Coronavirus Reopening: Long Uber/Short Zoom Pair Trade Opportunity

Summary

• Sentiment is at peak Zoom and trough Uber.
• Long Uber/short Zoom is a way to play the Coronavirus Reopening as these dynamics reverse.
• This pair trade is a market neutral opportunity for reopening gains.
• Debt and equity investors are supporting the airlines, which reduces liquidity risks for Uber.

Zoom (NASDAQ:ZM) is one of the winners of the Coronavirus shutdowns. Zoom is now the platform for work, education and family time. Zoom became a verb ("let's zoom"), joining the pantheon of technology companies that define their market. The last technology company to become a verb was Uber (NYSE:UBER), which has been hard hit by the Coronavirus crisis.

Investment Thesis

Uber and Zoom are leaders in their sectors. Zoom is a play on work from home and Uber is a play on mobility.

The Coronavirus crisis was a huge catalyst for Zoom. It elevated the sentiment on the stock, which drove up valuations. Zoom is positioned for continued growth, but is at peak optimism.

The video communications sector is crowded. Even Facebook (FB) is now a competitor (Messenger Rooms: Here's how to use Facebook's free new video chat app). On many days, I use Zoom, Microsoft Teams (MSFT) and GoToMeeting. Zoom doesn't have a clear advantage over the other options. The popularity of Zoom is going to attract more attention from competitors.

At the same time, Uber's core business has been hard hit by the Coronavirus. On March 19, 2020, Uber CEO Dara Khosrowshahi said that ride volume was down by as much as 60%-70% in the hardest-hit cities. However, we are at a turning point and Uber should see business improve as the economy opens up.

It will be a slow recovery. There will still be a lot of concerns about getting in a car with a stranger. Not ideal for social distancing. There is less business and leisure travel, so Uber is losing a lot of rides to/from airports, offices and other destinations. Despite the headwinds, the next two months will be better than the last two months.

Uber Eats, which is a smaller portion of the business, is holding up well (Uber Eats' U.S. Sales Surged 10% Last Week Thanks to Quarantines).

Uber also faces competition, especially from Lyft (LYFT). However, Uber is the ride-hailing leader and has dealt with competition from Lyft for many years. The competitive dynamic with Lyft is not going to change because of the Coronavirus.

Long UBER/short Zoom is an opportunity to play the reopening of the economy, without directional exposure to the markets.

Stock Performance

The divergence between Zoom and Uber began around the start of February and reached max levels mid-March. Although Uber rallied off its lows, the spread is still very wide and leaves an opportunity to capture the reversal of fortunes.

Data by YCharts

Financials

Zoom is in a better financial position. Zoom benefits from its Software-as-a-Service (SaaS) business model, with higher margins and better cash flow. It also has a higher growth rate, even before the Coronavirus.

(Source: Seeking Alpha)

Valuations

The valuations reflect the difference in financial performance with Zoom trading at 64x EV/Sales vs. 4x for Uber. Obviously, it is hard to know what are Uber's run-rate sales because of the downturn from the Coronavirus. It is fair to assume that Uber's real multiple is higher.

(Source: Seeking Alpha)

Zoom's sales are benefiting from the Coronavirus. The run-up in the stock drove up the multiple of EV/Revenue (Forward), indicating that a lot of good news is already priced in.

Data by YCharts

Uber's Liquidity

Uber's key risk is liquidity. Even before the Coronavirus crisis, Uber was losing money. The downturn is making the situation worse.

On March 20, 2020, Uber CEO Dara Khosrowshahi said the company had $10 billion in liquidity and a $2 billion revolver.

On April 28, 2020, there were reports that Uber is planning to cut its workforce to improve liquidity (Uber discussing plans to lay off 20% of workers: Report).

Although Uber has liquidity challenges, investors can take comfort from airlines. Airlines are facing similar challenges, but bond and equity investors have recently supported the airlines. For example: Southwest Air Raises $4 Billion With Stock, Bond Sales.

Conclusion

The country is reopening. The markets have already rebounded from the March lows. We are at peak Zoom and trough Uber. Long Uber/short Zoom is a market neutral way to play the reopening dynamics.

