Shares of Uber (NYSE:UBER) oscillated between gains and losses on May 31 after the ride-sharing giant reported mixed first-quarter numbers that simultaneously underscored the company’s secular growth trajectory. The report also highlighted competitive and profitability concerns that have plagued UBER stock ever since the company went public.
On top of all that, Uber’s earnings report was released only hours before U.S. President Donald Trump announced new tariffs on Mexican imports (Uber continues to struggle with timing, they went public the same week Trump announced new tariffs on Chinese imports), and that naturally weighed on investor sentiment.
Net-net, UBER stock ultimately traded lower following its first-quarter print.
A Closer Look at Uber Stock
Zooming out, Uber’s first quarter report was good enough to underscore and emphasize the company’s favorable big-picture fundamentals. Further, management addressed ostensible weakness in margins and take rates on the call, and explained that those weaknesses will improve going forward.
Putting that all together, Uber’s first quarter print wasn’t great. But, it was good enough. It underscored the long term growth trajectory, implied that today’s weaknesses won’t last, and ultimately paved a path for UBER stock to headway higher throughout the rest of the year.
As such, I’m doubling down on my bull thesis on UBER. Near term weakness is temporary. It will eventually be replaced by long term strength, and this pivot could happen fairly soon.
Uber’s first-quarter earnings report was a mixed bag.
On one hand, you had these huge bookings and usage growth rates that underscored continued secular strength in the sharing economy, of which Uber is the king. User growth was 33%, only a hair below last quarter’s 34% user growth rate.
Gross bookings growth was 34%, also only a hair below last quarter’s 37% bookings growth rate. Rideshare bookings rose 22% (versus 25% growth last quarter). Uber Eats bookings rose 108% (versus 129% last quarter). Trips growth came in above 35%.
All in all, the growth metrics were broadly favorable. They largely say that the Uber growth narrative remains robust and is hardly slowing, despite increasing scale.
Challenges for Uber
But, there were some problems when it came to take rates and margins. Specifically, Uber’s core platform take rate plummeted in the quarter thanks to higher driver incentives, and core platform adjusted net revenue growth was just 10%.
A year ago, that number was near 80%. Further, core platform contribution margin dropped to -4.5%, versus nearly 18% in the year-ago quarter, mostly due to increased sales and marketing spend.
More driver incentives and higher marketing spend? That screams competitive pressure. Indeed, what’s happening under the hood here is that Lyft (NASDAQ:LYFT) continues to make inroads against Uber, and Uber is being forced to spend more on keeping drivers and attracting riders in order to maintain market leadership.
All in all, Uber’s first quarter print was a mixed bag. There was something for the bulls in the form of big platform growth metrics. There was also something for the bears, falling take rates and margins.
Although Uber’s first quarter report was a mixed bag, the second, third, and fourth quarter prints will likely be much better. As those favorable reports come in throughout the rest of the year, UBER should rally from today’s depressed base.
The Bottom Line on Uber Stock
As mentioned earlier, there were two things wrong with Uber’s first-quarter earnings report. Take rates got whacked, and contribution margins dropped into negative territory. Management said on the call that both of those things should improve as the year progresses.
On the take rates front, management expects the ride-sharing market to become more rational and less promotional in the second quarter of 2019 and throughout the year, because they are seeing “signs of competition becoming more focused on brand and product versus incentives.”
That will lead to Uber easing up on driver incentives, and will naturally push the adjusted net revenue take rate higher from Q1’s depressed base. Further, management also said that they would ease on marketing spend in the coming quarters, as a result of their expectation for the market to become more rational.
Naturally, then, take rates and margins will improve throughout the course of 2019. As they do, assuming the platform growth metrics remain robust, then the Uber narrative will become increasingly positive as the year progresses. This will boost investor sentiment and ultimately push UBER stock higher.
Uber is a long term growth company going through some near term growing pains. The severity of those growing pains will ease over the next several quarters, while growth will remain robust. As this dynamic plays out, UBER stock will head higher.
As of this writing, Luke Lango was long UBER and LYFT.
