Uber (NYSE:UBER) CEO Dara Khosrowshahi flashed the cash yesterday and investors lapped it up. The ride-hailing company saw its stock jump a whopping 38% as it announced it had $10 billion in cash reserves with which to weather the coronavirus-induced storm over an analyst call yesterday.
It doesn’t take an economist to figure out that ride-sharing is going to be drastically affected by the pandemic as people remain at home. Both Uber and it’s main competitor Lyft (NASDAQ:LYFT) have seen their stock prices halved in the wider market sell-off, but the news that Uber has a safety net of 10 zeros gave the business a much needed boost. Khosrowshahi went on to say the words everyone tuning in to the call was thinking: “in any crisis, liquidity is key.”
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Sage advice that Boeing (NYSE:BA), Delta (NYSE:DAL) and United (NASDAQ:UAL) should have practiced, instead of spending all their hard-earned profits on buybacks and dividends. Alas, hindsight is 20-20 and I actually have an opportunity to write about stocks in the green, so that’s the last you’ll hear about the panhandling airline industry from me today.
On the call, Khosrowshahi said that, in a worst-case scenario in which the ride-hailing industry fell by 80%, Uber would still have $4 billion in cash at year’s end. An analyst from KeyBanc Capital Markets indicated that this drop off in demand would cull the weaker players from the herd and only strengthen Uber’s market share. Every cloud I guess.
What about Uber Eats?
As much as Uber’s ride-hailing business has seen a drop in demand, its food delivery service has seen a jump. In the same call, the Uber CEO stated: “in the United States, our F&B sales team is now closing two-and-half times the number of new restaurants we normally do per day.” While an increase in demand is always a plus, whether this uptick will make an impact on the company’s balance sheet is another question. In a gesture of goodwill, Uber is waiving delivery fees for independent restaurants across the U.S. and Canada.
On a grander scale, growth in its food-delivery sector won’t get investors out of their seats anytime soon. The industry is a loss-making, highly competitive one, with customers showing no real brand loyalty to any one business. Uber competes with Grubhub (NYSE:GRUB) and soon-to-be public DoorDash for market share domestically, while Amazon (NASDAQ:AMZN) backed Deliveroo and JustEat share the international markets amongst a litany of smaller, local competitors.
In an ideal world, Uber would own both ends of the social spectrum. If you’re going out, you hail a ride with them, and if you’re staying in, they bring you your food. This is far from an ideal world we’re living in, however, and while it is promising to see Eats growing, I feel many investors would not shed a tear if the company were to spin off its food-delivery service. It would also mean that it could pour those resources into its autonomous vehicle efforts, where it is looking to carve a slice of the nascent industry populated by heavyweights such as Google’s (NASDAQ:GOOG) Waymo, Tesla (NASDAQ:TSLA), and General Motors (NYSE:GM). However, that is a conversation for another day.
What’s Next for Uber?
The demand shock which has swept across all industries will postpone Uber’s profitability plans, which it had targeted for the end of 2020 under it’s non-GAAP, EBITDA, don’t-include-any-of-our-expenses, don’t-forget-to-carry-the-two accounting practices that have somehow passed as acceptable behavior on Wall Street these days. While it will remain loss-making for the foreseeable future, we may start to see it claw back some of the $50 billion it has lost in valuation since it went public last year, as it proves it has the wallet to hang around for a very long time.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Amazon, Google, and Tesla. Read our full disclosure policy here.
Financial Analyst at MyWallSt
Michael's first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.