Analyst’s 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[User 828881]

So you think the SPY will drop 15% but Uber will go UP LOL? Uber is on it's way back under $20 and will retest the teens as the markets retest the lows. April is now in the rear view mirror and the economic hit is enormous and May won't be much better IMO.

[Pismo Cap]

Might get more juice on your thesis with a long UBER/short NFLX trade but that takes brass you-know-what.

[Pendulum]

@Pismo Cap Thanks! I've been thinking about pair trades with short Netflix too. I think the same thesis applies

[Wellington999]

'take comfort from airlines?' UBER is short to zero. ZM is over 50% short now so will resume its rally in the short term more than likely

[mane]

UBER before the market crash when it was pushing $40 the profits from leaps ($65jan2020) traded from .25 and sold @1.51 and UBER was no were near $65, the options market's consensus seems to see a repeat on the long calls. The $65's are now at .21, Christmas twice, nice.

[NextLevelTrading]

I like this thesis. Smart trading.

I like UBER and LYFT here. ZM is a dog.

[Pendulum]

@NextLevelTradingdotcom thanks for the feedback!

[Bulldog67]

@NextLevelTradingdotcom

Just curious: when do you think UBER & LYFT will ever show any profits? And the REAL question is will they burn thru all current cash before doing so?

[KPAZ]

Agreed. People do not realize before the Corona virus their rideshare segment was profitable on an adjusted EPITDA basis. Eats and Freight was burning cash last quarter.

[Pendulum]

@KPAZ thanks!

[Bulldog67]

@KPAZ

Try going to any bank and getting a loan against positive “Adjusted EBITDA”!
You do realize that figure excludes interest expenses, taxes, depreciation, non-cash exec compensation, etc. don’t you?

That is like saying: “Well, if I ignore all these other costs, I would be Profitable!

Given it’s current cash burn rate, and the recently announced impairment charges of approx. $2 billion, Uber’s equity will represent only about 30% of its total capital by year end. And anyone wonders why Uber’s debt is junk rated?

[OverTheHorizon]

I think AMZN GOOG or APPL will buy Uber. Too cheap here for future potential ie driverless automatically disinfected cars coming soon to a neighborhood near you (someday they’ll fly too).

[Bulldog67]

@OverTheHorizon

Uber has too much debt for any of the above to buy them. Why not wait till they declare BK, or just get in dire financial condition before actually declaring BK? That way they can get them much cheaper.

NO rational investor (other company) will pay anything near today’s price for a cash burning company that shows no signs of every becoming profitable.

Anyone doing a basic ROIC calculation on a potential merger of Uber will quickly decide not to touch it.

[OverTheHorizon]

I know the #s don’t make sense but Bezo/Cook/Brin need an encore. Maybe a partnership of some sort?

[Bulldog67]

@OverTheHorizon

Bezo/Cook/Brin may need encores, but they are not stupid! No way any of the three is going to buy a company with as leveraged a B/S as Uber that is burning thru billions in cash.

[OverTheHorizon]

How bout short Uber long Winnebago?

[Pendulum]

@OverTheHorizon Interesting! I have been thinking about other long/short trades within mobility/travel. Thanks

[Ramy Taraboulsi, CFA]

Thanks @Pendulum for your article. I always like pair trades.

However, I have a major concern about your approach on two fronts:

(1) Uber/Lyft and ride-sharing businesses may not survive post COVID-19; such cars can be construed as petri dishes for the virus, as people do not know who was in the car before them and whether the driver is infected or not. Please keep in mind that people now have a huge awareness of the potential of infection by the flu as well, and this is also in addition to a potential for a second wave. I would say that consumption of personal cars may be on the rise again after COVID-19. The real recovery in that industry is years away...

(2) Zoom is now a verb. It is more pervasive than you can imagine. Phone utilization is dropping as people prefer to zoom instead of phone. I don't expect this trend to decline, and with the potential of monetizing their non-paying customers (please see my article: Zoom: The Hidden Opportunity, seekingalpha.com/... we might be talking about a multi-bagger here. Finally, don't bet against a company whose name became a verb.

Thanks again for your article.

