under the dark clouds which ensures that Uber still has a lot to gain. Uber stock is up 3.4% year-to-date while the S&P 500 and Nasdaq have returned 0.14% and 21.9% respectively in 2020.

 

UberEats to drive the growth story

Even though Uber’s ride sharing service is taking a hit, Uber Eats is showing remarkable growth Amid the coronavirus-induced lockdown, customers are wary of stepping into restaurants.

Hence, the food delivery business model is here to stay and prosper. Uber Eats also has the infrastructural advantage to support its growth. In fact, food delivery is the additional service Uber provides using its existing rides network. In all it’s a win-win arrangement for Uber. CEO Dara Khosrowshahi has revealed a robust 44% growth in the Eats business in the US. 

Earlier this month, Uber Eats acquired Postmates, the food-delivery services for $2.65 billion in an all-stock deal. The key motive behind this acquisition is to strengthen its position and lessen competitive forces.

 

Uber Freights and Robotaxis are the future

Another business that the lockdown is favouring is Uber Freights., the company’s on demand marketplace. Freights uses Uber’s existing mapping and routing technology to match the carriers with the shippers.

The ride-sharing company is betting big time on Uber Freight and wants to bring about the same disruption in the freights operation as it did with its taxis. According to a Bloomberg report on July 16, the company is in talks with investors for an investment of $500 million in Uber Freights.

Uber also believes in turning threats into opportunities. In fiscal 2019, the gap between the company’s adjusted net revenue and gross bookings is nearly $52 billion.  In order to bridge this, the company is looking at futuristic Robo-taxis and autonomous vehicles to replace human drivers. This means that filling this existing gap could very well boost its profitability.

Weak margins from UberEATS and competition stokes concern

That said, Uber has its share of concerns as well. The core ride-hailing business, which contributes 73% of the company’s revenue share, is facing a massive downfall in demand. Its other main segment, UberEats also suffers from weak margins per order.

It also has to accommodate the share of restaurants and drivers in this model. Secondly, competition is tough and promotional expenses eat into the profits further. Not to mention, the company also faces a grave labor-related litigation in the state of California.

 

Ride-sharing likely to bounce back post lockdown

We know that COVID-19 has severely impacted the business of the company. However, what’s unique is that it will be amongst the first to emerge stronger once the lockdown is lifted. As passengers would prefer to stay away from mass transit modes, ride hailing business will be the biggest gainer. As some cities have begun to come out of the lockdown in May, the company observed improvement in its gross bookings rate in the US and Hong Kong.

 

Diversification and Cost rationalization are the pillars of growth

In a nutshell, the company is changing its growth narrative to win back the investors. Uber is seriously committed to diversify its business beyond ride-hailing, using its proprietary technology and network of customers.

Uber is also looking at the online grocery delivery model through its acquisition of Cornershop, a grocery shopping app. Adding a grocery delivery business to its portfolio, is also a critical way to lock in customer loyalty.

The company is already on track to achieve profitability through sustained cost-saving efforts. Uber plans to lay off nearly 14% of its staff. The company is also set to close more than thirty offices worldwide. With the help of these measures, Uber expects to save $1 billion in fixed costs annually.

A diversified portfolio of business paves way for Uber’s strong market standing and a stable revenue growth. Also, its $9 billion cash balance looks good at financing these growth initiatives.

The stock plunged over 20% to a record-low in March, but was quick enough to recover. Since then, Uber stock has climbed about 13.5% as of July 27. While, there are risks associated with Uber, it may be worthwhile for the investor in the long-run. With the average price target at $42.13, the stock has an upside potential of over 35% looking at average analyst estimates.


Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.com. The observations he makes are his own and are not intended as investment or trading advice.