Will Uber's Q1 Earnings Extend The Rally

Summary

• Uber is at an inflection point and should benefit from the reopening of the economy.
• Long Uber/Short Zoom is a play on the reopening that I wrote about previously.
• Uber is announcing earnings on May 7 and I am watching these 6 things that will drive the stock.

Last week, I published Coronavirus Reopening: Long Uber/Short Zoom Pair Trade Opportunity. The thesis is that sentiment is at peak Zoom (ZM) and trough Uber (NYSE:UBER). The reopening of the economy is setting up a reversal.

Uber reports Q1 earnings on May 7, 2020. Uber gave an update on 1Q and withdrew 2020 guidance.

Keep in mind that Lyft (LYFT) reports on May 6, which will be an important tell for Uber.

I am looking at the following factors for confirmation (or not) of the Long Uber thesis.

1. Cash Burn & Liquidity

On March 19, 2020, Uber CEO Dara Khosrowshahi said that Uber had $10 billion of unrestricted cash and expected to end the year with $6 billion of cash and a $2 billion revolver.

The airlines recently raised equity and debt to fund their cash burn. However, it doesn't seem that they are covered through 2021, like Uber suggested. Uber may be in a better cash position relative to the airlines.

I will listen to the earnings call to see if Uber confirms:

• $6 billion of cash at year-end 2020
• It has enough cash to get through 2021 without raising additional equity or debt

Uber's shares could fall if there is hesitation about this.

2. Ride Volume

We all know that Uber's ride volume is down significantly. But, has Uber started to see an inflection in its major U.S. markets?

On the March 19 update call, CEO Khosrowshahi said that Uber's base case assumes a bottoming in 2Q and rebound in 3Q. Is that still the base case?

He gave specifics about 2 cities. Hong Kong was down -45%, but rebounded to -30% by the time of the call. Has Hong Kong rebounded further since March 19?

Seattle was down 60-70% at the time of the call. Did it see a rebound like Hong Kong, or is it still down 60-70%?

These two cities could be instructive across Uber's geographic footprint.

3. Uber Eats

Uber Eats was 22% of 2019 Gross Bookings, compared to 76% for Rides.

Uber Eats was up 10% in late March. I expect strong growth from Uber Eats, based on the extent of the shutdowns since March.

A strong growth rate for Uber Eats could drive shares higher.

4. Cost Structure

Before the coronavirus crisis, Uber expected to achieve profitability in 2021 (Source: Uber's February 6, 2020, Investor Presentation). However, this guidance was withdrawn in the April 19, 2020, update.

Uber Eats' segment Adj. EBITDA was a drag on the overall results in 2019. It will be interesting to see how the growth in Uber Eats impacted the segment profitability in 1Q.

(Source: Uber 2019 Annual Report)

Since the outbreak of the coronavirus crisis, the following cost cuts have been announced, or reported in the press:

• Uber Eats exits eight global markets
• Uber Discusses Plan to Lay Off About 20% of Employees
• $150 million pullback in advertising and incentives by March 19 (maybe more by now)

Uber is now a company that looks different:

• Smaller, profitable Rides business, which is hopefully rebounding in Q3
• Growing Uber Eats business (not yet profitable)
• Cuts to fixed costs and investments

Will Uber hint that this formula can achieve profitability in 2021?

5. Market Share

Many drivers and passengers use both Uber and Lyft. Can Uber gain market share from Lyft as we go through the coronavirus crisis?

Advertising, discounts and subsidies drive market share. In this environment, Uber and Lyft need to balance chasing market share with profitability.

I am listening for Uber's approach and if it can expand market share while being disciplined on expenses.

6. "Take a Seat" Wildcard

Amazon (AMZN) CEO Jeff Bezos said recently, "If you’re a shareowner in Amazon, you may want to take a seat."

Amazon built a lot of goodwill with investors over the years. Its investments have paid off.

Uber is in a different place. However, there is risk that Uber delivers a similar message to investors. This could cause the stock to drop in the short term, even if it works out in the long term.

Conclusion

Uber's results are down because of the coronavirus. The upcoming call will give us color on a few key questions.

