Ride-sharing stocks have become even more out of favor after Uber Technologies (NYSE:UBER) reported its third-quarter earnings on Nov. 4.
Uber stock has traded near its 52-week lows in recent days. Its Q3 EPS beat analysts’ average estimate, but its revenue missed their average outlook.
UBER. however, did have some strong metrics. Its monthly active customer count jumped 26% year-over-year to 103 million. But even though its revenue surged 30% YoY to $3.8 billion, the company lost $1.2 billion in Q3. UBER also reported $401 million of stock-based compensation.
It ended the quarter with $12.7 billion of cash, up $900 million QoQ. Uber raised its cash levels by selling $1.2 billion of debt in Q2.
Profitability on an Adjusted Basis
Uber reported that the EBITDA of its ride-sharing operations, excluding some items, came in at $631 million. That was enough to cover its general and administrative costs and its Platform R&D costs of $623 million. Despite the strong increase, investors should take company-promoted metrics with a grain of salt. Moreover, the company’s expenses continue to grow at a faster pace than its revenue.
Fortunately for investors, UBER showed a willingness to exit unprofitable markets. It exited the South Korean market, citing a low return on investment. Conversely, the volumes of its freight business more than doubled, and the unit demonstrated strength in the U.S. market. Although the division lost $81 million, in Q3 as UBER signs more long-term shipping contracts and adoption of its self-serve platform grows, the segment should achieve profitability.
The Outlook of Uber Stock
UBER expects its gross bookings to grow 33%-35% YoY, up from its previous guidance of 31%-35%. In Q4, its net revenue is expected to grow at an accelerated pace of close to 40%. Seasonal strength may explain the expected acceleration.
The bookings of the company’s food delivery service surged rose 77% YoY, but plenty of competition could emerge on that front.
As long as UBER remains number one or number two in ride-sharing and food delivery, it may achieve profitability.
The company believes it can be the top player in most of the markets it operates in. Uber also thinks it will be profitable by FY21. On the ride-sharing side of the business, its markets are improving. And as UBER finds constructive ways to cut costs and grow its revenue, the outlook of its business model will improve.
The Risks Facing Uber Stock
The ride-sharing business faces plenty of competition. So as pressure on Uber’s pricing increases, the company needs to clarify how it intends to further increase its operating margins.
Despite its uncertainties, Uber’s strengths in certain markets cannot be ignored. For example, in New York consumers easily absorb significant price increases. Even though its price hikes there slowed down demand growth, demand for ride-sharing remained strong. If Uber raises prices in its other strong markets, its losses will shrink.
Valuation and the Bottom Line on Uber Stock
Uber stock could potentially rise tremendously if the company sustains a 10-year compund annual growth rate of 14.9%. Based on a ten-year cash flow model, the fair value of Uber stock is around $35 or higher. But investors may not be willing to buy Uber stock at its current, high valuation. After Uber provided modest guidance, fading sentiment towards UBER will hurt Uber stock price.
Keep Uber stock on your radar, but don’t buy it yet.
As of this writing, the author did not hold a position in any of the aforementioned securities.