The novel coronavirus has sparked a substantial market selloff, with February seeing $6 trillion in value wiped off from the global markets in just six days and March’s volatility setting off several market circuit breakers. Uber (NYSE:UBER) shares are no different and have taken substantial hits this year. But before the new coronavirus outbreak, Uber’s stock was starting to gather steam after several rough quarters.
The multinational ride-hailing company lost nearly $8.51 billion in 2019, and analysts felt that it’s highly anticipated initial public offering was an abject failure. Normally, that would lead you to wash your hands of the stock … but the company has taken steps to put UBER on the path of profitability, with management acknowledging the need for course correction.
Uber stock has a lot of potential upside, and I believe that its network gives it a substantial competitive advantage to turn the other cheek before the year is over.
Ever since its IPO in May 2019, the multinational ride-hailing company has suffered substantial losses. furthermore, its credibility took a beating under CEO Travis Kalanick. However, since his departure, CEO Dara Khosrowshahi has steadied the ship, leading to stability in the boardroom.
Khosrowshahi has focused on streamlining costs and improving the company’s image and the fourth quarter of 2019. Revenue increased 37% from a year earlier to $4.1 billion in the fourth quarter, and it was largely down to its ride-hailing business.
Further, Uber reported gross bookings for rides increased 28% over the previous year to $18.1 billion.
Uber has its sights set on becoming the “Amazon Marketplace” for transportation. As its IPO approached, the company pitched itself as a comprehensive platform for logistics and transportation. It is also quite a diversified company with segments including Rides, Eats, Freight, Other Bets and Advanced Technologies Group (ATG) and Other Technology Programs.
In 2019, Uber Eats managed to post a 73% year-over-year increase in revenue. To shore up its balance sheet, the company divested 10% of its India business to a local competitor, Zomato. The company also made a strategic decision to suspend its operations in South Korea. Investment firm Cowen believes Uber Eats will not be profitable until 2024, where it would be able to shrink the loss per order from $3.36 currently to 46 cents.
An important aspect to note is the lack of competition the company has in this division, presenting a unique opportunity for the company to expand on the sector once it clamps down on costs.
Uber Freight presents a similar opportunity. The segment witnessed a 105% increase in the revenues in the year. With an aggressive revenue sharing strategy, the division has been able to market the platform to top carrier.
Mind the ‘GAAP’
Uber is pumping millions of dollars in self-driving cars, sales and marketing. The company has spent over $1 billion on its autonomous vehicles division, however, the company’s R&D spend is not capitalized on its books and this is one of the major reasons why tech companies are forced to expense out massive R&D outlays in their profit and loss statement.
This depresses the profitability of tech companies that would otherwise have been more profitable if the capitalization criteria for R&D spend under GAAP was consistent for all industries. However, this situation presents an ideal opportunity for investors to get a hold of fundamentally undervalued stocks.
The Novel Coronavirus Impact
Analysts believe that the reduction in the Uber stock price presents a great buying opportunity. The company’s stock has fallen by a whopping 19% since its encouraging run at the market after the fourth-quarter results.
Travel and transportation stocks have taken a big hit and currently present an excellent opportunity for investors to cash in their investments. Mark Mahaney of RBC Capital Markets feels that the Uber stock offers massive upside potential this year.
The opinion is shared across the majority of the Wall Street analysts who feel positive about the long-term potential of Uber’s stock.
Keep An Eye Out for Automation
One of the interesting things that will determine where Uber shares head next will be the effect of automation on its operations.
In fiscal 2019, the company said the difference between its gross bookings and adjusted net revenue exceeded more than $50 billion, an amount that the company can add to its bottom line through autonomous cars.
Uber is investing heavily in automation in the case that McKinsey’s prediction of driverless cars on the roads within three years becomes a reality.
Bottom Line on Uber Stock
Uber is back in business with its blowout fourth-quarter financial results. There is no doubt that Uber is not out of the woods yet, and a net loss of $1.1 billion, a 24% year-over-year decline, is nothing to be proud of, but the company is still moving in the right direction.
Uber’s CEO has laid out a clear path that should lead to it becoming profitable on an EBITDA basis by the current fiscal year’s fourth quarter.
The ride-hailing business continues to grow at a sustained rate while its other segments are also picking up the pace from last year. The company is betting big on its long-term plays, and the stock market seems to be buying the hype.
With the coronavirus scare and stocks taking a tumble, investors should take the opportunity to buy the dip and take advantage of the situation.
As of this writing, Muslim Farooque did not hold a position in any of the aforementioned securities.