From a purely technical perspective, traders might think that Uber (NYSE:UBER) is doing just fine. This outlook is understandable since the price of Uber stock has recovered nicely from March’s low point.
The problem here is that price action doesn’t necessarily tell the full story. You’ll need to step away from the chart and look under the hood to see if the engine is running properly at Uber.
And indeed, there are developments brewing that might dissuade cautious investors from taking a long position in Uber stock now. The company’s toughest times, in fact, might be just around the corner.
Job Losses Underscore Problems
Sometimes analysts and social-media commentators will consider job cuts a good thing. That might sound sadistic, but there’s actually a sound basis for that line of reasoning.
Hardly anyone actually likes layoffs and firings, but they can prove to be effective cost-cutting measures during financially challenging times. And few times are tougher than what businesses are experiencing today with the spread of the novel coronavirus.
In the case of Uber, however, job cutting seems to have taken a turn for the bizarre. The company let 7,000 employees go in just the past month, and as perhaps some form of a consolation prize, Uber listed those unfortunate individuals on its “Talent Directory.”
This so-called directory reads almost like the obituaries section of a newspaper. In it, “[w]e wouldn’t be where we are without them” is Uber’s touching tribute to the unceremoniously axed former employees.
In any case, traders evidently took no issue with Uber’s recently mega-scale layoffs. They went ahead and bid the price up to approximate pre-pandemic levels.
Are they ignoring a big red flag that’s waving in their faces? A business typically doesn’t lay off large swaths of its workforce if it’s doing well. The closure or consolidation of 45 Uber offices worldwide further suggests a company in distress, or at least in an uncomfortable transition.
A Battle That Can’t Be Won
Traders reacted positively not only to the round of layoffs, but also to rumors that Uber wants to acquire GrubHub (NYSE:GRUB). Currently GrubHub is a primary rival of Uber in the food-delivery niche. Therefore, Uber’s already considerable market share would grow if U.S. regulators allow the acquisition.
But that’s where there’s a big, powerful roadblock. Not every regulator is going to support the acquisition because the much bigger Uber would have nearly full control over the U.S. food-delivery marketplace.
And so, four U.S. senators have expressed strong concerns over the potential for anti-competitive practices. Specifically, Senators Patrick Leahy, Amy Klobuchar, Cory Booker and Richard Blumenthal sent an emphatic cautionary letter to the Federal Trade Commission.
In it, the senators warned that a Uber-GrubHub merger would “raise serious competition issues in many markets around the country.” They also suggested that the FTC and the Justice Department should “closely monitor this potential transaction and to initiate an investigation if the parties reach an agreement to merge.”
In justifying their position on the issue, the four senators raised concerns that the merger could “threaten competition and consumer welfare.” This, in turn, could lead to higher prices and reduced quality as well as fewer choices for consumers.
It could even stifle innovation, the senators suggested. Could they be right about all of these potentially dire outcomes? Maybe yes, or maybe no. Either way, the senators are waging war from a position of power, and that could spell trouble for Uber.
Thus, Uber’s choices are either to allow GrubHub to retain its share of the food-delivery market, or to fight a battle against the aforementioned regulators. It’s a real Catch-22 situation for the company and, by extension, for its shareholders.
The Takeaway on Uber Stock
By pushing the price of Uber stock to pre-pandemic levels, traders are effectively discounting potential problems on the horizon. Rather than take a position in a company whose problems might persist for a while, it’s probably better to stay on the sidelines watch the battles from afar.
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, David Moadel did not hold a position in any of the aforementioned securities.