Uber (NYSE:UBER) bought itself — and those who care about Uber stock — a lifeline in Postmates.
The deal, for $2.65 billion in Uber stock, makes Uber Eats the second-leading food delivery operator. It also gets Uber Eats into other types of delivery beyond restaurants, which are struggling with the pandemic.
But this is not an offensive play. This is a defensive play. Uber needs to generate cash flow and work for drivers. Both the company and its workforce are hurting.
Uber lost $2.9 billion during the March quarter, on revenue of $3.5 billion. The June quarter looks set to bring a smaller loss of 78 cents per share, but on much smaller revenue of $2.27 billion.
When Uber went public in May 2019, folks asked if it would take over the world. The question now is whether it can be saved.
Uber Stock Suffers From a Cash Bleed
The Postmates deal stems from Uber Eats’ relative success. That part of the company grew its revenues 52% year-over-year in the first quarter.
But Grubhub (NYSE:GRUB), which Uber had been trying to buy, found a lifeline with European delivery app Just Eat Takeaway (OTCMKTS:TKAYY). DoorDash is bigger than Uber Eats and Postmates combined.
Uber CEO Dara Khosrowshahi insisted the deal means Uber will be profitable in 2021. He insists the ride-hailing business has bottomed, and the stock got a 7% bump on the deal. At its July 8 opening price of $33.21, however, it has yet to trade above its IPO price of $42.
While most analysts remain in Uber’s corner, with 27 of 30 saying buy and none saying sell, their one-year price target remains below the offering price. Some traders, however, now see the split between expectations and results providing an opportunity to short the stock. Some 28% of the company’s interest is currently short.
What About Labor?
Meanwhile, Uber still has labor troubles.
Uber and its competitors have put $110 million into Proposition 22, a November ballot initiative to exempt them from California’s Assembly Bill 5. That’s a law passed last year that would treat drivers as employees, not contractors. They’re also fighting the regulator enforcing the law, claiming it has no power over them.
Uber is telling drivers and voters that the gig economy offers flexibility, while the Postmates deal offers “stronger and more predictable earning opportunities.” Some drivers, however, see Uber trying to become a monopsonist, controlling the market for their labor. They call the Postmates deal “an embezzler buying a bank.”
Uber knows that, like the internet’s other middlemen, it has a very bad reputation. It is trying to boost driver pay by letting some set their own rates. It is trying to boost its reputation with new independent directors such as Revathi Advaithi, who runs the contract manufacturer Flex.
The Bottom Line
I don’t get the bullishness of the analysts regarding Uber stock.
Uber ended March with $9.2 billion in cash, down from $11.4 billion in December. It is continuing to lose money, and the business has shrunk. Postmates was never public so we won’t know what it brings to the party until August. Price targets remain below where it first traded last year.
Yet most still have it on their buy lists? It makes no sense.
The virus has divided the stock market into winners and losers. Investors are piling into winners, mainly cloud application stocks. They’re dumping the losers.
They got a name for the winners in the world, and Uber will have a name when it loses. Sell it now.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
