There's no question that Uber (UBER 3.25%) is the king of the road in the rideshare space, and in the third quarter it gunned the engine to the tune of a 30% increase in revenue. Unfortunately, to do that, it burned more than $11 million a day on the bottom line. That's a big loss. And, as MarketFoolery host Chris Hill and MFAM Funds' Bill Barker discuss in this segment of the Nov. 5 podcast, just half a year after its IPO, the mindset in the market is a lot less forgiving about a "high growth, profitability someday" business model. They also talk about the near-term reason some shareholders had for getting out last week, and the longer-term reasons why some analysts and value investors aren't as down on the stock as you'd expect.
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This video was recorded on Nov. 5, 2019.
Chris Hill: Uber's third quarter report, they lost a billion dollars. There were other numbers, too. But shares of Uber are down more than 8%, and I'm assuming it has something to do with the fact that they lost $1 billion in 90 days.
Bill Barker: Probably has a bit to do with that. They are growing rapidly still. 30% top line growth. They'd like you to look at that number, but the market is looking at the bottom line instead, which ends up not being a fair fight for Uber. It's just going to keep talking about the top line. It is saying, "Well, we can be adjusted EBITDA positive by 2021," which is a lot of adjustments there.
Hill: I was just going to say, there are a lot of caveats that come with that.
Barker: Yeah, a couple of years out, if you don't look at EBITDA, which is not looking at net income, but you look at adjusted EBITDA then, and you squint real hard, you'll see that we look like we're not losing money years from now in this world. And the market is looking at the fact that tomorrow, the IPO lockup expires, so you've got a lot of new shares available for sale. I think that maybe some of today's selling has something to do with wanting to get out before more people get out tomorrow.
Hill: Yeah. I think I've made this point before -- it's a little bit like, in your personal life, saying, "Don't judge me by my looks. Judge me by adjusted handsomeness. On adjusted handsomeness, I'm pretty close to Brad Pitt, if you adjust."
Barker: [laughs] "If you adjust."
Hill: "Just straight up looks? No, nowhere near that. But adjusted handsomeness? Sure!"
Barker: Adjusted future handsomeness.
Hill: [laughs] In 2021.
Barker: Look, when we're both dead, we'll look just as good.
Hill: We're going to come back to this with Peloton -- it does seem like we are absolutely, at this point with the market right now, where there are a lot of investors, and a lot of them are probably institutional investors who are not willing to put up with things that they were willing to put up with six months ago, 12 months ago. So, Uber is saying, "Look, we're growing the top line!" It's like, that's fine, but that's less interesting to us than it was last year.
Barker: Yeah. You've always got a large chunk of the market which is going to be value investors, and who always care about earnings. And then you've got the growth investors, who are excited about the top line growth, maybe more so than the bottom line. But there are a lot of other companies out there that are growing the top line in a very healthy manner as well. So, Uber's presentation that, "Hey, we can grow the top line at 30%. Let's not look at the bottom line," is up against many companies, largely in the software space, that are growing both the top and bottom line by impressive amounts. So, Uber's growth story is in competition with profit growth stories, and that's not a good fight for it to be having.
Hill: I'm sure there are some growth investors who look at the drop in Uber today and say, "Wow, it's down 8%. I like this even more because I'm willing to hold it for five years." Are you one of those people?
Barker: Well, I've seen a couple of analyst reports talk about dropping their target price, but still having a target price around double of what the current share price is. They're focusing on, "The 2021 adjusted EBITDA profit, maybe that doesn't sound great to you, but we were thinking it was going to take even longer, until 2023, maybe. We're willing to tilt our head a little bit and squint and look at the numbers in the way that Uber would like us to look at them." Maybe that's because these analysts are looking at Uber's need for financing in the mid to near-term future. Maybe they need to raise more cash, bonds, to cover all these losses. So, they might want to be on Uber's good side. You always have to season your analysis of Wall Street's work with that perspective. But, the growth is impressive. Uber someday could pull back on how many different businesses it's losing money in, and probably come up with a quicker profit growth story than it's presented so far. Maybe that's something to hang your hat on.
Hill: Still trading below the IPO price.