[Pendulum]

@Ramy Taraboulsi, CFA Thanks for the feedback. I think Uber will survive. I agree about the "petri dish" risk, but that is true for all forms of public transportation, buses, subways and airplanes. There will be reduced rides for a long time, but our society is not set up to completely avoid public transportation. I hope that Uber and Lyft can figure out a way to minimize the "petri dish" risk. I'll check out your Zoom article.

[polymath ryan]

As someone who drove for Lyft before, you will still have the business person from let's say Pittsburgh working in Chicago every week that needs a ride to the airport. This is more common than you'd think. I believe it will take an effective treatment but as soon as peoples worry is alleviated you will see a return to business as usual for uber and the regular traveler.

[jd100]

Correct all the way, Uber is not worth going long. Business needs better profit metrics to start and then on too zoom, I have never heard of a short for a company that leads a hot sector. That is like all the fools who kept advocating a short on Netflix because Disney was going to launch their second rate online offering.

[Optimomentum]

It's a bit mind-blowing the number of people who think a confirmation of a consensus opinion is going to move a stock at all. Hint - if the entire world thinks Uber is going to drop a bomb in its earnings report, then all it has to do is drop slightly less of a bomb and it's off to the races. You could've been short a year ago in the $40s, or long last month in the teens. In both cases you would've traded opposite the prevailing sentiment. Near-term downside here is low $20s unless the market craters. In that case, good luck finding any shelter.

[devsinsix2000]

I am short Uber, but what you say about consensus is true. Fundamentals say Uber is a short, but the story is a good one. Many see Uber as the future and maybe it is. We shall see. I think Investors will give a Uber a pass for the first quarter and stock will hold up. I think sentiment will turn negative with a worse second quarter and terrible cash burn rate. If they have a better than expected 2Q and can slow down the burn rate in a meaningful way then I will abandon my position. Otherwise I see low twenties toward the end of summer. Nothing is certain in life or investing.

[Pendulum]

@devsinsix2000 Thanks for the comments. Good luck!

[Optimomentum]

I too think Q1 is a pass. As long as the forward guidance isn't apocalyptic, I think the reaction is muted at worst and a pop higher if better than expected. Now, Q2 is going to be the clinker not just for Uber and Lyft but for the entire market. People are waaay too complacent in general about the state of the economy and think we're out of the woods by the summer. Not likely. I'm not saying Uber/Lyft don't get knocked back 10 or 15%, but in this market there are plenty of shorts that seem a lot more certain (like airlines a couple of weeks ago).

[Bulldog67]

Pendulum,

In a market correction of this impressive rally off the March lows, both Zoom and Uber will be heading South big time!

The fact that bond and equity investors have supported the airlines, not to mention government bailouts, is totally irrelevant for Uber. Uber’s cash burn of $1+ billion plus per quarter pre-pandemic is going to increase dramatically! For your long on any pair trade, you would be better picking a fundamentally sound company like MSFT or WMT.

[Pendulum]

@Bulldog67 Thanks for the comments. The pair trade idea is about the relative sentiment between Uber and Zoom. I agree that MSFT and WMT are stronger companies for the long term.

[blacky_]

The sentiment for Uber is, in my mind, way too positive. Do not forget that Uber will run out if cash by end of the year and never threw a single quarterly organic GAAP profit. So sentiment and fundamentals should not support the current relative peak price of Uber for long.

[bskylar]

How can they be burning more cash if the volume of rides is way down and their cost is variable? Not to mention workforce reduction...

[Andreas VT]

Not very intelligent advice, especially now.. Exactly the opposite would make some sense... Uber is 100% up from his lows and ZM lost 20% during the last 4 sessions. Reopening the economy would maintain the work from home trend and social distancing, which is still good for ZM and bad for Uber..

[Pendulum]

@avtaprantzis Thanks for the feedback. This is definitely a contrarian idea. Interesting to see the pushback on this idea. We'll see how it plays out

[ludicrous_display]

uber is garbage unable to function at a profit even during boom

[Ejat]

Not very informative... I don’t see how Uber long is good advice. They burn money like no one else, 80% of their business is halted and Eats loses even more money. Also the CTO left. So many risks, I wouldn’t jump into this stock until everything starts to settle.

