Author: Vincenzo Furcillo – 27-Aug-2020 – Seeking Alpha
Uber’s core business is still suffering from the pandemic. Cash burn has increased in Q2, and revenues declined sharply year over year.
Signs of recovery keep hopes up for the future, but the much-needed business improvements are still yet to be experienced.
The delivery business segment is showing significant growth (over 100% year over year), and this trend should last towards the end of the year.
Without a significant catalyst to change the narrative, Uber stock is expected to go nowhere in the short term.
Uber (NYSE:UBER) stock has been floating around the $30 mark for quite some time now, with its recent short rally towards $35 being promptly stopped by disappointing Q2 earnings. Signs of recovery keep hopes up for the future, but the much-needed business improvements are still yet to be experienced. With the cash burn widening and revenue declining, I see Uber’s stock trading sideways for the short term.
Uber’s Good Management Is Keeping The Stock Alive
Uber survived the pandemic crisis better than many expected. I attribute this success to management’s ability to think sharply and take the necessary actions to cut losses quickly. Since the coronavirus pandemic, Uber has laid off about 25% of its workforce, leading to more than $1 billion in cost savings. Uber’s business model also allows flexible management of costs. Main costs, such as R&D and marketing costs, can be actively managed to properly respond to recovery or recession scenarios. Moreover, fixed costs represent only one-third of total costs. If the platform is not used, Uber does not accumulate variable costs, such as driver compensation and related platform fees, making it pretty easy for the company to maintain margins stability and withstand demand crisis.
However, this flexibility does not translate in substantial benefits should the core business not be already profitable. Unfortunately, for Uber, this is currently the case, as operations losses significantly widened over Q2.
Uber Cash Burn Picked Up again
Figure 1 – Source: Uber Financials – Author’s graph
Uber has an average cash burn of around $700 million per quarter. While the cash from operations loss in Q1 was below average, Uber cash burn has picked up again in Q2 to reach $1 billion, the second-highest burn of the last two years. This cash flow deterioration, coupled with a decrease in revenue, should put a pretty low ceiling to Uber’s stock price.
Revenue Declining As Well, But There It’s Not All Dark
Figure 2 – Source: Uber Financials – Author’s graph
Q2 finally showed the true impact of the pandemic on Uber’s bottom line. Revenues were down 29% year over year to $2.2 billion, with gross bookings also down 35% year over year. Uber is increasingly relying on its delivery business segment to post growth and appeal to investors. In fact, delivery segment revenue grew 103% year over year. Towards the end of Q1, Uber Eats had already seen a sharp acceleration in demand. In April, year over year gross bookings were up 89%. In Q2, Uber managed to improve even more, with Eats posting an impressive 122% year over year growth. CEO Dara Khosrowshahi now describes Uber Eats as a “second Uber” and stresses the future potential of this business line for the company:
“Our delivery business alone is now as big as our Rides business was when I joined the company in 2017. We’ve essentially built a second Uber in under three years, with an accelerating growth profile, a global footprint and an enormous TAM.” (Dara Khosrowshahi)
The delivery business momentum should continue into Q3 and Q4. Stay-at-home orders in place across the world, high chances of a second coronavirus wave, and people’s cautious behaviour extending over the winter are all catalysts to this trend. Taking into account delivery and mobility segments’ gross bookings, we can see that the trend is positive, and Uber gets closer to pre-pandemic levels for every week that passes by.
Figure 3 – Source: Q2 Uber Presentation
Uber Price Analysis
Uber option-implied price gives an indication of low volatility in the short term. The stock has a high probability of prolonged sideways movement around the $30 mark over the next month. Interestingly, option betting places a higher-than-expected chance of positive returns already over the medium term (3 to 6 months). Without a significant catalyst to change the narrative, capital is currently better invested in other opportunities.
Figure 4 – Source: Author’s Calculations
Conclusion and Takeaway
Uber’s core business is still suffering from the pandemic. Cash burn has increased in Q2, and revenues declined sharply year over year. However, there are bright spots in Uber’s results that point to well-executed diversification and future growth. In particular, the delivery business segment is posting over 100% year-over-year growth, and this trend should last towards the end of the year. With these negative and positive factors still balancing out, we can expect limited downside or upside in the short term, excluding relevant news. I maintain my Hold rating on Uber.
Source: Seeking Alpha