Uber Stock Owners: Be Very Afraid of What Square Just Did

Last week, DoorDash, one of America’s largest food delivery companies, announced that it was buying Square’s (NYSE:SQ) food delivery business, Caviar. Incredibly, DoorDash is paying just $410 million for Caviar. This is terrible news for Uber Technologies, Inc. (NYSE:UBER) and other companies in the food delivery space.

UBER Stock: A Case of Near Term Pain, Long Term Gain
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It adds to a series of other problems Uber has been having lately. These include permit issues in London, layoffs, and a report suggesting that ride-sharing services make traffic congestion worse. There’s a lot going on with UBER stock and Uber stock price, and it’s not good news.

A Fire Sale

If you’re tempted to dismiss the importance of this situation, think again. Caviar was supposed to be a nice opportunity for Square. Analysts had modeled Caviar and Square’s food platform as a meaningful value driver in coming years. Since announcing the Caviar sale last week, SQ stock has plummeted from $81 to just $64.

That’s because Square ended up dumping Caviar for just $410 million. That’s peanuts. In fact, it was less than 2% of Square’s market cap. Industry leader GrubHub (NASDAQ:GRUB) is valued at more than $6 billion. What can we take away from this?

Square was willing to give Caviar away for next to nothing simply to stop the bleeding. Square had previously tried to sell Caviar in 2016 but couldn’t find a buyer at an agreeable price. Reportedly Square wanted to get rid of Caviar due to its excessive losses, and apparently decided it was finally time to bite the bullet and dump the property. Square didn’t report Caviar’s financials separately, so we don’t know just how bad the overall financial performance was.

Uber Stock: Public Versus Private Company Dynamics

Square’s move to unload Caviar at any price is another demonstration of an important economic theme at the moment. If you’re a private company funded with venture capital money, you can do anything you want right now. Want to buy millions of electric scooters that will end up inevitably getting thrown in dumpsters and lakes? Not a problem. Companies like Bird and Lime have gotten plenty of VC funding despite an absurd business model.

But if you’re Uber, you probably don’t want to go into electric scooters to compete. Why’s that? Because public investors actually care about profits and losses. Call them old-fashioned if you wish, but the public markets still look at business metrics other than the revenue growth rate. Square proved this by dumping a fast-growing business for barely any consideration at all.

Square showed that a business that is losing gobs of money with no signs of imminent improvement is effectively less-than-worthless. It was better to get out altogether than keep taking losses, regardless of how much revenue it brought into Square overall.

Uber stock may find that it faces similar problems in the new businesses that it has been trying to launch. When you’re competing with venture capital folks who are willing to run massive losses indefinitely, it’s hard for a company that is accountable to public shareholders to compete.

What Becomes of Uber Eats?

It’s worth asking if investors have built too much optimism into UBER stock because of its ownership position in Uber Eats. Publicly-traded industry leader GrubHub has gotten walloped. GRUB’s stock has lost half its value over the past year. Meanwhile, we saw what happened to Square stock last week as they announced the Caviar sale.

Other competition is floundering as well. Smaller rival Waitr (NASDAQ:WTRH), which focuses on delivery in smaller urban areas, has gotten smashed. The stock has lost nearly two-thirds of its value recently, and will likely lose more going forward. If Caviar is only worth $310 million, is Waitr still worth $300 million? Almost certainly not. All these falling stock prices will make Uber stock owners question their valuations for the Uber Eats part of the business going forward.

UBER Stock Verdict

UBER stock investors already had reason to be nervous. Last week, Uber announced the layoffs of 400 members of its marketing team. And Uber didn’t limit the cuts to the United States. It fired employees in places as far-flung as Colombia and Ghana. This is not a good sign at all, as Uber needs international growth to distinguish itself, particularly as long as Lyft (NASDAQ:LYFT) remains a pesky rival in the core American market.

And now Square’s efforts to dump Caviar call into question the value of Uber Eats. Square stock has long been highly-valued on the basis of future growth potential. That’s just like UBER stock. Square’s management just gave you a loud clear sign that it needs to focus on profits rather than revenue growth and the stock market reacted by furiously unloading Square’s stock.

If Uber goes down a similar path – and firing marketing employees is a troubling sign – it will greatly curtail Uber’s blue sky potential going forward. I believe UBER stock has potential for long-term investors willing to endure a few years of losses. But if the market forces the company to pivot to profitability now, it could come at the loss of huge future markets such as food delivery and effect UBER stock price.

At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2019/08/uber-stock-owners-be-very-afraid-of-what-square-just-did/.

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