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Uber Rides Is Strong But Eats Is A Dead Weight

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Uber UBER released a solid earnings report, and the markets got excited, trading this stock up over 10%. The results were just about in line with estimates with a marginal EPS beat and a revenue miss that was less than 1%. Investors are just happy that Uber appears to be on track.

Uber is able to turn a robust positive EBITDA for its core ridesharing business, but its other bets have been pulling down the company’s profitability. The more revenue Uber Eats brings in, the larger the losses. This past quarter Uber Eats was able to improve its sales by 154% year-over-year, but the segment’s EBITDA was down 111%, somehow losing more than it netted in sales.

Segment Concerns

Uber Eats is operating in a very competitive landscape. There are a handful of services for customers to choose from, but the largest in the space include Grubhub (GRUB - Free Report) , DoorDash, and PostMates. The meal delivery segment grew by 41% in 2019, according to the Second Measure. Grubhub had been the segment leader for some time but recently lost that title to DoorDash. Below you can see a Second Measure graphic of how the competition in the space has heated up over the past 2 years.

Grubhub has been struggling to stay afloat as the competition steepens. The firm has seen a significant deceleration of sales, earnings that have turned negative, and a share price breakdown of 40% in the past 52-weeks. Uber Eats may be headed in the same direction. The battle for meal delivery domination is losing these public companies an excessive amount of money, and this may be a race to the bottom (aka the end of their capital).

Uber Freight isn’t doing much better with a year-over-year revenue decline of 139%. Uber’s operations outside of its core business are losing the company a massive amount of money, and the company will need to see continued cash infusions if it wants to keep these other segments running.

In the Q4 earnings call, analysts were looking for synergies between ridesharing and Uber’s other plays for justification of keeping these. Management is saying that Uber Eats is in the early stages of development and says that they have regions where Uber Eats has positive EBITDA margins. This is a good sign for the business, but the massive growing losses from this segment are still a concern for investors like me.

Lyft (LYFT)

Lyft’s (nearly) pure-play ridesharing strategy appears it may be becoming the company’s competitive advantage in the duopoly. Uber and Lyft’s race to profitability will prove this one way or another. Uber is substantially better capitalized with the world’s largest VC firm’s backing it and over $6 billion in cash to burn. If it is a race to the bottom of their capital Uber may survive the longest.

Lyft is releasing its Q4 earnings after the bell Tuesday, February 11th, and expect a big move with the stock’s first three quarterly reports having an average price impact of 7.9% (1 up, 2 down). Analysts are estimating an EPS of -$0.57 on sales of $984 million, according to Zacks Consensus estimates. This would represent Lyft’s best sales to date. Look for management’s guidance on a profitability timeline as this will likely be a big mover for these shares.

Final Thoughts

The ridesharing segment is working hard on creating fleets of autonomous vehicles to replace their high-cost drivers. It will likely be years before these fleets are deployed, but some investors are putting their long-term bets on these firms’ autonomous cars none the less.

Uber’s noncore businesses may be the death of the company if it can’t turn around the increasing losses. The company’s ability to turn ridesharing around has given me hope that they can do the same with these other segments.

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