Why the Postmates Deal Is Good for Uber Stock

After losing a bidding war for GrubHub (NYSE:GRUB) to Just Eat Takeaway, ride-sharing and food delivery giant Uber (NYSE:UBER) agreed to acquire peer online food delivery service Postmates for $2.6 billion in July. This is great news for Uber stock.

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Because Uber is all about unit economics. This deal lays the groundwork for the company’s food delivery unit economics to follow in the footsteps of its ride-sharing unit economics and significantly improve over the next few years.

As those unit economics improve, Uber stock will push higher.

Here’s a deeper look.

Unit Economics Will Drive Uber Stock

When it comes to Uber stock, it’s all about the unit economics.

The company’s top-line drivers are undeniable. Ride-sharing is increasingly becoming ubiquitous, while consumers have fallen in love with the convenience of on-demand delivery platforms. Both of these businesses will continue to grow revenues at a steady, double-digit pace over the next several years.

Very few on Wall Street disagree with this premise. For the next decade, the consensus Wall Street estimates on Uber call for consistent revenue growth of at least 10%.

But, despite these strong top-line drivers, Uber’s businesses have poor unit economics. That is, it costs a lot of money to incentivize humans to drive their own cars to deliver passengers and food. You have to cover the cost of gas, and then add in some profit for the drivers, leaving very little room for Uber to take profits and cover all of its own expenses.

Ultimately, the trajectory of these unit economics drive the trajectory of Uber’s profits.

Consequently, when those unit economics deteriorate, Uber stock drops. When those unit economics improve, Uber stock rallies.

Improving Ride-Sharing Unit Economics

In Uber’s ride-sharing business, the unit economics have been steadily improving over the past few months, thanks to market rationalization on the back of industry consolidation.

That is, the North American ride-sharing market has essentially shrunk down into two notable players: Uber and Lyft (NASDAQ:LYFT). For years, those two players aggressively ran promotions in order to undercut one another and gain market share, ultimately resulting in poor unit economics.

But such promotional behavior eased over the past few months as Wall Street has exerted pressure on both companies to stop the cut-throat competitive games and instead work towards profitability.

Because there are only two legitimate players in the market, you really only need Uber and Lyft, and not a dozen companies, to buy into this strategy in order for the market’s unit economics to dramatically improve.

Lyft stops running so many promotions. Uber does the same. Unit costs for both players go down, without driver churn for either business since there is no formidable third-party app to migrate to. Unit economics improve. Both stocks rally.

It should be no surprise, then, that both Uber stock and Lyft stock are up big over the past few months.

Postmates Deal Helps Uber Eats’ Unit Economics

Uber buying Postmates lays the groundwork for Uber Eats’ unit economics to improve in a similar fashion to how the ride-sharing business’ unit economics have improved over the past year.

As of late 2019, the online food delivery industry in the U.S. was highly fragmented with a ton of players, such as Uber Eats, DoorDash, GrubHub, Postmates, Caviar and Waitr (NASDAQ:WTRH).

Because there were so many players, promotional activity in the market was ruthless. That is, everyone was running promotions against one another in order to undercut prices and win market share.

Since then, the online food delivery market has significantly consolidated. DoorDash bought Caviar. GrubHub was acquired. Uber bought Postmates. Waitr will likely be acquired soon.

By the end of 2020, then, the U.S. online food delivery market will probably only have three players: DoorDash, Uber Eats and GrubHub.

In other words, the online food delivery market is following in the footsteps of the ride-sharing market. It is increasingly consolidating into an oligarchy, which will drive promotional pressures down and push unit margins higher for the remaining players.

To that end, Uber Eats will go from burning tons of cash every month today to narrowing its losses by the end of 2020, to eventually being profitable by 2021-22.

As Uber Eats’ unit economics improve dramatically, Uber stock will rally.

Bottom Line on UBER Stock

I say buy Uber stock.

The stock is still depressed from Covid-19 hysteria. That hysteria will fade over the next several months. Travel and ride-sharing trends will recover to normal levels by 2021-22. Uber stock will rebound on those recovering demand trends.

Assisting that rebound will be improving unit economics in both its ride-sharing and food delivery businesses.

Overall, then, the growth outlook for Uber stock over the next six to 12 months is quite compelling. Revenues, profits and the stock price should all head significantly higher.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/07/why-the-postmates-deal-is-good-for-uber-stock/.

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