Uber's (NYSE:UBER) stock has lost a third of its value after its IPO last May, as concerns about the ride-hailing giant's massive losses and business practices overshadowed its decent revenue growth. The COVID-19 crisis, which caused its rides to plunge about 80% in April, exacerbated the pain.
Yet plenty of investors remain bullish on Uber: Most Wall Street analysts who cover the stock still rate it as a "buy," with an average price target near its IPO price of $40 a share. However, I still wouldn't touch Uber's stock, for four simple reasons.
1. Fighting two losing battles
Uber's ride-hailing business and its Uber Eats food delivery business are both ceding market share to faster-growing rivals.
Uber's market share in the U.S. transportation-sharing market could drop from 75% in 2019 to 71.7% in 2023, according to eMarketer, as Lyft's (NASDAQ:LYFT) share rises from 48.2% to 59%. There's a clear overlap between the two services, but Second Measure recently claimed "most" U.S. ride-hailing customers are loyal to one of the two services.
Uber Eats' share of the U.S. food delivery market declined from a peak of 28% in mid-2018 to 22% this May, according to Second Measure, putting it in third place behind DoorDash (45%) and Grubhub (NYSE:GRUB). Trying to maintain its market share in two cutthroat markets will limit Uber's pricing power, and new regulations aimed at Uber's classification of drivers as "independent contractors" could further crimp its margins.
2. Uber Eats is killing the company
Last quarter, Uber's ride-hailing business generated $2.47 billion in revenue, with an adjusted EBITDA of $581 million. Uber Eats generated $819 million in revenue, but its adjusted EBITDA loss of $313 million erased most of the ride-hailing segment's profits. Uber Eats is struggling to stay relevant in the saturated food delivery market, which is filled with players that still can't squeeze out a profit between their low wages and high fees.
Uber tried to merge Uber Eats with Grubhub to stay competitive, but that deal fell through last month. Uber subsequently agreed to buy Postmates, which controlled just 8% of the food delivery market in May, in a $2.65 billion all-stock-deal announced Monday. But that acquisition will merely increase its exposure to a difficult market.
3. Wasteful spending on autonomous cars
Uber's long-term strategy is to replace its human drivers and couriers with autonomous vehicles -- which can't protest, demand higher wages, unionize, or demand to be classified as full-time employees. As a result, Uber's driverless investments, which are housed in its "ATG (Advanced Technologies Group) and Other Technology Programs" segment, are taking a huge bite out of its bottom line.
The segment, which also inexplicably develops flying cars, generated just $25 million in revenue but racked up an adjusted EBITDA loss of $108 million last quarter. Uber will keep burning money on these long-shot initiatives for the foreseeable future.
4. No path toward profitability
Uber generated $3.5 billion in revenue last quarter, but that trickled down to a whopping net loss of $2.9 billion. Most of that loss came from a $2.1 billion impairment writedown on its investments in Didi in China and Grab in Southeast Asia. Uber exited both markets in exchange for minority stakes in both companies.
Its adjusted EBITDA loss narrowed year-over-year from $869 million to $612 million, but that metric generously excluded its stock-based compensation, COVID-19 safety initiatives, its writedowns, and other one-time and variable expenses.
Over the long term, it's doubtful Uber can ever generate a profit as it loses market share in both rides and food deliveries while throwing more money at autonomous technologies and desperate acquisitions like Postmates.
Uber previously raised more cash with bond offerings, which helped it end last quarter with nearly $9 billion in cash, equivalents, and short-term investments. But that strategy could also prove dangerously unsustainable since the company is already shouldering $5.7 billion in long-term debt.
The bottom line
Uber needs to do one of two things: aggressively retaliate against its rivals in the ride-hailing and food delivery markets, or tighten its purse strings and focus on profits instead. Unfortunately, it's pursuing neither strategy, and that lack of direction -- which suggests it's still thinking like a start-up instead of a public company -- could make it a toxic investment for the foreseeable future.