Does Uber have enough cash to get to the other side? Does Uber Eats' growth offset declines in the rides business? What is the profitability of the new Uber?

The economic reopening should be a positive catalyst for Uber. We will see if there is confirmation from the earnings report.

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

[Anarchy99]

How to get your stock to go up 17% in a day? Easy; just lose 3 billion dollars for the quarter! Isn't Bizzaro World fun?!

[WolfpackCapital]

The write down was the vast majority of the loss and was a one-time impairment. The future is very bright

[dpwroc]

Its funny how they keep these one-time write-offs.

Remember the 5.3 Billion loss last year in, was it Q3 reporting, 2019?

Their 1 Billion loss-per-quarter is predictable, though.

[Bulldog67]

@WolfpackCapital

Yes, total reported loss of ($2.936 B). Backing out the impairment charge for overpaying for investments in other companies (we messed up and overpaid!), Uber “only” lost ($1,141 billion)! That is a bigger loss than 1Q19 or 4Q19, but the future is bright! LOL!!!

[WolfpackCapital]

Today is fantastic proof that future cash flows for UBER are massive. Nice 15-20% reward for understanding that

[Jmmcdonald52]

What proof? They had less loss because their ride business was down 80% in April. Unfortunately, their eats business was up so that increased the loss a lot, but not enough to offset the gains from less ride business.

[WolfpackCapital]

You have to think about the FUTURE. Eats generates losses RIGHT NOW. If Eats is always going to generate losses, why on Earth would they continue it? Nothing is stopping UBER from shutting down Eats totally.. the Rides end of things is robust and profitable. Why can’t anyone understand that? Oh wait, the market does.

[Jmmcdonald52]

Eats is clearly not profitable and I can't even imagine how it could be. If someone buys a $15 meal, Uber takes $4.5. Who wants to deliver a meal with no tips for $4.5, and what Restaurant wants $10.50 as that is a huge cut to profit margin. Restaurants are okay with losing their profit during hard time, but I don't think this is sustainable. I think Restaurants are going to have to close their retail area, and just deliver via Uber eats to make this model make sense. Otherwise the prices have to rise. Anyone can sell a product below cost. I could have a billion in revenue right now if I sold Gold for $1100/oz.

On the regular rides business - the most profitable rides are to/from the airport and that is going to suffer for awhile.

Plus the states forcing them to hire employees.

If the prices were raised by 30% then I would believe it is a rational business model. Maybe I am missing something but I think Uber has to raise prices.

[Growth Movement]

Will Uber ever make a profit?

[Bulldog67]

@Growth Movement

The bulls better hope they don’t, because then everyone could calculate a PE ratio and see how overpriced this stock is.

[Jmmcdonald52]

When all rides and eats stop and they invest the $8B in bonds. Strange business model.

[Bulldog67]

Jmmcdonald52,

They had to make the 2nd payment for Careem in early April. So cash is already down to $7 billion at best.

[Markkuppe]

We are temporarily living in the "opposite world" but this will pass and this stock will tank.

[1979-2012]

Why? More positives than negatives will emerge. Uber is cutting costs, exiting markets and starting new revenue streams. They are adapting to the new world. Better than oil and transports asking for bailouts. Those stocks are over valued.

[WolfpackCapital]

We are living in the real world. That world is one where future cash flows are discounted to present, arriving at today’s value.. which is up 7+% ahead of earnings. When stocks don’t go the way YOU want them to, (really talking to Bulldog here) that doesn’t discredit the reality of the situation. Thank you.

[Bulldog67]

@WolfpackCapital

I agree that the present value of any stock should be the discounted value of a future stream of earnings and cash flow. Just curious, when do you think UBER will be generating free cash flow and positive GAAP earnings?

Remember the further in the future those #’s are, the lower the stock’s PV.

[1979-2012]

Uber will be huge in 5-10 years. Think end to end transportation solutions. Connecting real world with the virtual

[dpwroc]

Fantasy

[1979-2012]

No, that isn't out of the realm of what their strategy can deliver.

