Analysts’ average expectations for Uber’s (NYSE:UBER) first-quarter results, scheduled to be unveiled after the market closes on May 7, look too high. The company’s medium-term and long-term outlook, however, is strong. As a result, I recommend that investors sell Uber stock ahead of the company’s results and buy it on weakness in the wake of its earnings.
Wall Street is predicting that the company will report per-share losses of 83 cents for this quarter, a major improvement from losses of $2.23 during the same period a year earlier. Furthermore, analysts are calling for Q1 revenue to come in at $3.51 billion, meaningfully above the previous year’s $3.04 billion.
For the second quarter of fiscal 2020, Wall Street expects Uber’s per-share loss to narrow even further to 71 cents. Also, the revenue estimate for the period is $2.86 billion.
However, since the economies of most cities around the world started closing in March, it’s unrealistic to expect the company’s Q1 results to rise year-over-year. And because many of these places remained closed in April, Uber’s Q2 results are likely to drop sharply YOY.
Overall, expectations seem like they are a little high for Uber heading into earnings. And with all of that in mind, let’s dive in and see why Uber stock is a buy on weakness.
Uber Eats Won’t Compensate for the Shutdowns
One reason for the overly optimistic estimates may be analysts’ bullishness on Uber Eats, the company’s food delivery service. I have no doubt that the delivery service’s revenue has jumped during the pandemic. But in Q2 of 2019, the unit’s revenue accounted for only 12% of the company’s top line. Based on that figure, if Uber Eats’ revenue doubled and the rest of the company’s sales dropped 25%, Uber’s overall revenue would fall 10%.
Additionally, given the amount of competition that Uber Eats faces, I have my doubts as to whether its revenue doubled. While Uber’s only real competition when it comes to ride-hailing is Lyft (NASDAQ:LYFT), the company has many competitors in the food delivery business. Among the most well-known companies in the sector are GrubHub (NYSE:GRUB), Postmates and DoorDash. There are also many companies, including Blue Apron (NYSE:APRN) and Freshly, that deliver ingredients for specific meals.
Furthermore, in the ride-hailing market, Uber is a much cheaper option than conventional taxis. But in the food delivery sector, many restaurants — including Domino’s (NYSE:DPZ) and a multitude of Chinese restaurants — provide delivery service for free. Although, a tip for the driver is expected in most cases. Still, though, Uber Eats is not meaningfully cheaper than those options. And during the pandemic, I’ve seen other fast food companies offer free delivery service.
Uber Will Bounce Back
In an April column, I predicted that as cities and businesses reopen, Lyft would benefit from an “abandonment of mass transit” due to fears of the coronavirus. That said, over the longer term, I expect Uber and Uber stock to be boosted by the same trend.
Moreover, I think Uber’s recent decision to require its drivers and passengers to wear masks is a very good idea that will greatly increase confidence in the ride-hailing service. And I also believe that the company will benefit from continued elevated demand for Uber Eats.
Additionally, Uber’s new delivery services are likely to generate meaningful revenue fairly soon. I also continue to believe that by the end of this year, many companies –including Uber — will start deploying autonomous vehicles to move people and products along fixed routes. And the latter business will be extremely profitable for Uber.
The Bottom Line on Uber Stock
Seemingly reflecting overly optimistic estimates for Uber Eats, analysts’ average predictions for Uber’s Q1 earnings are way too bullish. And as a result, I think the company’s Q1 results and Q2 guidance will disappoint the market — leading to a meaningful decline of the shares.
However, I remain upbeat on the company’s longer-term outlook. And consequently, I recommend that medium and long-term investors buy the shares on weakness in the wake of the results.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s leading business daily, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any of the aforementioned securities.
