Now that we’re months into the spread of the novel coronavirus, traders have to adjust to waves of bad news. Sometimes the news is so unsettling that it’s best just to avoid certain investments. And the developments surrounding Uber (NYSE:UBER) make the stock a toxic asset, at least for now.
That’s not to say Uber is a bad company by any means. Uber still remains the ride-sharing leader and the coronavirus probably won’t change that fact. Plus, practically every company on the planet has suffered from some bad news.
Yet, in Uber’s case, the odds are stacked heavily against the company and, in turn, the stockholders. As you’ll see, recent developments don’t bode well for the company. It’s understandable that value-oriented traders want to buy shares of good companies at a low price. However, the current circumstances suggest that Uber stock could easily go lower.
A Good Reaction to Unfortunate News
No matter how many times we see it happen, it’s always amazing to see traders bid up a stock price despite bad news. There are plenty of examples of the price of a stock going up sharply, even when unfortunate events are happening to the company.
Why does this happen? Oftentimes it’s simply because the investing community and/or market analysts had very dire expectations surrounding the company. They were expecting the absolute worst. Then they heard that the news was bad, but not as bad as they expected it to be. So, a relief rally commences.
Successful investors generally don’t buy shares of companies because they’re doing poorly, but not as badly as expected. Warren Buffett, Charlie Munger and other legendary investors avoid companies that aren’t doing well fundamentally. After all, there’s more to value investing than just buying a stock at a low price.
Given the recent developments associated with Uber, we can easily see how price and value have been divorced. Specifically, Uber stock traders bid the price up by more than 5% on Friday, April 17, after discovering that the company withdrew its fiscal guidance for 2020. During pre-market trading, they even managed to push the price up 8.4% at one point.
Major Challenges for Uber
Uber’s statement regarding the withdrawal of its 2020 fiscal guidance attempts to justify this action:
“Given the evolving nature of COVID-19 and the uncertainty it has caused for every industry in every part of the world, it is impossible to predict with precision the pandemic’s cumulative impact on our future financial results.”
Given the ride-sharing industry’s challenges amid the pandemic, current and prospective investors in Uber stock need clarity now, not uncertainty. Some people might view the guidance withdrawal as prudent. But with the future already so uncertain, this might be the worst possible time for Uber to withhold its fiscal outlook.
Moreover, the unfortunate developments aren’t limited to the guidance withdrawal. Uber is now projecting that due to investment impairments, the company’s net losses will increase by $1.9 billion to $2.2 billion. That’s a startling write-down, and it’s hard to justify a higher Uber stock price in light of this development.
Were analysts and the investing community expecting something much worse than this? Perhaps they were, but the magnitude of the write-down is still quite stunning. Besides, the higher post-news share price makes Uber stock even less attractive as a value proposition.
The Takeaway on Uber Stock
The Uber stock price is certainly lower than it was during its February peak. However, price is not the same as value. And when traders bid up the share price upon hearing fundamentally bad news, the value proposition became less favorable.
Therefore, while the company and the overall ride-sharing industry should recover at some point, this isn’t the ideal time to take a chance on Uber stock.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.
