Uber Technologies Inc. (UBER, Financial) is a multinational ride-sharing business operating in over 900 metropolitan areas around the globe. The name is a popular story stock, but it has struggled since its Initial Public Offering due to lackluster financial statements and public controversy. Uber stock could be set for a period of hardship after expectations were not met in its latest earnings release.
A profitable company was expected
The market finally anticipated Uber would become a profitable company after management released bullish rhetoric in October. According to chief financial officer Nelson Chai, “With positive Adjusted EBITDA in July and August, we believe Uber is now tracking towards Adjusted EBITDA breakeven in Q3, well ahead of our prior guidance.” Chain added, “We expect to deliver sequential Adjusted EBITDA improvement in Q4, even as we continue to invest in our growth initiatives.”
Uber came out with still-negative earnings per share of -$1.28, which is a $0.98 miss. This earnings release could have major repercussions as the stock was already trending downwards prior to the company's bullish comments.
Unfortunately, Uber has high variable costs, which disables it from claiming sustainable earnings. Because the company has drivers who aren't set employees on its balance sheet, it's becoming increasingly difficult to predict operating costs.
Furthermore, Uber has developed a high reliance on advertising revenue via its Uber Eats app, which suggests that core revenue isn't as solid as it should be.
Valuation
Uber stock is very much overvalued, even for those bullish on the name. The stock is trading above its sector average price-sales and price-to-free-cash-flow ratios by 284.54% and 659.70%, respectively.
The company also has a negative interest coverage ratio of -9.2 along with a working capital decline of 97.37% year-over-year, which suggests that we're looking at a company in potential distress.
Momentum
Many investors have bought into short-term momentum, but the stock is still trading below its 200-day moving average. I believe the 200-day MA is a more relevant data point to look at as it better reflects the reality before the market anticipated a profitable company.
The stock's RSI is in the mid-50s now and has mostly hovered around the oversold mark (30.00) prior to the CFO's claims of a profitable company. I think this is transitory, and the metric will decrease again to its mid-year level.
Final word
Uber investors anticipated a better bottom-line earnings read in its Q-4 earnings report, which elevated the stock price above its fair value. Despite the high variable costs and poor profitability metrics, the stock is dangerously overvalued, which is a lose-lose combination.
