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Uber Q2 Earnings Preview: Will Profit Ever Appear?

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Uber (UBER - Free Report) stock rose just 0.3% Tuesday amidst aftershocks from additional U.S.-China trade war tariffs and broader market concerns. Uber stock has dropped 6.4% since its IPO in May. Investors are looking for signs that the company will eventually become profitable, and for what to do if it doesn’t.

Overview

Uber is the world’s largest rideshare company, with operations in more than 700 cities worldwide. Uber offers peer-to-peer ridesharing, food delivery, and a bicycle sharing system called Jump. The company has roughly 110 million users worldwide and holds 69% of the U.S. rideshare market. The firm’s only major domestic competitor is Lyft (LYFT - Free Report) , which holds 28% of the market.

Many investors are worried about Uber’s cash flow problems and lack of profitability. Based on 2018 Q2 private investor information, of the roughly $12 billion in bookings that Uber generated, just over two thirds got paid to drivers. Of the roughly $4 billion left, another $1 billion got paid out in promotions, incentives, and refunds. This leaves $2.8 billion in net revenue, of which $1.3 billion went to cost of goods sold and $2.2 billion to operating costs. After all of this, Uber was left with a $700 million loss.

These issues are supposed to reverse as the company matures and grows. However, it has worsened, after it reported $3.1 billion in net revenue and a $1 billion net loss last quarter. This came out to a loss of -$2.26 per share, a huge figure for Uber stock, which currently trades for around $39 a share.

Operating metrics reported by Uber show strong growth over the past year. From Q1 2018 to Q1 2019, monthly active platform customers increased by 33% to 93 million. At the same time, gross bookings increased 34% to $14.6 billion, showing a slight increase in either ride length or quantity. However, over the same period, Uber’s operating loss increased 116% to $1.03 billion, opposite of what one would expect given the platform usage growth.

While large losses are somewhat normal for young tech companies, we must remember that Uber is not young. It was founded in 2009 and has still never turned a profit. Competitor Lyft was founded in 2012, and is in a very similar situation.

Estimates

Our Zacks Consensus Estimates call for adjusted Q2 EPS of -$3.33, and Q2 revenue of $3.41 billion. Estimates for next quarter show a better picture, but are still in the red, with EPS at -$0.84. Revenue for Q3 is estimated to rise 9.38% over Q2 to $3.73 billion. 

Outlook

When Uber was growing quickly, executives at the firm believed that there would be a large network effect for attracting drivers and customers. This means that services with more customers would attract more drivers and vice versa, so that the largest rideshare company would eventually crowd out the others. However, the company realized that the incredibly cheap and easy cost of switching between services for both riders and drivers kills the projected network effect benefit, as both can price shop quickly between apps.

The ability for drivers and riders to quickly price shop means two things for Uber’s future profitability, neither of which are good. First, it means that Uber can’t raise its prices by much in order to increase margins, as customers will just move to another rideshare service. This creates a serious problem for the already unprofitable company, as they will have to find margins somewhere else.

Second, due to the ease of switching between apps for different rideshare services, Uber can always be effectively challenged. Even if a rideshare company is brand new and has twenty drivers, as long as rates are lower than Uber, customers will flock to the cheaper service, allowing it to grow. For example, Didi Chuxing challenged Uber in China, which resulted in Uber selling its business in the country to Didi and exiting in 2016.

Bottom Line

Uber currently holds a Zacks Rank #2 (Buy), due to earnings estimates for Q2, Q3, fiscal 2019, and fiscal 2020 being revised marginally higher in the past 60 days. Investors should look for signs that Uber will eventually become profitable, but the current picture does not look good.

In January 2018, SoftBank (SFTBY - Free Report) invested $12 billion in Uber for a roughly 15% stake. This cash gave Uber much needed capital to smooth out operations at the company and provide more runway as it racked up losses. However, Uber will likely run out of cash unless it makes drastic changes to its business model. And if it does have to seek another round of funding, how many would want to invest in a company that quickly lost $12 billion?

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