Uber Stock Will Continue Driving Investors Up the Wall

Ride-hailing giant Uber (NYSE:UBER) has had an incredibly difficult time during the pandemic. Its revenue sharply dropped amid the initial proliferation of the novel coronavirus and consequently, it was forced to sell off assets and acquire new debt to run its operations. Though its food and freight delivery segments were bright spots last year, macroeconomic headwinds will continue to challenge its business. Therefore, UBER stock remains a relatively risky investment, and it’s also overvalued based on its financial results.

2 Critical Reasons Uber Stock Will Weather the Pandemic

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UBER stock has moved sluggishly in the past year, in-line with its business performance and outlook. The stock has lost  13% of its value since the beginning of the year. I don’t expect the shares to rebound anytime soon, considering the macroeconomic hurdles that the company is facing. Therefore, it’s going to be another challenging year for Uber, and investors should wait for a better entry point before investing in its stock.

Weak Fundamentals

Uber’s ride-sharing business took a massive hit during the pandemic. Its revenue fell 43% year-over-year in 2020 to $6.08 billion. However, the impact of that decline was offset considerably by the 179% increase of its food delivery revenues, which came in at $3.9 billion.

Overall, Uber reported 2020 sales of$11.1 billion, down 14% from 2019. The trend continued during the first quarter of this year, when Uber’s revenue fell 11% year-over-year to $2.9 billion.

The company’s margins were very low last year, but that has been a major problem for the company for a long time.  Over 40% of its sales are used to pay its drivers. It classifies these payments as part of its cost of revenues.

The flaw in Uber’s business model is that as its drivers offer more rides, the money it pays its drivers increases almost as quickly as its revenues. Consequently, in  2020 and 2019, its operating margins  were consistently and significantly negative.

Perhaps an even bigger concern for Uber at this time is its free cash flows. Despite the popularity of its service, it has not yet generated positive cash flows, and it is entirely dependent on debt financing. Since it has gone public, its annual cash flows from operations were below -$2 billion in 2019 and 2020. Moreover, its problems in this area are likely to be exacerbated by the substantial labor shortage in the United States.

Macroeconomic Headwinds

The labor market is still recovering from the effects of the pandemic. The number of jobs has risen at a healthy pace, but hiring has lagged considerably in the United States. Consequently,  the private sector has had to increase workers’ wages by a significant margin.

This problem could be due to the boost to unemployment benefits provided by the federal government. This unemployment bonus increases the opportunity cost of working. Long story short, there may be little incentive for anyone to be an Uber driver  in the current economy.

Moreover, because 2022 is a Congressional election year, the company will likely run into political roadblocks and related challenges. Special interest groups will be lobbying for ridesharing workers.

They will try their best to lobby Democratic House members to introduce legislation that would recognize Uber drivers as employees. Though such legislation might not materialize, the possibility of its passing will weigh on Uber stock’s price.

The Bottom Line on Uber Stock

Uber had a turbulent 2020, and 2021 isn’t likely to be much different. Its financials are a mess, and the labor shortage will push its driver costs even higher.

Moreover, the current economic climate isn’t conducive for its business to thrive and should have a crippling impact on its free cash flows. Therefore, investors should avoid UBER stock.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines


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