Go Long on Uber Stock Despite Short-Term Headwinds

Smart management moves have UBER headed for dominance in ride-sharing and food delivery

Uber (NYSE:UBER) stock rose approximately 11% ahead of its earnings report on May 7. The rally had less to do with the ridesharing company and more to do with competitor LYFT (NASDAQ:LYFT) The company reported first-quarter revenue growth and unveiled its plans to survive the pandemic.

Go Long on Uber Stock Despite Short-Term Headwinds
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In reporting its own set of earnings, Uber revealed it lost $2.9 billion in the first quarter, translating to a GAAP loss of $1.70 per share for the period. Analysts were expecting a loss of $1.53 billion in the first quarter or 90 cents per share.

On the bright side, CEO Dara Khosrowshahi noted the core ride-hailing business was showing signs of recovery with week-over-week gains in each of the last four weeks. Revenues climbed to $3.54 billion, a 14% increase over the year-ago period, but rides were down 3%.

Despite the disappointing results, Khosrowshahi said he was confident that the company has ample liquidity to survive the effects of the novel coronavirus pandemic. Uber Eats is the company’s strong suit in these times; it grew 54% YoY, thanks to the surge in demand for food deliveries. Also, the company is looking to curtail its fixed costs and investments to narrow out its losses as much as possible.

I was quite satisfied that these are all positive developments. Uber has done what it can to make the best of a bad situation. It has been nimble-footed in carrying out some essential spring cleaning, and as the effects of the virus start to dissipate, the markets will reward these efforts.

Uber Eats is Growing at a Fantastic Pace

At its 2009 start, Uber’s primary purpose was to help people to get from point A to B, essentially creating a new platform for ridesharing. Since then; it has become a multi-billion dollar company, diversifying into several different service areas apart from its core business. One such segment is the food delivery service Uber Eats. It started as a pilot project in 2014 called UberFresh, delivering lunch and dinner from specific restaurants in California. Since then, it has expanded its restaurant selection and operates in several markets around the world. The Uber Eats division has had double-digit revenue growth for the past five years, with a 54% growth in Uber’s latest quarter results.

However, the segment has had trouble gaining traction in certain regions, particularly India and China. Rather than waste time, energy and money, the company has discontinued its operations in China and sold the Indian Uber Eats operations to Zomato earlier this year.

Interestingly, though, Uber announced it is making a play to acquire Grubhub (NYSE:GRUB), which currently has a 30% market share in the food delivery business. With the acquisition, Uber Eats would have 50% of the market share in the food delivery business, 15% bigger than its main competitor, Doordash.

Liquidity and Cost Cutting

Uber and other ride-hailing services have been hit hard by the health crisis, which is why they are looking to preserve the strength of their balance sheets. Currently, Uber’s cash equivalents and short-term investments are $9.0 billion, which the company feels is enough to cover its cash burn until there is a significant rebound in demand for its ride-hailing service.

Belt-tightening initiatives are already underway, as the company laid off 14% of its workforce in the past couple of months. Uber is also closing around 40% of its Greenlight locations.  CEO Khosrowshahi has also agreed to waive his base salary for the rest of 2020.  In addition to this, the company has exited eight global markets and has pulled back $150 million in advertising and incentives.

It’s worth noting that Uber recently landed a contract worth $810 million to provide ride-hailing services to the U.S. federal government, which will run through 2025. All of these initiatives should help shore up the company’s balance sheet, leading me to believe the company has sufficient liquidity to weather the storm.

About That Valuation

Most analysts believe that Uber is currently underpriced and that investors could grab the stock at a bargain. According to Refinitiv, the price target for Uber stock lies somewhere between $55 and $15, with the average at $39.40. Surprisingly, Refinitiv has boosted its Earnings Rating for Uber over the past week from 5 to 7. The average Earnings Rating for its Online Services industry is 6.4, while the S&P 500 index average is 6.5. Additionally, Uber stock trading at a 37% bargain to its 52-week high price at $47.08. Therefore, there is a 21% upside to the stock to its current price of $32.54 per share.

Uber’s Q1 results are underwhelming. Analysts expect a more challenging second quarter due to negative headwinds and the structure of the company’s offerings. However, the company’s swift actions in preserving its liquidity and focusing additional resources on its Uber Eats division are likely to pay dividends in the future.

Bottomline on Uber Stock

Uber’s core ride-hailing business is showing signs of recovery, and with the easing of restrictions across the world, things will only get better. The balance sheet looks strong enough to survive the crisis until the end of the year, but it needs to cut costs wherever it can to give it more breathing space.  Furthermore, the acquisition of Grubhub will give it a decisive edge over its competitors in the food delivery business.

Considering all this, it should come as no surprise that I am long on Uber stock.

As of this writing, Muslim Farooque did not hold a position in any of the securities mentioned above.

Article printed from InvestorPlace Media, https://investorplace.com/2020/05/go-long-with-uber-stock-despite-short-term-headwinds/.

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