[Optimomentum]

Uber has bounced back more than the S&P500 since the market bottom so going long has been a great trade. Your comment bears out the thesis that sentiment is at peak pessimism, and not necessarily based on accurate info (no, 80% of their business is not halted). Eats has been a money-loser due to incentive payments. But in this environment how much money do you think Uber needs to throw at drivers to take delivery orders? Yeah. All Uber has to do is beat the worst expectations. Meanwhile look at AMZN's big, fat thud this week.

[Bulldog67]

AMZN - thud
UBER - thud thud

[ShankaSwingTrades]

Sell UBER,
give me a break.

[Kaydop]

long uber yes short zoom hell no

[fitzwilde]

@Pendulum Good example of how charts can deceive you. Uber is being fundamentally damaged by this downturn They have already rebounded 60%+ off their recent bottom (so not exactly a trough) and their sales for April and May will essentially be zero. Uber eats revenue is nothing compared to their core business. Until a cure or vaccine is available, ridership and travel will be way down. This leaves them in a position where they are levered up, and may have to borrow under distress. And that’s without the support airlines will probably get from Govt.

Before opening any position, I’d wait for earnings. I think people will be surprised at just how bad they will be. And, if losing money every quarter was bad before, it will be catastrophic today. Time will tell, but it’s important to note that even if people can travel, it doesn’t mean they will. I expect very few will resume for quite some time.

[RollingTheDice]

Seems like everything's been working against Uber lately,
on top of the fact that they weren't making money before.
I'm probably gonna short it before earnings, but I worry
about them announcing the 'imminent' deployment or
some kind of stupendous progress with their autonomous
driving software. Any such announcement
would probably catalyze a nice short squeeze.

[Bulldog67]

@RollingTheDice

Any announcement regarding an autonomous vehicle is years away. Given it’s cash burn, Uber will be BK long before then!

[Pendulum]

@fitzwilde Earnings will be interesting this quarter. The key will be cash burn and liquidity. We will see if there is incremental bad news or if the bad news is already priced in.

[Frank Oak]

Uber is still cheap in the long run,like 5 years.

[Andreas VT]

Uber will still be loss making 5 years from now, if it is still around..

[art intell]

It probably won’t be around ...

[RobertPredicts]

I agree. Wait until Uber goes autonomous with it's cars. The stock will be trading like Tesla one day.

[Milford55]

Uber is too high here near 30s, May be if it goes back to 20$ then worth considering

[dpwroc]

I would agree with that. The equity is overpriced there (@ 20) even, due to the cash burn bla, bla... and general BS that is the Uber gift to the world, yet to fully discover.

But from a trade perspective, 30s too tricky a price for a buy on the slippery slope that is Uber.

I would wait for a considerably lower price. Reporting for the rest of the year will be predictably full of forward looking garble, coating the pig in lipstick, but it (Uber) will only be able to spin the numbers so much, and willing here to go out on a limb to say that there is likely to be some real price erosion around earnings, coming up I think, on Friday?

[Bulldog67]

@dpwroc

I agree! That’s why I added to my short at just over $31 this week. 1st quarter is going to be bad, but 2Q will be a disaster!

$2 billion impairment charge plus cash burn of $1-2 billion per quarter eats away at shareholder equity. Uber’s weakening B/S will require them to go back to the equity market by late 2020 - early 2021.

[art intell]

I will buy UBER if it goes to $5. There will be second wave ....

[RobertPredicts]

Great article. To be clear are you suggesting to trade zoom on the short term and get out in the near future while playing uber for the long? Or did you mean short zoom stock downwards?

[Mistrade]

I second that, great article. I’d short ZM as their “15 minutes of fame” is about to be over, too much more serious and first rate competition, and their product is for not legit - too many privacy concerns and slow down and poor quality that I’d experienced first hand. 👍🏻

[Andreas VT]

Zoom is doomed to go higher and it will. Great entry point at current price levels (at $135-140). Don’t miss it. It was among the very few stocks that went up during the Friday sell off.

[Pendulum]

@RobertPredicts Thanks! The article is intended to be about a pair trade with the same duration. It want to see if the spread between Zoom and Uber narrows