Investors love to talk about Uber Eats, the fast-growing food-delivery wing of Uber Technologies (UBER -7.64%).

Indeed, the food-delivery business looks like a bright spot for a company that is coming off a disappointing initial public offering (IPO), faces decelerating revenue growth, and has struggled with brand-image problems in the past.

Uber bulls believe that the food-delivery business will become a substantial profit center, and that its rapid growth since the Uber Eats app launched in 2016 shows the power of optionality, or the company's potential to be much more than just a ridesharing company. 

However, there are a number of problems with this argument. First, Uber Eats isn't as strong a business as certain numbers, like last year's 149% revenue growth, might make it appear. Second, the food-delivery segment will always be much smaller than its core ridesharing business. In order for the company to justify its $74.5 billion market cap and deliver growth, it needs to execute on ridesharing. 

The Uber Eats app icon alone, and among other app icons on a smartphone

Image source: Uber.

That funny smell

Uber Eats revenue came in at $1.46 billion last year, and in the first quarter of 2019, the segment's revenue was $536 million, a 89% jump year over year. However, those numbers don't accurately reflect the real impact of the business's growth on Uber. 

In terms of adjusted net revenue, a figure that subtracts excess driver incentives, or the additional payments Uber makes to the drivers to support retention and boost their income, growth is much slower. Adjusted net revenue from Uber Eats in the first quarter increased just 31% to $239 million, or less than half of the segment's unadjsuted revenue growth rate. 

In the fourth quarter of 2018, Uber Eats' adjusted net revenue increase was even slower, at just 11.5%, even though unadjusted revenue doubled. In other words, the majority of what appears to be Uber Eats' skyrocketing revenue growth is really just money passing from the customer to the restaurant to the driver. It's never really in Uber's hands. Though Uber Eats' bookings are growing rapidly, its ability to keep any of that money is quickly diminishing. 

Presumably, Uber is paying those excess incentives because the company believes it's in its best long-term interest to do so, but the need to keep paying them seems unlikely to go away.

Uber has been confronted with intensifying competition in recent quarters, especially from DoorDash, which surpassed Uber Eats in U.S. market share last October, according to data-analysis firm Second Measure, and now has 29% share compared to 22% for Uber Eats. Grubhub (GRUB), with a 32% share, remains the leader.

DoorDash's surge has come with the help of Softbank, the same investor that helped fuel Uber's growth. The industry is shaping up to be a battle royale for market share, with companies spending aggressively on advertising and incentives. That's a poor sign for profitability, as food delivery is essentially a commodity business.

Uber Eats made a smart move nailing down exclusive contracts with chains like McDonald's and Starbucks, but now it seems like they won't pay off as much as expected -- McDonald's is renegotiating the deal as franchisees were unhappy with it. The fast-food giant may also end the exclusive arrangement with Uber Eats. Either way, the new terms are expected be more favorable to the fast-food chain as Uber needs it more than it needs Uber. In its prospectus, Uber also acknowledged that it sometimes loses money on delivery for the largest restaurant chains, understood to include McDonald's, because it charges them a lower service fee.  

The upshot of the increasing competition and accelerating excess driver incentives is that Uber Eats isn't nearly as strong as a headline number of 149% revenue growth would indicate.

Just a side dish

Investors also seem jazzed about the Uber Eats business because it efficiently builds off of the technology in Uber's ridesharing service, and taps into the same driver pool. Uber makes this argument in its prospectus, claiming that Eats helps boost drivers' earnings and complements their business during times like lunch and dinner when ridesharing isn't at peak. 

However, demand for food delivery will always be minor compared to the ridesharing business. Uber itself estimates that the service addressable market for ridesharing is $2.5 trillion, triple that of food delivery at $795 billion. Innovations like autonomous vehicles would also dramatically change the economics of ridesharing and could therefore lead to a boom in the industry down the road. It's hard to envision a similar leap in food delivery -- the input costs of the ingredients and labor to prepare the orders will remain the same even if self-driving vehicles go mainstream.

Finally, considering Uber already commands a valuation in the range of $75 billion, it's unlikely that Uber Eats is going to significantly move the needle for the stock. Grubhub, the leader in U.S. food delivery, commands a market cap of just $6.5 billion. DoorDash, the fastest-growing food delivery app, was valued at $12.6 billion in its latest funding round last month. 

Even if you attribute a similar valuation to Uber Eats, the vast majority of the company's valuation comes from the ridesharing business. So the success of that is ultimately going to determine the Uber's future, rather than side businesses like Eats and Freight, or futuristic ambitions like helicopters, flying cars, or even autonomous vehicles -- which could do more to hurt the company than help it by exposing it to greater competition.

Uber, thus far, hasn't demonstrated that it can succeed at multiple projects at once. Its autonomous-vehicle division hit a roadblock after a pedestrian fatality last year, and its reputation under former CEO Travis Kalanick for skirting local laws and fostering a frat-boy culture full of sexual harassment has damaged the brand, allowing rival Lyft to steadily grab market share.

That Uber's ridesharing business grew revenue by just 9% while the company lost more than $1 billion in its most recent quarter should be alarming. There's only one place for a no-growth, money-losing stock to go, and it's not up. The company needs to get its core ridesharing business in order if it's going to have any shot at long-term success.

Talking about Uber Eats may make investors feel better, but food delivery won't change the company's broken fundamentals.