The stock market has certainly stabilized in recent weeks, at least compared to the March madness investors experienced. The full extent of coronavirus damage is coming to light, forcing companies such as Apple (NASDAQ: AAPL), Under Armour (NASDAQ: UAA) and more to pull guidance for the year. Other industries such as airlines are massively affected, and with Boeing’s (NYSE: BA) recent warning about major airline bankruptcies, tensions are high.
Uber (NYSE: UBER), on the other hand, does not seem all that worried. In its Q1 2020 earnings on May 7, Uber saw revenues rise 14% year-on-year, thanks in large part to its UberEats food delivery business. Net losses still managed to widen though to $2.9 billion, and the company is still a long way from profitability. What does Uber believe to be the best course of action then? To make a takeover bid for yet another unprofitable business: GrubHub (NYSE: GRUB).
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Can Uber buy GrubHub?
Well, according to reports, the two companies are at loggerheads over the price, with Uber reportedly rejecting an all-stock offer from GrubHub. Because the stock market has been acting rationally and completely in line with economic reality lately [pause for dramatic, sarcastic effect], GrubHub stock shot up 29% just on the news of failed negotiations. True, this is typical investor behavior as they try snap up shares before the deal goes through, but I like to have excuses to be sarcastic.
Uber is said to value the company at $6.25 billion, which is generous considering the company’s $4.3 billion market cap prior to the offer sending stock soaring, as well as its complete inability to turn a profit.
Disagreement over price and payment is not the biggest issue facing the merger though. Congressional representative David Cicillline said in a statement:
“Uber is a notoriously predatory company that has long denied its drivers a living wage. Its attempt to acquire Grubhub — which has a history of exploiting local restaurants through deceptive tactics and extortionate fees — marks a new low in pandemic profiteering.”
Strong words, and there is some sense to them. Antitrust regulators would have a field day if Disney (NYSE: DIS) tried to buy Netflix (NASDAQ: NFLX) — not that they could afford to — or if Amazon (NASDAQ: AMZN) tried to buy Shopify (NYSE: SHOP). So why should the biggest food-delivery company be allowed to buy one of its chief rivals?
The deal can certainly expect a review from regulators at the very least, and it appears that Congress has already placed a bullseye firmly on Uber’s back for its past indiscretions, so it may not be so easy as simply agreeing on a price.
Should Uber buy GrubHub?
I will sum up my thoughts on the deal via MyWallSt’s Head Analyst and Chief Music Picker, Rory Carron, who vented his feelings on Twitter (NYSE: TWTR):
UBER Exec: How can we diversify our losses?— Rory Carron (@rorycarron) May 12, 2020
I may be repeating myself here, but I wonder why one unprofitable company would buy another unprofitable company in the midst of an economic crisis? Well, let’s try to work out some of the reasons.
The primary benefit of the merger is clear, as GrubHub has claimed for some time now that the saturated food delivery market has slowed its growth. By combining and consolidating the food delivery space, the UberEats/GrubHub ‘juggernaut’ could leverage to boost fees for restaurants. I would agree with this logic to a point, if food delivery was showing any signs of profitability. Many investors have been waiting for the industry to kick off, but it has come to a point now where we must ask ourselves: “If not now, then when?”
People need food delivery more than ever, given the closure of restaurants and being forced indoors. Yet so far, food delivery has not prospered because of this. In fact, some of the most successful restaurant stocks during this pandemic have been those who stayed clear of third-party delivery such as Dominos (NYSE: DPZ) and Chipotle (NASDAQ: CMG).
The food delivery business also has mixed reviews from the restaurant industry and customers alike. The promotional offers and ease of use have been great, but it looks like such deals and low-cost delivery prices could end up just being short-term gimmicks that eventually give way to passing rising costs onto consumers’ backs. This would be the only way for food delivery to move towards profitability.
In the end though, customers won’t care who delivers their food, as long as it’s on time and affordable. But third-party companies still need to repair their less-than-savoury reputation among the restaurant sector, and make it worth their while, to have any chance of survival.
Is Uber a good investment?
Uber itself does still have a chance to become a profitable company, despite recent showings. It has significant competition, especially from Lyft (NASDAQ: LYFT), which is also unprofitable, but it is making more money. There are several ways in which the company can begin to turn things around, and if they do, an investment now would be a bargain. You can read more about these reasons below:
Food delivery, on the other hand, I do not see as having a strong future. Perhaps that will change in time, but for now, it’s an industry I would not invest in, and not just because my orders are constantly cold by the time they arrive.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
Editor at MyWallSt
Jamie is the Content Editor here at MyWallSt. His favorite stock is Apple, which is also the first stock he ever bought. Jamie is not only a big fan of its products, but he believes that the tech giant has a whole lot more to give the world, and hasn't even scraped the surface of its potential.