Traffic Jam: Uber Seen Posting Losses In Latest Quarter As Stock Still Stuck

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Includes: BYND, LYFT, MCD, UBER
by: JJ Kinahan
Summary

Uber is set to report earnings Thursday after the close.

The company is expected to report sharp quarterly losses.

Analysts see revenue seen up sequentially, but micro issues remain.

Many parents of millennials gave their kids a lesson about the stock market: “Buy the things you know.”

Transportation company Uber (UBER) is one a lot of millennials know, and they’ve snapped up its shares enthusiastically since the company’s stock debuted in May, according to TD Ameritrade data. However, UBER — which is set to report earnings after the close of markets this Thursday — hasn’t necessarily convinced veteran market analysts that it can find a way to reach profitability.

There’s a different sort of pressure when a company goes public, and UBER is finding that out. Once you’re public, people expect you to make money.

Despite the big millennial interest, UBER’s stock hasn’t come close to matching the market performance of some other recent initial public offerings (IPOs). The stock dropped more than 7% on its opening day, and now nearly three months later, still trades well below the IPO price of $45.

Earnings come as UBER wrestles with a couple of recent challenges. First are some micro issues, as the company announced last quarter that its chief operating officer and chief marketing officer were both leaving. UBER also cut one-third of its marketing staff, or about 400 employees. That’s not usually a sign of things going swimmingly, though it might help reduce costs.

Then, even more recently, media reports surfaced that UBER was likely to get a short-term extension of its license in London, not a five-year one. A short-term license would allow UBER to keep operating there for another two years, but it isn’t necessarily a ringing endorsement of the company from one of its key markets. The license in London is temporary and expires next month.

Economic worries are also growing for the entire global economy, and that’s not good for companies like UBER. If things do slow down, people could start walking instead of logging on to UBER or competitor Lyft (LYFT).

Questions About Business Model Remain Open

UBER is expected by many analysts to remain unprofitable when it reports, but the same is true for other recent IPOs whose stocks got a lot more power out of the gate, like Beyond Meat (BYND). Why is UBER getting the cold shoulder from investors?

One thing that’s hurt both UBER and LYFT, according to a Barron’s analysis, is that once the stocks became public, investors started focusing less on strong demand for the companies’ services and more on questions about how they’d eventually grow profitable.

Two of the paths to profitability — lowering prices for consumers and cutting payments to drivers — could hurt growth by making the services less affordable and turning qualified drivers away, Barron’s said. Some analysts even question whether the business model can succeed.

Shares of UBER didn’t see any real summer recovery after a tough spring, falling 9% in July. UBER’s performance in the stock market so far is a reminder of why investing in IPOs can carry risk as they find their place in the market. Investors may want to keep a cautious outlook and remember the potential downsides of investing in IPOs. It can be difficult to calculate the value of recently private companies that have no trading history or public quarterly financial results. In the end, determining an IPO’s prospects is generally more art than science.

This won’t be UBER’s first earnings report as a public company. In late May, UBER reported that it lost just over $1 billion in Q1 of 2019 on revenue of $3.1 billion. The earnings loss was roughly in line with Wall Street’s expectations, but revenue beat third-party consensus slightly.

One of the metrics to consider watching when UBER reports Q2 results Thursday is gross bookings, which measures the total dollar value paid for its services including taxes, tolls and fees, but not tips. In Q1, gross bookings totaled $14.65 billion, up 34% from the same period a year earlier, UBER said.

In addition, UBER grew its monthly active platform consumers 33% in Q1 to 93 million.

UberEats is another big aspect of the company’s business and might bear watching in Q2. Back in Q1, UberEats saw adjusted net revenue for the segment grow 31% to $239 million. In a potential blow to UberEats, McDonald’s (MCD) said in July it was ending its exclusivity with UBER and adding DoorDash as a new delivery partner.

In Q1, UBER reported an average of 17 million trips per day and an annualized gross bookings run-rate of $59 billion. UBER is likely to report Q2 numbers for those metrics Thursday.

At the time it reported Q1 earnings, UBER noted “less aggressive pricing by rideshare competitors” that continued into Q2, something that might be worth monitoring.

BRAKES STILL PRESSED. Uber shares haven’t spent much time above their IPO price of $45 a share, and recently fell toward new lows. Data Source: Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Uber Earnings and Options Activity

When UBER releases results, it is expected to report adjusted EPS of negative-$3.19, on revenue of $3.39 billion, according to third-party consensus analyst estimates. That revenue would be up from the previous quarter.

Options traders have priced in approximately a 7.2% stock price move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.

Looking at the Aug. 9 weekly option expiration, call activity has been high at the 43 and 44 strikes, with put volume concentrated at the 36 through 37 strikes.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.