Uber Technologies' (UBER -3.78%) core business has been decimated during the COVID-19 pandemic, with little reason for people to hail rides. That hasn't stopped the tech stock from positioning itself for life after COVID-19, investing in areas that should continue to grow once lockdowns are lifted.
It's early in the game for these newfound efforts, but with an acquisitive CEO, roughly $9 billion in its coffers , and cost-cutting in the works, Uber could emerge as a leaner, more diversified company once the pandemic is contained.
To say it's been tough going for Uber is an understatement. A ban on global travel and shelter-in-place rules in effect around the world contributed to bookings in its Rides segment declining 80% worldwide in April. In response, Uber laid off 6,700 employees, nearly a quarter of its workforce.
At the same time, UberEats, its food delivery unit, is booming. Gross bookings were up 89% year over year in April, excluding India. At the end of last month UberEats surpassed a $25 billion gross booking annual run rate. The division still only accounted for 17.7% of Uber's overall sales as of the end of 2019, presenting opportunity for growth. When announcing the layoffs, Uber's CEO Dara Khosrowshahi told employees the company still has its sights on profitability, calling UberEats its "next enormous growth opportunity."
The food delivery industry is crowded, with several players including DoorDash, GrubHub (GRUB), and UberEats vying for consumers' business. They've all experienced increased demand during the pandemic, getting food to millions of people sheltering in place.
But food's not the only thing consumers want, and companies that deliver more could earn a leading position in this competitive market. With that in mind, Uber has been expanding what it's delivering during the pandemic. Just last month, it launched Uber Direct, which it's testing in a handful of markets, enabling consumers to get everything from over-the-counter medicine to pet supplies delivered. Uber connect will deliver packages between friends and family.
Those services may lose their luster when the virus is contained, but for now, they give Uber new revenue streams and more reasons for people to try its delivery services. They may also create goodwill among users who were able to get, say, a favorite book to a family member, or much-needed medicine from the pharmacy. That, in turn, could translate into repeat business in the future.
Uber eyes GrubHub
To prevent Uber's efforts in the delivery market from fading once life adjusts to a new normal, the company has been eyeing acquisitions, particularly a big one: GrubHub. Recognizing that consolidation is inevitable in the food delivery industry, the two have been holding deal talks for a while. That has taken on more urgency with the hospitality industry suffering heavily under social distancing rules. As it stands, both sides are currently haggling over a price.
It's not clear whether Uber and GrubHub will reach an agreement or whether regulators will allow it, but if Uber pulls it off, UberEats could get a whole lot bigger and more efficient. As of the end of 2019, GrubHub had nearly 24 million active diners, processing more than half a million orders a day.
The cost savings from a deal are estimated to be more than $300 million annually, but some on Wall Street think the gains could be at least double that. According to the Wall Street Journal, which broke the news of a potential deal, Grubhub would save $2 to $3 per order on the orders it delivers for customers by using Uber's platform. There will also be cost synergies in sales and marketing that will make the combined company a leaner and meaner food-delivery contender.
GrubHub isn't the only acquisition Uber is eyeing. Uber just raised $900 million in a bond sale that it said gives it fresh firepower to make more buys. Taking on debt to fund expansion shouldn't worry investors too much if the buys cut costs, expand its addressable market, and put it closer to profitability. If they result in even more losses, Uber's stock could -- and probably should -- suffer.
New life for electric scooters?
Then there's its electric scooter business, which Uber is looking at in a new light as a play on a post-COVID-19 world. In that world, some city dwellers aren't willing to hop in an Uber for a ride, take a packed subway, or board a crowded bus to get around. But they might rent an electric scooter.
Earlier this month Uber led a $170 million investment in Lime, the electric scooter, and electric bike company. As part of the deal, Lime will acquire the operations of JUMP, Uber's rival electric scooter business, and integrate its mobile app with Uber's.Electric scooters may not have been a big business for Uber prior to the pandemic, listed under Other Bets in its revenue statement, but this deal suggests the company may be taking more of an interest in them. Uber also expects to save $160 million in annual EBITDA, plus additional capital expenditure savings, from the move.
Once lockdowns are lifted, people are going to need to get around, and they may opt for micromobility as their preferred means of transportation. Uber's CEO thinks that will be the case, calling it a "critical part of the urban landscape." Demand for eScooters had been waning ahead of the pandemic, and in the long run, they may not make a feasible alternative in inclement weather. But for now, micromobility may see renewed interest among jittery consumers who'd rather not be cooped up in an enclosed space with other people.
A few crucial caveats
It's worth noting that Uber is still losing a lot of money, and it hasn't generated any free cash flow. For its just-reported first quarter, Uber posted a net loss of $1.1 billion, which doesn't even factor in $1.8 billion in writedowns related to investments gone bad. That's slightly more than the year-ago first quarter, when company turned in a net loss of $1.03 billion.
The jury is still out on whether Uber's efforts to branch out will pay off. But one thing is for sure: Life after COVID-19 will be a lot different, and Uber needs to adapt if it wants to thrive, let alone survive. After all, a leaner, more diversified Uber means more money in the pockets of its investors.