Uber Technologies (NYSE:UBER) ended last week with a whimper.
The ridesharing leader closed Friday at $27.01 -- 40% below its $45 May IPO price -- after its third-quarter earnings report showed the company continues to bleed cash profusely. The stock hit an all-time low of $25.58 on Wednesday after its post-IPO lockup period expired and insiders were allowed to sell their shares for the first time.
Despite the sell-off, there was some good news in the report. The company broke out its adjusted EBITDA by business segment, and showed a surprising profit from its Rides segment, the company's biggest business, excluding costs for corporate general and administrative expenses, and research and development. Adjusted EBITDA from Rides grew 52% in the quarter to $631 million. However, it delivered losses in every other segment.
Recognizing that the mood on Wall Street has changed following the collapse of WeWork's planned IPO, Uber CEO Dara Khosrowshahi did his best on the earnings call to reassure investors that the company was on track for profitability. "Our current target with a ton of hard work from all of our teams is to get to total company EBITDA profitability for the full year 2021, as we see the benefits of global scale and efficiency," he said.
Khosrowshahi's statement echoed a similar one from his counterpart at Lyft (NASDAQ:LYFT): Just weeks ago, CEO Logan Green said Lyft would be profitable on an adjusted EBITDA basis by the end of 2021. That company took big steps toward that goal in its third quarter, scaling back on coupons and incentives for riders.
However, Uber's path to profitability will be more difficult, primarily because it has ambitiously sought to be all things transportation, modeling itself after tech giants like Amazon and Alphabet.
The Rides business is the core of Uber. It's the oldest and biggest business, and its brand and technology anchor the rest of the company. So it shouldn't be that much of a surprise that ridesharing is its only profitable segment.
Under former CEO Travis Kalanick, Uber aggressively expanded its ridesharing business in an attempt to block out all other competition, going as far as to raise billions of dollars with the purpose of starving competitors of funding. That strategy mostly paid off. Though the company was forced to pull out of some markets such as China, Southeast Asia, and Russia, in the process, it negotiated for minority stakes in the leading ridesharing companies that operate in them. It controls about 70% of the U.S. market, and holds significant pieces of the market -- in some cases, majority shares -- in much of the rest of the world.
However, Uber wasn't able to give that sort of head start to its next-largest business, Eats. In the third quarter, that unit's adjusted loss ballooned by 67% to $316 million, although adjusted revenue from food delivery jumped 109% in constant currency to $392 million. Here again, management argued for the profit potential.
"We have nearly a hundred Eats cities that are adjusted EBITDA margin positive," noted CFO Nelson Chai during the conference call. But he also acknowledged that "competition has been fierce in some markets," and made an indirect reference DoorDash, which has become the leading food-delivery service in the U.S. thanks in part to heavy funding from SoftBank, the same Japanese conglomerate that poured billions of dollars into Uber.
"Approximately 15% of our Eats gross bookings make up over half of our adjusted EBITDA margin loss," Chai explained, underscoring the level of competition in food delivery. The company is willing to abandon low ROI markets, he said, as it did recently when it pulled out of South Korea.
However, that competition, in the U.S. at least, only seems to be intensifying as Grubhub's recent earnings report made clear. What was once the dominant food delivery company in the country has seen its profits evaporate in a brutal battle for market share that is unlikely to leave any operator much room to generate significant profits anytime soon. For Uber, that means the Eats business is unlikely to get out of the red by 2021.
The company did continue to see strong growth from Uber Freight, where revenue jumped 78% to $218 million, but the adjusted loss in that segment jumped by 161% to $81 million. Its adjusted EBITDA loss for Corporate and R&D also rose by 24% to $623 million, and in the quarter, overall adjusted EBITDA loss jumped 28% to $585 million.
The core dilemma
Based on the segment numbers above, the quickest path to profitability for Uber would appear to be for it to jettison its secondary businesses, or -- more realistically -- cut investments in them. However, management clearly isn't interested in either of those options. The company sees its ability to layer transportation-related businesses atop one another as one of its key competitive advantages, and it's doubling down on that strategy by combining offerings like Rides and Eats into one app.
Unlike Amazon and Alphabet, whose core businesses generate sufficient profits to allow them to experiment with new technologies and "Other Bets," Uber is still drowning in red ink. It hasn't earned the benefit of the doubt from the market to throw money endlessly at fledgling growth businesses, especially at a time when investors are developing a phobia for such cash-burning risks.
In order to turn Uber's stock-price trajectory around, management will have to put the company on a clear road to profitability. But in order for it to deliver on its promise of becoming the Amazon of transportation, it will have to execute in more areas than just ridesharing. That likely means further significant investments in businesses like Eats, Freight, and Other Bets.
For Uber shareholders, that means the bumpy ride they've been enduring for the past few months is far from over.