By Levi Sumagaysay
The COVID-19 pandemic disrupted Uber Technologies Inc.’s core ride-hailing business, with travel coming to a standstill and would-be riders sheltering in place, leading to thousands of layoffs, but there is a possible bright side for Uber: food delivery.
Uber /zigman2/quotes/211348248/composite UBER +3.33% operates Uber Eats and recently agreed to buy Postmates, a rival delivery app. While ride-hailing flails, food delivery is expected to show huge gains when Uber reports second-quarter earnings Thursday.
“If this upward trend of case activity continues and we’re looking at a more protracted period of disruption as a result, it’s going to be a tale of two businesses when you think of the impact to Uber,” said Tom White, an analyst with D.A. Davidson & Co., in an interview.
White said that while ride-hailing is slow at the moment, at least the food-delivery business is “maintaining some sort of engagement with drivers and riders.” Customers use Uber Eats to order delivery from restaurants, many of which aren’t allowed to accommodate diners, especially indoors.
Uber’s delivery business will be bolstered by its $2.65 billion acquisition of Postmates, an app from which customers can also request delivery of groceries, alcohol and other items. The deal is expected to close in the first quarter of 2021 so won’t affect earnings immediately, but could prove to be key as the pandemic continues with no end in sight.
During a call in early July to discuss the acquisition, Uber CEO Dara Khosrowshahi — who said the company’s Eats business was “offsetting headwinds” in its rides business — talked up gaining market share and cost savings.
“Anyplace you want to go, anything you want to deliver to your home, Uber is going to be there with you,” he said.
Uber Eats and Postmates together comprise a 37% market share in food delivery in the U.S., according to Edison Trends. DoorDash retains the biggest industry share at 45%.
Because of Postmates’ size, White said “I’m not holding my breath” that buying it will make a significant impact on Uber’s bottom line. But other analysts agree with Khosrowshahi and point to the possibility that the purchase will pay off eventually.
“The acquisition will allow Uber to expand into other verticals, bringing it closer to its vision of becoming the platform of choice when people travel, and also the platform of choice when they want anything delivered,” Deutsche Bank analysts said in a note to clients when the all-stock deal was announced.
One issue that could weigh on Uber Eats in the second quarter and moving forward: Some cities and counties have instituted caps on commissions that delivery apps can charge restaurants, which are already hurting from decreased business, during the coronavirus crisis.
In the Bay Area — home to Uber and Postmates — cities that have capped delivery commissions include San Francisco, Oakland, Berkeley and Fremont. Other big cities such as Los Angeles and New York have done the same. The caps range from 15% to 20%.
As for Uber’s rides business, investors on Thursday will find out just how drastically bookings were hit. Gross bookings of rides in the first quarter had been up in January and February but fell 39% in March compared with the same period last year as the shelters-in-place began. Trips had started picking back up in April as businesses started reopening, Khosrowshahi said during the company’s first-quarter earnings call. Analysts expect gross bookings of rides to have fallen 66% in the second quarter from the first quarter.
But as U.S. COVID-19 cases continue to rise, office workers keep working from home and some infectious disease experts call for another lockdown, the outlook for U.S. ride-hailing — which RBC Capital Markets analysts had identified as an important risk to its rating of Uber’s stock — is uncertain. Analysts and investors will also be paying attention to how rides are doing in countries where business has started to return to pre-pandemic levels.
Aside from the pandemic, Uber faces myriad regulatory issues. Most notably in the United States, the company is battling a new California law over worker classification of its drivers. The state is suing the company and its main rival Lyft Inc. /zigman2/quotes/208999293/composite LYFT +2.84% over their non-compliance with Assembly Bill 5, which calls for them to classify their drivers as employees instead of independent contractors. Uber and Lyft, along with DoorDash and others, have committed $110 million toward Proposition 22, which will be on the California ballot in November and would exempt gig-economy companies from AB 5. The companies are offering some concessions that would provide drivers with some benefits but fall short of classifying them as employees.
Earnings: Analysts surveyed by FactSet on average expect Uber to post a loss of 81 cents a share, or nearly $1.4 billion, compared with the company’s whopping $5.2 billion loss in the same period last year. They expect an adjusted loss of 66 cents a share.
Revenue: Analysts on average expect revenue of $2.1 billion, compared with $3.16 billion of revenue in the year-ago quarter.
Stock movement: Uber shares are up 4.9% this year through Monday’s trading session, while the S&P 500 index /zigman2/quotes/210599714/realtime SPX +1.60% has gained 2%.
Money-losing Uber had promised to become profitable by the end of the year, but Khosrowshahi said during the last earnings call that it could take a few more quarters to reach that goal due to the pandemic. Some analysts think it could take longer.
“We continue to expect Uber to achieve EBITDA break-even during 2021, but do not expect material full-year EBITDA profitability until 2022,” RBC Capital Markets said in a note to clients.
Out of 36 analysts surveyed by FactSet, 28 have a buy rating on Uber stock, five say hold, two consider it overweight and one says sell. The average price target as of Monday was $41.32, when the stock closed at $31.19.