Uber Technologies (UBER -3.13%) is set to report third-quarter earnings after hours on Monday, and given its volatility since its May IPO, the stock could move sharply on the results.
Shares have already sunk 30% since their IPO nearly six months ago, and investors still seem to be skeptical about the ridesharing industry, as both Uber and Lyft (LYFT -0.39%) sold off earlier this week in spite of a strong earnings report from Lyft.
Analyst are expecting Uber to report revenue of $3.69 billion, up 25.5% from $2.94 billion in the quarter a year ago, and a per-share loss of $0.81. While the market is sure to compare the results to those figures, there are some other things investors should keep an eye out for. Below are three questions investors should be asking as the numbers come out.
1. Is the price war with Lyft easing?
Lyft's adjusted EBITDA narrowed sharply in its third-quarter earnings report, thanks primarily to the company's decision to pull back on discounts and coupons that had artificially deflated the price of a ride. That strategy has been part of a long market-share war with Uber and smaller ridesharing companies, and both Uber and Lyft had previously made allusions to prices moving higher.
Lyft's sales and marketing expenses fell 32% to $163.9 million in the second quarter, and management mentioned a number of times on the earnings call that it was able to reduce couponing and incentives during the quarter.
Lyft CFO Brian Roberts said, "We're hearing a recurring theme is the market is increasingly rational. There is significantly less discounting than a year ago." He added, "We expect that these market conditions will continue as the industry focus is on achieving profitability."
Lyft did not mention Uber specifically on the call, but since Uber is its primary competitor, it seems logical the improving market conditions would also favor Uber. About half of Uber's revenue comes from U.S. ride-hailing, so the company doesn't have the same level of exposure there as Lyft, but it's still by far Uber's biggest business. Take a look at Uber's sales and marketing expenses as a reflection of the price war with Lyft, though investors will also want to see if Uber is defending its market share effectively as cutting back on marketing spending only helps if it doesn't mean giving up sales.
In the second quarter, Uber's sales expenses jumped 71% to $1.22 billion, so investors should expect that pace to slow.
2. How is Uber Eats holding up?
Grubhub's (GRUB) recent earnings report sounded the alarm on the food-delivery industry. The onetime food-delivery leader is now seeing profits rapidly evaporate, and its revenue growth is slowing sharply. After its recent earnings report came out, the stock plunged 43%, and CEO Matt Maloney called his customers "promiscuous," a reference to a lack of loyalty due to intense competition among operators including Grubhub, Uber Eats, DoorDash, and Postmates.
Uber bulls often hold up the Eats business as a sign of the company's potential and its ability to be more things than just a ridesharing business. They've even argued that food delivery has better economics than ridesharing since restaurants help support the cost of it. However, the food delivery industry seems to be entering a phase that ridesharing is now just starting to come out of: a brutal battle for market share as brands aim to grab customers and stand out from one another in what's essentially a commodity business.
Uber Eats' adjusted revenue jumped 53% in the second quarter, but I'd expect that number to slow in the third quarter as DoorDash's rises. DoorDash, like Uber, is also fueled by Softbank cash, and Grubhub's stumble shows that competition is becoming cutthroat.
3. Is contribution profit moving in the right direction?
Uber throws a lot of esoteric terms at investors in its earnings reports, including metrics like excess driver incentives and adjusted net revenue, but a key concept for investors to understand is contribution profit. This is the money from Uber's core businesses, ridesharing and Eats, that it keeps after deducting direct expenses. In order for Uber to convincingly make the argument that it can one day be profitable, it needs to show growth in both contribution profit and margin.
In the second quarter, contribution profit in the core business fell 40% to $220 million, a sign of increasing competition, though the company did improve sequentially from the first quarter. Core platform contribution margin fell from 14.7% to 8.2%. Lyft's earnings report and comments about the market becoming rational seem promising, but investors will need to see evidence that Uber's profitability is improving. Otherwise, a relaxation in the price war just means Uber is losing market share to Lyft.
Despite Uber's wide losses in its first few quarters as a public company, the company's ambition has shown no signs of ebbing. The company forged an agreement last month to take majority control of Cornershop, an online grocery service primarily in Mexico and Chile, and it raised $1.2 billion in debt just four months after its IPO.
If Uber is going to truly capitalize on its promise to reinvent the vast transportation industry, it needs to start showing strong growth and taking steps toward profitability. The market has thus far given the stock a reality check, sending it down 30% from an already tamped-down IPO pricing, and that skepticism isn't going to disappear easily.