Uber Technologies, Inc. (UBER, Financial) is a highly diversified technology company that has grown to become a part of the day-to-day lives of consumers across the globe, whether it be for calling rides or ordering food. After going public around October 2019, the company’s stock has had a wild trajectory. The company has never been profitable, and the pandemic deeply impacted its ridesharing business even while giving a much-needed boost to its food delivery segment.
After the Postmates acquisition, the company has become a truly formidable player in the food delivery space and is gradually lowering its cash losses as well with every passing quarter. The company is at an interesting juncture today; if it can become profitable, could provide stellar returns, but it faces a variety of headwinds on that road.
Recent financial performance
Uber has evolved to become one of the leading players across the globe in both ridesharing and delivery. The company reported a top-line of $3.93 billion for the period ended June 30, 2021, which implies a staggering 105.38% growth as compared to the $1.91 billion in revenue reported in the corresponding quarter of 2020 (there was an easy comparison due to the pandemic though, so this should be taken with a grain of salt). The company beat the analyst consensus estimate of $3.76 billion.
These revenues translated into a gross margin of 35.58% and an operating loss of 29.57%, which were slightly lower than in the same quarter of last year.
The Delivery business has been a major contributor towards the improving bottom-line of the company. Uber’s net income of $1.14 billion translated to adjusted earnings per share (EPS) of 58 cents, which was well above the average Wall Street expectation of a loss per share of 52 cents. The company burnt close to $341 million in the form of operating cash losses and spent an additional $101 million in investing activities during the previous quarter. It is evident that it has a long way to go before reaching profitability.
The Postmates acquisition
With competition continuing to heat up in the food delivery space, Uber went on to complete the acquisition of one of its rivals, Postmates Inc., in an all-stock deal valued at approximately $2.65 billion. The company closed the acquisition in December 2020 and is expected to derive strong synergies. It is worth highlighting that the merger brings together Uber Technologies’ universal mobility and delivery platform with Postmates’ business in the U.S. in order to strengthen the delivery network of grocery, food and other essential goods.
The customer-facing Uber Eats and Postmates applications continue to run separately but through a better-organized, combined merchant base and an improved delivery network. The company has a strong commitment to the success of the merchants and restaurants that use its technology to reach customers and delivery partners. They are expected to continue innovating and bringing new products and services for customers, delivery partners and merchants across the U.S.
New pricing structure
There is little doubt that food delivery has become the main cash cow business for Uber, which is where its Postmates acquisition is also giving it a financial boost. Recently, Postmates and Uber Eats announced a new tiered pricing, with 15%, 25% and 30% fee plans. Uber Eats had started testing this new fee structure in late 2020 based on feedback from partner restaurants. Its latest pricing structure is a deviation from the single marketplace fee used to charge partner restaurants. Such pricing structures also seem to be beneficial to restaurants complaining of the high commission fees averaging 30%. The earlier fee structure included costs of onboarding new delivery couriers, equipping couriers, paying couriers, marketing and technology as well as customer services for partner restaurants. Criticism of this high commission had become more intense during the pandemic when delivery became an important lifeline for a number of restaurants, which is why the company is looking to offer more flexibility today.
Uber has adjusted its merchant contracts by eliminating the requirements for pricing comparison between in-restaurant dining and delivery. Uber Eats’ Lite fee plan with a commission of 15% is designed for restaurants interested in low-cost delivery fulfillment. The 15% pricing tier includes higher delivery fees for diners but doesn’t include Uber Pass benefits. Moreover, restaurants choosing this plan must pay out of pocket to run advertisements and promotions and will only appear in the Uber Eats app when customers search for their brand directly. The 25% ‘Plus’ and 30% ‘Premium’ plans include increased visibility in the Uber Eats app, Uber Pass benefit and reduced customer delivery fees. While Plus members have to pay for advertisements and promotions, Uber Eats will match Premium members’ advertisement spend up to $100 per month. Additionally, the Premium plan places restaurants higher in the Uber Eats application home screen. This move is bound to help the company onboard a larger base of restaurants and optimize revenues.
Final thoughts
As we can see in the above chart, Uber Technologies has had a rather volatile trajectory over the past year. The company’s valuation has improved slightly over the past couple of months and it is currently trading at an enterprise-value-to-revenue multiple of 7.63 and a price-book ratio of 6.22. The company still has a long way to go in terms of reaching profitability, particularly in its ridesharing business, which is a major cash guzzler even today. The company also faces strong regulatory risks with respect to the nature of contracts and compensation it provides to its gig workers.
To sum up, I believe that while Uber definitely has an interesting story, the stock is more of a watchlist candidate today and does not deserve an immediate place in your portfolio.
