Uber Technologies Inc (NYSE:UBER) is an interesting company to watch. It spent the 2010s being lauded as a unicorn company for being valued at over $1 billion while only a startup.
This is because the company disrupted the taxi, bus, and limousine industries and created the ridesharing economy. It’s such a massive industry that even its competitor Lyft Inc (NASDAQ:LYFT) was a unicorn.
However, Uber’s investors had a rocky ride, and even its post coronavirus moves are likely to end with a net loss, as the company struggles to make profits.
So, is Uber stock overvalued?
That’s the question investors are asking as the company struggles to reach and maintain its Initial Public Offering price of $45 per share.
It’s also pushing into other services and expanding into new markets as competitors flood every turn. Its May 29, 2019 IPO valued the company at $82.4 billion, and those early believers have still yet to recoup their investment costs.
Let’s navigate Uber’s team, paperwork, and history to determine if it’s possible to make money by investing today.
Why Uber Stock Went Up
Uber is synonymous with ride hailing today, but it wasn’t always that way. Pew Research shows the industry went from 33 percent of the adults having never heard of it in 2015 to only 3 percent in 2018.
When the economy collapsed and unemployment rates jumped to 14.7 percent in April due to coronavirus lockdowns, people flocked to freelance marketplaces like Uber to earn a living and keep the lights on.
Although bookings for Uber Rides declined by 3 percent in its first quarter, Uber Eats orders increased by 54 percent, this gave the company $15.8 billion in gross income from its bookings, an increase of 8 percent from the prior year.
This set the stage for a $2.65 billion July acquisition of Postmates, a food delivery service that also delivers for Walmart, the Apple Store, and more.
This move made it clear that Uber is doubling down on its delivery services as municipal shutdowns and public lifestyle changes moved toward ecommerce and delivery. Heading into the fourth quarter of 2020, retailers and restaurants are still struggling, and these meal deliveries are a key to them staying in business. This is especially true in foreign markets like Japan, where ride sharing has yet to take off the way it has in the U.S.
It didn’t take long for Uber share prices to rebound from its 52-week low of $13.71 to over $30, but can its financials support a market cap of nearly $60 billion?
Uber Financials Are Still Negative
Although famous in investment circles for a decade, Uber is not yet profitable. In fact, it loses money each year – revenue in 2019 was $14.1 billion, a growth of 26 percent from the prior year. Still, the company lost $8.5 billion, compared to a profit of $997 million for that year.
The company also entered 2020 with a hefty amount of debt on its balance sheets, showing $7 billion at the beginning of the year and predicting only a $1 billion loss for 2020. Of course, that was before the coronavirus hit.
Second quarter revenues of $2.2 billion represent a 29 percent decline from 2019, which includes a 35 percent decline in gross bookings to $10.2 billion. However, this was largely created by a 73 percent decline in Ride bookings, while delivery revenue grew 103 percent year-over-year.
Its net loss of $1.8 billion left it with $7.8 billion in cash on hand. The company also lost $48 million in COVID-19 response initiatives and is a constant target for lawsuits. It also has to account for its $3.65 billion all-stock acquisition of Postmates.
This has some investors wondering if Uber’s valuation is too high.
Is Uber Valuation Too High?
Uber’s financials make it clear that CEO Dara Khosrowshahi is focused on deliveries for growth. While it made the first move, it wasn’t long before competitors Lyft and Grubhub partnered to face the company head on. It was also reported in mid-October that the company is looking to exit its Uber Elevate unit.
The company spends heavily on money-losing research and development projects that aren’t panning out the way they thought. Elevate is the company’s 80-employee aerial drone delivery and passenger service that never took off.
The company’s autonomous vehicle program also hit several speed bumps, being put on pause in 2018 after the first fatality recorded in self-driving cars occurred in Tempe, Arizona.
It restarted the program in San Francisco in the spring of 2020, and it’s unclear when a more widespread rollout could occur. Its self-driving cars may be the future for ridesharing, but human interaction is still necessary for delivery services.
There’s also the matter of an impending recession that could cause Uber’s stock to drop.
Will Uber Stock Drop?
Although it’s up from the coronavirus pandemic, Uber still hasn’t surpassed its IPO price from the summer of 2019. Growth opportunities are also limited, as the service is already available in over 10,000 cities across 80 countries.
Whenever it does enter a new market, it often faces strong opposition from the local government and taxi industry. It’s going to need to keep signing up both restaurants/stores and customers (along with drivers) to keep its three-sided marketplace profitable.
That’s not going to be easy in 2021 – government stimulus packages and financial protections will be largely gone, and rising food costs combined with lower incomes will squeeze the margins for everyone involved. This could put Uber in a precarious position where it struggles to ever reach its initial market cap. It could be years before it does.
Is Uber Stock Overvalued? The Bottom Line
Uber is one of the most visible brands these days, and it may feel like its been around forever at this point. The taxi industry disruptor was leaned on during the coronavirus, but not for its ridesharing. The company’s future appears to be in food delivery service, although even that market could change as society adjusts to COVID-19.
Still, it’s struggling to make profits from its growing revenue, and growth opportunities are far slimmer than they were ten years ago.
If you believe the company will reach its IPO price, now’s a great time to invest. The stock price is discounted, and it has plans to decrease spending and increase profitability to earn the praise that was always showered on it.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.