The future will see less car ownership and more sharing of transportation assets

[WolfpackCapital]

Reality

[CoolerHeadsPrevail]

To everyone here negative on Uber its up 9% after hours on Lyft earnings and they are up 16% after hours. Uber going to be up over 25% between today and tomorrow after earnings is my guess. Yes weird market as all anyone looks for is it worse than we thought or not and if not boom.

[1979-2012]

Let's not forget that Uber also launched 2 new business models during the lockdown with Connect and Direct. They also exited key markets that were losig money.

[dpwroc]

This following of price is a consistent dynamic that transpires always at earnings and exactly what happened last year during several quarters. It couldnt be more temporal and meaningless, as an investment signal of anything real or significant, in pertaining to what is going on with two different companies.

[dpwroc]

lol

[Stop The Printer]

I absolutely cannot get over the fact that Uber is trading flat today with news of them laying off thousands of employees.

I need to go on a silent meditation retreat to recover from what’s been happening in the markets.

You cannot take an Uber or a Lyft right now. The app doesn’t even allow it.

The market has lost it’s mind.

[iankharris]

The massive expansion in the monetary base has to go somewhere. As Albert Edwards put it (I paraphrase), "there's nothing that obliges the expansion of money to go into stocks. It will chase whatever momentum trade is trending at the time."

Growth stocks are the momentum trade of this decade. That trade hasn't settled down yet.

[Bulldog67]

Even momentum investors will eventually demand real earnings or they will realize the “Emperor Has No Clothes”!

[Lams]

HK Uber down 30%... are you sure? i think it has 30% left right... No travellers, no bar / pub, and no gatherings....

joined some uber group and see people waiting for 2-3 hours for the next passengers...

[dpwroc]

No, it will not.

Uber is cutting 14% of workforce as coronavirus ravages demand - Business Insider
www.businessinsider.com/...

[dpwroc]

Remember Porky the Pig?

"Thats all Folks"

California sues Uber and Lyft, saying drivers are employees
www.latimes.com/...

[Bulldog67]

@dpwroc

Uber reminds me of a drunk stumbling along banging into every table and chair possible. Every time the drunk gets off the floor, something else hits him and he is back on the floor.

Pulling Uber Eats out of several countries, cutting headcount at Careem and now at Uber, taking salary reductions, incurring a $2 billion impairment charge for overpaying for minority ownership in other companies - none of these are a sign of a healthy company!

California AB5 is just one more dagger in Uber’s heart. And cash strapped states like NJ, NY, IL, etc. will follow CA’s lead!

[cbroncos]

Well this Uber driver has not had a ride since March 18 and I was one of the highest earning Uber drivers in my area. I cannot see me getting back out there until there are now new cases in a 14 day period. In fact I wonder if I will ever drive again as I can collect SS in March of 2021. Right now there are 7-10 drivers waiting for a ride at the Philly Airport. Three months ago there would have been over 150 drivers just for Uber.
Uber eats is a terrible way for drivers to make money. So I doubt there will be big growth in that area. Part of the problem with Uber eats is the time of day. Why would I take less pay for Uber eats and no tips when I can take people to bars and restaurants and 30% of the time get a tip?
One thing that could boost Uber rides as we come out of this is that many people will not use public transportation. They have also said no Uber pools.

[CoolerHeadsPrevail]

Tech companies get sued everyday meaningless at the moment.

[rfermoselle]

Uber and Lyft should move their headquarters out of California and let the regulators and the left-wing politicos figure out what to do with the thousands of people who will lose their jobs and the tax revenue loss....
The AG and the regulators will win in court.... Both companies should just move out right away... stop service in the state and let the left figure out what to do with thousands of drivers that will lose their jobs and the end users who need transportation.
Uber is also facing attacks by scammers targeting the drivers by way of the Uber app to scam them out of their wages... it is happening... I can attest to that... I was a target... Uber is slow to act and it is a nightmare dealing with the Uber internal administration to investigate and act to protect the drivers... the whole thing is insane! Law enforcement is also to blame because they are either unable of incompetent...
I do not believe that the rosy picture depicted in the article reflects reality... Uber is not necessarily at fault... we have many problems in society and the economy and the company is a victim of all of these problems...

