Investors have dumped a whole host of stocks related to the travel and transportation industries. Inherently, that makes sense. In a stay-at-home world, people simply don’t need most transportation services. That includes Uber’s (NYSE:UBER) rideshare business. Not surprisingly, investors rushed to dump Uber stock during the recent market crash, causing Uber to fall from $40 to a low of $14 in just a few weeks.
Now, however, Uber is back on the upswing. Its shares have nearly doubled off their recent lows. Even a seemingly negative headline, like Uber suspending its full-year guidance, hasn’t caused the stock to retreat. And there’s good reason for that; Uber’s prospects are brighter than many think.
Don’t Panic About Uber’s Business Update
On Thursday, Uber gave a preliminary update on its second-quarter results. The company, not surprisingly, withdrew its full-year 2020 guidance that it had previously issued in February. Given the huge decline in traveling, that was to be expected.
The company acknowledged two further costs as well. The first is that it is assisting its drivers with their expenses to help enable them to survive the crisis. It expects that to cost around $20 million in Q1 and $60-$80 million in Q2.
We can assume that those payments will continue in Q3, but they should not be too expensive. The bigger issue is that Uber will take a writedown of about $2 billion this quarter on the loss of value in its investments in other companies.
That is going to make it look like Uber lost a great deal of money in Q2. So be prepared in advance for an ugly headline in May when Uber reports its Q2 results.
Keep in mind, however, that it will be a non-cash charge that won’t hurt the company’s operational profitability or cash position. And, when the economy picks back up, the value of those equity investments could rise as well.
Plunging Gas Prices Are Great for Uber
One underrated point is that falling gas prices will give Uber a big tailwind. But drivers pay for gas, not Uber, so how will that affect the company?
Think about the data for a second. The average taxicab in New York travels 70,000 miles per year, according to data the city collects for its medallion program. An individual driver would cover less ground, however, as taxicabs are often shared among drivers.
Still, after reading rideshare forums, I think that it’s common for full-time Uber drivers to accumulate 1,000 miles per week. So say a driver goes 50,000 miles a year in a car that gets 25 miles to the gallon.
He would buy 2,000 gallons of gas per year. According to AAA, gas prices have already fallen by an average of $1 per gallon in the U.S. over the past year. So the driver could potentially save $2,000 annually. And gas prices should continue trending lower with oil’s ongoing slump.
So Uber’s full-time drivers can now get a $2,000 per year boost without costing the company a single penny. That should help Uber retain more drivers, keeping down the costs of finding and signing up new drivers. Having more and happier drivers in the network will also improve the experience of Uber’s customers because its drivers will be more experienced and arrive faster.
Uber Will Recover Quickly
It’s easy to look at the headlines and assume Uber’s revenue will be down a huge amount for an extended period. There are certainly plenty of reasons for concern. Trips to the airport are nearly non-existent at the moment. There’s no nightlife right now. Even mundane things like commuting and going shopping have largely dried up for the time being.
As soon as the stay-at-home-orders lift, however, demand will come back. The rebound won’t be instantaneous. But people are tired of being cooped up. Folks will enjoy other diversions, such as parks, more. And with traffic way down, people can travel much more quickly with Uber now.
Meanwhile, on the delivery side, UberEats’ traffic is up sharply. Even more importantly, it appears to be taking some share from rivals such as GrubHub (NYSE:GRUB). Also, keep in mind that Lyft (NASDAQ:LYFT) is not a meaningful player in the delivery space.
Thus, many consumers are using Uber’s app during the crisis. Uber is also building goodwill among its drivers by continuing to give them steady work now, while income-earning opportunities with Lyft have slowed to a trickle.
The Verdict on Uber Stock
The business update from Uber should be reassuring. Sure, the company is going to have ugly results in 2020, especially if its non-cash charges are included.
None of that will matter in the long-term, however. Uber is building its competitive advantage, while its key rival, Lyft, is losing market share.
The crisis is also a golden opportunity for Uber’s customers to get used to choosing Uber for other applications, such as food delivery. And, in the long-haul, the fall in oil prices will pay big dividends for Uber’s drivers, strengthening its overall network. Uber will announce some messy quarterly results, but the company’s big-picture outlook remains favorable.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
