Shares of Uber (NYSE:UBER) collapsed in February on concerns that the rapidly spreading coronavirus outbreak would materially impact the company’s ride-sharing operations around the world. Peak to trough, Uber stock dropped about 20% in February.
The reasoning was pretty straightforward. The more the coronavirus spreads, the more consumers in impacted areas will get concerned about catching it, and the less they will opt for ride-sharing services. At the same time, the more the virus spreads, the fewer consumers will travel, and the less traffic ride-sharing services will see going to and from airports.
But, Uber stock has rallied more than 6% in March as data has surfaced which rejects this bearish idea.
Executives from both Uber and Lyft (NASDAQ:LYFT) have come out and said that ride-sharing demand trends remain strong, the coronavirus impact on business remains small, and that each company is on track to hit their forward revenue and profit targets.
In other words, the coronavirus fears that caused Uber stock to drop 20% in February, were grossly overstated.
Now, the stock is in rebound mode. It will stay in rebound mode because: 1) coronavirus issues will continue to fade, and 2) the core fundamentals underlying the business will continue to improve.
Net-net, I say ignore the coronavirus noise in Uber stock, and buy the dip. This stock could see prices closer to $50 by the end of the year.
Coronavirus Fears Will Fade
The coronavirus is a big, scary, and volatile thing. But, it’s still just an epidemic. Like all other epidemics before it, it will pass, and relatively soon.
Just look at the data. Exact start dates of the outbreak are tough to peg, but most experts say the coronavirus outbreak started in China sometime in December. Less than three months later, the virus is already dying down in China. That is, the spread has almost entirely stopped, with the number of new cases dropping close to zero, the number of active cases dropping rapidly, and the number of recovered cases rising. As a result, factories are coming back online, and life in China is returning to normal.
In other words, in less than three months, China leveraged strict quarantining to “beat” the coronavirus crisis… without the help of warmer weather or a potential vaccine.
Fortunately, governments across the globe have been just as fast as China in responding to the outbreak with strict quarantining. Those governments will also be assisted by warmer weather in March and April. There’s also hope for a treatment, soon. Big picture, then, the rest of the world should be able to “beat” the coronavirus crisis within the next few months.
For Uber, that’s great news. It means that any adverse impacts of this virus — namely, less high-margin airport traffic — will be short-lived. Over the next few months, coronavirus fears will fade, and so will the damage that they inflicted on Uber stock.
The Fundamentals Will Improve
More important than the coronavirus, improving profit trends should drive Uber stock way higher in 2020.
That is, Uber has never had any trouble with top-line growth. Mega-tailwinds in the global ride-sharing industry and the company’s enormous ride liquidity network have sustained huge bookings growth for the company ever since inception.
But, Uber has had problems with profitability. Those problems will ease significantly in 2020.
For the first time in several years, the North America ride-sharing market is rationalizing. Both Uber and Lyft have stopped running aggressive driver and rider promotions against one another, as both companies are trying to improve profitability. This has resulted in materially higher take rates for Uber. The company’s adjusted net revenue take rate, which dropped as low as 18.2% in the second quarter of 2019, has bounced back to 20%-plus over the past two quarters, and is expected to head north of 21% in 2020.
Even further, both Uber and Lyft are cutting back on their “spend-at-all-costs” agendas. Both companies are now reducing headcounts and slimming the expense model. As such, Uber’s expense growth rates have moderated significantly over the past few quarters, profit margins have improved, and net losses have narrowed.
Both of those dynamics are expected to continue in 2020. Uber will reduce promotional activity and cut expenses. Take rates and profit margins will continue to improve. Net losses will narrow.
Amid these favorable profit trend improvements, Uber stock will rally, likely to new highs.
Bottom Line on Uber Stock
The coronavirus crisis has created a golden buying opportunity in Uber stock. Any and all impacts from the coronavirus outbreak will be short-lived. Once they phase out, this stock will fly to new highs in the back-half of 2020 on dramatically improving profit trends.
As such, I don’t think the investment thesis here is that complicated. Forget the coronavirus noise. Buy the dip. Let profit improvements push the stock significantly higher. Take profits after the stock pushes back towards $50.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
