Uber (UBER -7.25%) Eats once held an exclusive delivery partnership with McDonald's (MCD -4.57%). But that deal ended in early 2019, and McDonald's subsequently spread out its bets by signing additional delivery deals with DoorDash (DASH -8.61%) and Grubhub (GRUB).
The end of that exclusive deal highlighted the symbiotic but fragile relationship between third-party delivery platforms and restaurants. It also suggested that Uber, which still generates most of its revenue and all of its adjusted EBITDA from its ride-hailing platform, could be a flimsier investment than McDonald's -- even though it was growing at a much faster rate.
Growth-oriented investors might still favor Uber over McDonald's today, but I believe the fast-food giant will easily outperform the ride-hailing and food-delivery company this year, for three simple reasons.
1. More sustainable growth
Uber's revenue fell 14% to $11.1 billion in fiscal 2020, as Uber Eats' growth throughout the pandemic failed to offset its declining ride-hailing (mobility) revenue. Uber's growing dependence on Uber Eats is worrisome because the food delivery platform remains deeply unprofitable.
Uber Eats' adjusted EBITDA loss narrowed from $1.37 billion in 2019 to $873 million in 2020, but its mobility business's adjusted EBITDA plummeted 44% to $1.17 billion -- which offset most of Uber Eats' bottom-line improvements.
As a result, Uber's total adjusted EBITDA loss only narrowed slightly from $2.73 billion to $2.53 billion for the full year. On a GAAP basis, its net loss narrowed from $8.51 billion to $6.77 billion.
That pressure could ease this year as the pandemic ends and its mobility business recovers, but Uber Eats could also lose its pricing power with restaurants and diners in a post-pandemic world. Its recent takeover of Postmates, along with the inevitable promotions to keep pace with DoorDash and Grubhub, should prevent Uber Eats from generating a profit anytime soon.
Wall Street expects Uber's revenue to surge 46% in fiscal 2021 with a narrower net loss, but it should continue burning cash throughout the year.
McDonald's revenue fell 10% to $19.2 billion in fiscal 2020, as its global comparable-store sales dipped 7.7% throughout the pandemic. Its net income tumbled 22% to $4.73 billion, and its EPS dropped 20%.
But McDonald's top-line growth isn't dependent on an unprofitable business segment like Uber Eats. Instead, its core business -- which maintains stable margins by franchising about 93% of its restaurants to collect high-margin rent, royalties, and other fees -- should easily recover after the pandemic ends.
McDonald's expects new menu items, including spicy Chicken McNuggets, a new chicken sandwich, and new McCafe bakery items, to bring back diners. It also plans to continue investing in its "three Ds" (digital, delivery, and drive-thru) to reduce its dependence on in-store diners.
McDonald's revenue dipped 6% in the first quarter of 2021, with a 3.4% decline in its global comps, as its EPS dropped another 15%. That tepid start to the year was disappointing, but analysts expect its revenue and earnings to rise 15% and 39%, respectively, for the full year as its growth accelerates.
2. Fewer competitive and regulatory headwinds
Uber faces tough competitors in the ride-hailing and food delivery markets. It shares a near-duopoly in the ride-hailing market with Lyft in the U.S., and it faces various regional competitors and taxi services overseas.
Uber Eats ranks a distant second behind DoorDash in the U.S. food delivery market, and it competes against deeply entrenched rivals like Just Eat Takeaway, which is on the cusp of buying Grubhub, along with Delivery Hero's Foodpanda, Zomato, and Deliveroo in other markets.
Uber also faces regulatory pressure to raise its wages and reclassify its drivers from independent contractors to employees. All those competitive and regulatory headwinds will make it difficult for Uber to narrow its losses.
McDonald's, which operates more than 39,000 restaurants in over 100 countries worldwide, can fend off its competitors with its scale and universal brand appeal. It also faces regulatory pressure with demands for higher wages, but it doesn't face existential threats like Uber and its "gig economy" peers.
3. The rotation from growth to value
Lastly, growing concerns about rising bond yields and interest rates have recently sparked a rotation from frothy growth stocks to cheaper value stocks.
Uber isn't terribly expensive at six times this year's sales, but its wobbly business model, its long list of competitors, unresolved regulatory challenges, and a sea of red ink could all leave it more exposed to this bubble-bursting rotation than McDonald's.
Meanwhile, McDonald's still looks reasonably valued at 22 times forward earnings and pays a forward dividend yield of 2.5% -- which is still higher than the 10-year Treasury's current yield of 1.5%. That stable P/E ratio and yield should help McDonald's withstand the market volatility better than Uber.
The bottom line
Uber's business could stabilize over the next few quarters, but it still has a lot to prove before I'd consider it a worthwhile investment. McDonald's might seem like a dull investment, but its slower and steadier growth could help it stay ahead of Uber and other speculative stocks this year.