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Uber Stock Is Settling Down, But That Doesn’t Make it a Buy

Uber stock could be a winner someday, but it faces a lot of hurdles

Uber Technologies (NYSE:UBER) recently went public in what was once of the most ballyhooed initial public offerings in recent memory. Immediately following the IPO, Uber stock — emulating the shares of rival ride-hailing company Lyft, (NASDAQ:LYFT) after its April IPO — tumbled.

It's a Dicey Proposition, but Uber Stock Could Be the Next Facebook
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The struggles of Uber stock in the wake of the Uber IPO gave increased credibility to bears who speculated prior to the recent round of the so-called unicorn IPOs that investors were losing patience for cash-burning companies that sacrifice profitability in the name of growth.

Uber stock already has dubious distinctions associated with it, not the least of which is that, compared to prior tech IPOs, Uber was old before it went public and losing more money. Investors are now demanding profitability, or at least a path to it, rather than being enamored by companies that occupy interesting niches or have unique technology.

“Eighty-four percent of companies looking to IPO today have no profits, up from 33% just a decade ago,” according to State Street Research. “While their performance on the date of the IPO is similar to profitable peers, in the next three years, unprofitable companies underperformed the market by 9.7% while companies that turned a profit prior to their listing outperformed the market by 7.9%.”

Steady For Now, But That’s Not an Endorsement

To its credit, Uber stock has shaken out of its post-IPO doldrums, sort of. On Friday,  Uber stock price closed at $41.51, slightly below the Uber IPO price of $42. Susquehanna Financial Group analyst Shyam Patil recently initiated coverage of Uber stock with a tepid “Neutral” rating and a price target of $42.

While Patil says that Uber stock price probably won’t rise much in the near-term, he said Uber is “a once-in-a-generation company with a massive opportunity to revolutionize transportation and logistics.” The analyst noted Uber could be profitable on an EBITDA basis in 2023 (hey, that’s only four years from now!), but added that the company’s financials are complex.

“Uber’s financial model is extremely complex with various segments, adjustments and new internet metrics,” Patil wrote, according to Barron’s. “The company has also chosen to limit disclosures on key performance indicators for the core business, making it more difficult to analyze performance. Lastly, there isn’t a great direct and relevant comparables set.”

Let’s simplify things: much of the path to profitability for both Lyft and Uber revolves around a potentially toxic cocktail of charging customers more, paying drivers less and retaining a higher percentage of revenue. In today’s social climate, gouging customers is a recipe for social-media disaster and rightfully so. Fleecing contractors (ride-share drivers are not employees) is an equally poor idea. Doing both is risky, and that is putting things delicately. But it appears that Lyft and Uber will do just that to appease Wall Street. By its own admission, Uber expects its relations with its drivers to deteriorate further.

California Conundrum

Uber’s actions could easily make drivers unhappy and cause many of them to quit. Take the plight of drivers in California. Due to an arcane tax system and use of seasonal blends of gasoline, California is home to some of the highest gas prices in the country, but Uber has been unresponsive to that trend. What do airlines do when fuel prices rise? They pass the costs onto passengers, but Uber has not done that in California, sending a message to drivers that they are expendable.

In some California markets, Uber’s pricing structure leaves something to be desired, and it appears analysts are not factoring this into their ratings and their price forecasts for Uber stock.

Riddle Uber stock analysts and investors this: Newport Beach, CA has a median household income of almost $120,000 and a median property value of $1.7 million. There, Uber riders pay 60 cents per mile. In nearby San Juan Capistrano, those numbers fall to a median income of $81,730 and a median property value of $635,100, but Uber charges riders in that town 87 cents per mile.

That is not a tenable pricing structure. If Uber is doing the same thing in other large markets, it is only a matter of time before riders in the communities with higher fares demand lower fares, resulting in a long road to profitability for Uber. Imagine if the company charged riders in Queens higher fares than Manhattan passengers pay. There would be an uproar, and a near-term problem for Uber stock would be created.

The Bottom Line on Uber Stock

Many experts believed Uber would perform better when co-founder and former CEO Travis Kalanick departed the company. Amid allegations of a so-called “bro culture” and harassment of female employees, it made sense for Uber to oust Kalanick.

While Kalanick was no angel, Uber may have traded one set of issues for another when it hired its current CEO, Dara Khosrowshahi. She seems unable to clearly articulate a path and timeline to profitability and, at least on the surface, does not really seem to care much about Uber’s drivers. Of course, drivers are sort of a nuisance for a ride-hailing company that is trying to make money. That’s why the company is pushing autonomous vehicles, a gambit that was, at one point, costing some $20 million per month.

Think of the times you were a passenger in a Lyft or Uber vehicle and had a nice conversation with your driver or the driver made a special accommodation for you. If autonomous comes to ride-hailing companies, the human touch will go out the window.

But since Uber and Lyft need to make money, they are not taking into consideration the loss of human capital. Time will tell if that and other initiatives pay off in the form of gains by Uber stock.

Todd Shriber does not own any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/05/uber-stock-is-settling-down-but-that-doesnt-make-it-a-buy/.

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