[dpwroc]

Interesting

[siriusmarine]

Not really news but solid perspective. Lets see how the market reacts and what adjustments Uber makes. I think all companies have to think and operate differently...This is not isolated to Uber. That being said, it will take some time but Uber gets it right at the end of the day.

[Pendulum]

@siriusmarine Thanks for the feedback!

[CoolerHeadsPrevail]

I remember when everyone hated Twitter and said it was going to zero. These companies find their way and it takes awhile. Lawsuits meaningless as all the big techs get taken advantage but Liberal States looking for votes. Ride sharing here to stay and will grow so bet long term on the one with the most marketshare.

[Bulldog67]

You obviously have never looked at Uber’s income and cash flow statements! You eventually have to make money or you go out of business! Basic Econ 101!

[Saul Leardi]

Your analysis is fresh water!

[Bulldog67]

Pendulum,

“Before the Coronavirus Uber expected to achieve profitability in 2021.”

There you go drinking Dara’s non GAAP kool aide! Uber was hoping to become “Adjusted EBITDA “ positive by end of 2021. Let’s be clear that Adjusted EBITDA excludes interest expenses, taxes, depreciation, Exec non-cash compensation, and other possible expenses. So even before Covid-19, Uber was NOT going to be profitable in 2021.

Also remember that the final cash payment of $1.9 billion for Careem was not made till early April. So any cash balances as of 3/31/20 need to be adjusted downward by that amount.

In addition to cash burn, I am also watching the amount of shareholder equity destroyed on the B/S. The ~ $2 billion impairment from overpaying for minority ownerships in other companies will reduce equity along with the ongoing GAAP loses.

[ludicrous_display]

so called "post-IPO downward rally"

[blacky_]

You that is a very funny interpretation of the current situation. Stock price only down ~35% from IPO = UBER is doing great? LOL

The facts look different, at least when looking closely. Uber is a sinking hard and fast - it only looks OK on the surface.

Some issues:
- this quarter a loss of 3-4 billion USD (!) can be expected, that was mostly PRE corona. The real impact on GAAP numbers will be visible in Q2 (July/August)
- the CAREEM aquisition did not work out, 100% was paid out in cash; 3,1 billion USD gone. It is not clear on how much Uber overpaid, but no doubt it must be plenty - see recent firing wave at Careem
- Uber eats GAAP margins are even worse the one from ride sharing. see recent exits of markets with around 200 million people (egypt, ukraine, ...) plus the move before (moving out of india alltogether for a 15% equity share). By the way Amazon left the food delivery business alone as it showed no positive prospect of success
- Uber hat not a single quarter of organic GAAP profit (Cash flow or income), and that will not change during 2020
- Uber's debt is already at junk status with interest rates at around 6-8%.
- AB5 law suite just started in california. This may play out only in a while but additional to other law suits (e.g. UK) the overall picture is a diaster
-> It is 100% certain to me that Uber will not to stay afloat until end of the year without further injection of capital.

[CoolerHeadsPrevail]

They will easily make it on cost cutting and Q3 rebound. Also they got a Gov contract worth almost 1B thats a pretty sizeable bump no one expected. Add in they are testing delivering other goods and have a huge network to do so. Uber long.

[Bulldog67]

@CoolerHeadsPrevail

You need to do a little more research. Uber did not get a government contract. They won the right to bid on that contract, but nothing concrete at this time.

And how much $$ is Uber making in all their other delivering businesses, including Eats? Answer = losses and more losses!

[rex32]

1. 2.1B of the 3B loss are actually investment write-downs, it's not cash burns. The real cash burn is around 1B.
2. Cost for rides will go away because most of them are variable cost.
3. The company has great improvement on cost efficiency for marketing spend, which will help on promoting UberEats.
4. Food delivery had been a pretty profitable business for Grubhub, until doordash and uber joined the race. I'd doubt how much $ left for doordash to continue compete with Uber.
5. Half of the Careem acquisition cost are paid in convertible notes
6. Uber has 10B cash at hand, i don't think you can be 100% certain they need further capital.