DOW vs. BITCOIN: Which One Could Reach 40,000 in the Next 12 Months?

ONLINE NOW: Watch as Louis Navellier and Matt McCall reveal their #1 picks for the coming bull market for FREE.

Stay Away From Uber Stock After the Postmates Buyout

Investors are better off with Lyft than Uber

Uber (NYSE:UBER) stock and Lyft (NASDAQ:LYFT) stock have been two of the most popular names to trade on Wall Street in the past year. Both stocks, however, have performed horrendously since their overhyped 2019 initial public offerings.

2 Critical Reasons Uber Stock Will Weather the Pandemic
Source: NYCStock / Shutterstock.com

Uber stock got a big bump on Monday after the company reportedly closed a deal to acquire Postmates for $2.65 billion of stock. Postmates is apparently Uber’s consolation prize after it failed to land Grubhub (NYSE:GRUB) last month.

As I said when Uber made an offer for Grubhub, the ride-sharing business is difficult and unpredictable enough on its own. And food delivery is a complicated and very costly business. Ride-sharing investors should keep things simple: forget about Uber and stick to the pure-play option,  Lyft stock.

Postmates And Uber Stock

First of all, I am not arguing that the Postmates deal doesn’t make sense for Uber. If the company is going after food delivery, it needs to aggressively do so. CFRA analyst Angelo Zino estimates that the Postmates merger will give Uber Eats a roughly 30% share of the U.S. meal delivery market. While that is a sizable amount, it is still well behind DoorDash’s 45% share.

The pandemic has also been a huge tailwind for food-delivery growth. In the first quarter, the bookings of Uber’s Rides business were down 5%, but the bookings of its Eats unit were up 54%.

“While Eats had been seen as a headwind, the pandemic has illustrated the promise of that business (23% of Q1 sales with GAAP segment sales up 53%) and we see a line of sight towards adjusted profitability,” Zino says.

“While this deal would not see the same type of benefits as Grubhub, we believe it could still support better take… rates.”

But the analysts hyping  Uber Eats’ growth numbers tend to downplay just how much cash the business is hemorrhaging. Uber Eats generated a $313 million net loss in the first quarter. Its losses could be even worse in the second quarter after Uber waived restaurant fees, cut prices and offered promotions due to Covid-19.

Is a Pricing War Ahead?

Now that Uber has landed its consolation prize of Postmates, the U.S. food delivery market is primed for a major pricing war. The high-growth market is split between market leader Door Dash, Uber and Grubhub, which together account for about 98% of the market.

With overall penetration still extremely low, investors can expect these three companies to fight tooth and nail for customers. And of course, one of the best ways to win over customers from the competition is by cutting prices.

Uber may soon be forced to choose between losing food delivery customers or ramping up its losses by competing in a pricing war.

While Uber is throwing huge sums of money and stock at food delivery, Lyft is eating away at Uber’s ride-sharing market share. It’s also competing with Uber to be the first to reach profitability. Going deeper into the money-losing business of food delivery is not going to help Uber’s chances in that department either.

Morningstar analyst Ali Mogharabi says Lyft has been gaining ground on Uber.

“The firm has successfully gained market share going head to head against the market leader, Uber, in pursuing riders in an addressable market (including taxis, ride-sharing, bikes, and scooters) that we value at over $550 billion (based on gross revenue) by 2024,” Mogharabi says.

Uber’s first-mover advantage has created an uphill battle for Lyft. But Uber’s food-delivery distraction may help Lyft close the ride-sharing gap.

“We like Lyft’s relatively narrower focus on consumer transportation but still note that Uber has an edge on Lyft in terms of an earlier start, higher market share, and a stronger network effect around its services,” Mogharabi says.

Lyft Versus Uber

As I said last month, the owners of Lyft stock are happily watching the food-delivery drama from the sidelines. Growing the ride-sharing business and developing a viable, profitable business model is difficult enough. Uber is trying to juggle food delivery at the same time. That may end up paying off in the long-term. In the meantime, food delivery will continue to generate huge losses for Uber in the foreseeable future.

Lyft doesn’t need food delivery. Morningstar estimates that ridesharing alone will generate total revenue of more than $500 billion within four years. Instead of expanding into other money-losing areas, Lyft is focusing on gaining market share on Uber. It’s also investing in autonomous vehicle (AV) technology by teaming up with Alphabet (NASDAQ:GOOGL) subsidiary Waymo. In the long-term, AV technology could be the key to making ridesharing profitable.

When it comes to investing, I’ve always been an advocate of keeping things simple. Lyft is laser-focused on ridesharing. I believe that strategy will pay off for its investors.

Lyft is now the one, true ride-sharing pure play for investors who want to avoid the risk posed by the food-delivery business.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long GOOGL.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/stay-away-from-uber-stock-after-the-postmates-buyout/.

©2020 InvestorPlace Media, LLC