A lot has been made of Uber (NYSE:UBER) and its financial woes. Investors have been lukewarm on Uber’s prospects since all the way back when the company launched its IPO. Uber stock came in at $45, which was near the bottom of its IPO range. Since then, Uber Technologies has reported disappointing earnings. Competition keeps on coming … and Uber’s numbers are starting to stagnate.
Not surprisingly, investors are continuing to lose confidence. Uber stock closed this week at $33.43 which is more than 25% off its IPO price.
On Aug. 8, Uber reported second-quarter revenue numbers that fell short of analysts expectations. This was despite the ride-hailing giant posting both revenue and “adjusted net revenue” numbers that were better on a year-over-year basis.
Momentum in their core ride-hailing business continues to stall. In the second quarter, Uber reported ridesharing revenue of $2.3 billion on $12.2 billion worth of ride bookings. The problem is that the revenue was up only 2.5% on a YoY basis, while bookings were also slowing down, up only 20% from the previous year — marking the slowest growth for any quarter in which Uber has broken out the data.
Uber Eats Is Eating Away at the Company’s Profits
This is not to suggest the company is unaware of the problems it faces. One way Uber is trying to address the stagnant ride-hailing business is by branching out into food delivery with Uber Eats. In the second quarter, Uber Eats revenue came in at $595 million, a 72% year-over-year increase. Order volume saw an even more impressive jump to $3.4 billion — a 91% YoY increase.
But while Eats is growing quickly, the food delivery business model is more complicated than Uber’s traditional ride-hailing business. In a typical Uber Eats application, the company charges customers an up-front free and takes a cut of the bill from the restaurant. After that, Uber still has to pay the driver/delivery person.
Having multiple people to pay presses on margins, and analysts are taking notice. In a recent report by the investment firm Cowen, analysts estimate that Uber is losing $3.36 on every order. And while they expect that loss to shrink to 46 cents per order by 2024, in the short term Uber Eats is not turning a profit.
Furthermore, Cowen gave no guidance for when they expect Uber to make a profit. “Driving better unit economics for Eats is a key issue among investors as it remains one of the primary growth engines for the company,” the analysts wrote.
So why is Uber Eats losing money?
Answering this question may be as easy as looking at the numbers. In the second quarter, Uber paid out $253 million more to their drivers than they brought in from revenue. That number was almost double what it paid out in driver incentives in the same quarter in 2018. Adding to that, Uber Eats is still in the growth stage, which means it is spending money on discounts to incentivize customers to use the service.
Imitation Is Not Flattering for Uber Stock
As I see it, the problem for Uber and Uber stock is that they have a business model that is too easy to copy. Not surprisingly, therefore, opycats are cropping out almost as quickly as you can yell “Taxi”. In addition to its well-known competitor Lyft (NASDAQ:LYFT), several more small private companies like GroundLink, Turo, HopSkipDrive, Gett, Lift Hero, Curb, Wingz and UZURV are making inroads in this space.
Marketing 101 teaches you that if you don’t have a way to set yourself apart, you become a commodity. One of many. At best, first among equals. Except Uber may not even be that right now. They have name recognition. And there might be something to be said for the fact that they are a little like Kleenex in that people can say colloquially “let’s get an Uber” when what they mean let’s use a ride-sharing company.
But that’s about where it stops. The U.S. economy is showing signs of weakness. Travel and entertainment are two of the hardest hit areas in any recession. Companies like Uber that rely on consumer confidence could find demand decreasing further from levels that are already making investors uncomfortable.
Uber has a brand name, but until they figure out a way to make that brand name stand for something more than a category, it’s hard to see Uber stock growing any time soon.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
