I expected Uber (NYSE:UBER) to decline in trading. While Uber did beat analyst estimates for earnings, its revenue and bookings disappointed. As a result, Uber stock declined 5.5% in after-hours trading Monday and continued that fall well into Tuesday.
To be sure, I’m not ready to try and time the bottom here. I wrote in August that there are significant questions about the structural profitability of Uber’s business.
Uber’s lockup period expires this week, which could lead to selling pressure. And this still is an unprofitable company valued, at the after-hours UBER stock price, at roughly $50 billion.
That said, I’d recommend investors at least take a close look at Uber’s earnings release. The company for the first time broke out its performance into segments — and the core Rides segment showed a reasonably solid performance.
I’m not sure that performance necessarily suggests UBER has to be valued at $50 billion or more, but it does suggest that the initial reaction to Uber’s headline numbers might be missing part of the story here.
Rides Profitability and Uber Stock
For the first time, Uber broke out its results among five segments:
- Rides is the core Uber transportation business;
- Eats is the UberEats business, which competes with the likes of GrubHub (NYSE:GRUB) and DoorDash;
- Freight is the company’s entrance into the freight brokerage space;
- Other Bets includes the company’s smaller early-stage offerings, including scooters, e-bikes, and transit;
- ATG and Other Technology Programs houses the company’s autonomous vehicle unit.
Uber management clearly tried to make one point clear: the core Rides business is more profitable than investors realized. Adjusted EBITDA for the segment was $631 million in the quarter. And as CEO Dara Khosrowshahi noted in the Q3 release, that figure was higher than the company’s total corporate overhead.
Put another way, Uber would have reported positive Adjusted EBITDA without its investments beyond the core business. And figures from the company’s supplemental information presentation show significantly improving margins in that core business.
Rides adjusted EBITDA cratered in the fourth quarter of last year and the first quarter of 2019. But profits have rallied sharply, and rose 52% year-over-year in the third quarter.
The performance in the core business could — and maybe should — assuage investor fears. No, Uber isn’t profitable on a consolidated basis. But the segment-level detail suggests that is only because the company isn’t choosing to be profitable.
Rather, it’s spending on other growth opportunities. And given that investors have rewarded the likes of Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) for a similar strategy, Uber management likely hopes for similar credit from the market.
“Other” Investments and Uber Stock
Meanwhile, outside of Rides, there’s some good news looking closer as well. UberEats is showing explosive growth. Bookings rose 77% year-over-year. Adjusted net revenue more than doubled. Losses have expanded, as Uber invests in the business. But UberEats clearly is taking market share.
It’s likely taking that share from GrubHub, whose shares plunged after its Q3 results showed slowing growth. GrubHub still is worth over $3 billion, and its trailing twelve-month revenue is only modestly higher than Uber’s adjusted figure over the same period. UberEats can’t on its own drive upside in UBER stock, but it might be worth $5 billion or more — a material portion of overall value.
Meanwhile, Freight drove over $200 million in revenue in the quarter as well, which suggests that it is becoming a real business. Autonomous vehicles aren’t contributing to the top line, but given that analysts are valuing Alphabet’s Waymo at over $100 billion, Uber’s ATG unit might have some value as well.
It might be too aggressive to argue that the non-Rides businesses can support a substantial part of Uber’s current market capitalization. But the segment-level detail does suggest, at least, that there are real businesses beyond the Uber that investors and consumers know so well.
The Case Against UBER Stock
That said, there are two core problems here. The first is that, again, Uber still has a market capitalization of $50 billion. Rides EBITDA less corporate overhead for the quarter was only $8 million. Uber might be profitable outside of its investments — but it’s barely so, even on an adjusted basis.
The second issue is that Adjusted EBITDA still excludes an enormous amount of stock-based compensation. Uber booked a whopping $401 million in stock-based compensation in the third quarter, well over 10% of revenue. Add that back (and it is a real cost), and the company is sharply unprofitable even excluding losses outside of Rides.
The declines can continue for some time to come, and the fundamentals remain questionable. Rival Lyft (NASDAQ:LYFT) saw no help from a strong third quarter, which shows a market-wide lack of confidence in the ride-sharing model. Lockup expiration could drive more selling this week and beyond.
That said, savvy investors should at least keep an eye on UBER — and understand that there’s more going on here than headline numbers and media coverage might suggest. That doesn’t mean Uber is worth $50 billion, but it might mean there’s more value here than a first glance would suggest.
As of this writing, Vince Martin has no positions in any securities mentioned.