Last November, I wrote that Uber (NYSE:UBER) was on the comeback trail, making Uber stock a buy.
At the time, it was trading around $27. In the months since, it’s been on a wild ride ranging between a high of $42 and a 52-week low of $13.71.
As it rebounded from its mid-March low, the question is whether I’m as committed to its stock as I was back in November.
Here in Halifax, Nova Scotia, we don’t have Uber, but strangely, we do have Uber Eats. I can say from my own little world that its delivery business is busy, busy, busy. Now, I’ll grant you not every restaurant here is open and providing takeout and delivery, but many are and that kept Uber Eats drivers in business.
InvestorPlace contributor Ian Cooper recently suggested that Uber CEO Dara Khosrowshahi is hugely confident about Uber Eats’ growth during the coronavirus pandemic: “One of the companies benefiting is Uber Eats, ‘even in Seattle,’ said Khosrowshahi. Just over the last week, Uber Eats saw a 10% increase in sales week over week.
Uber shareholders need some good news because there’s none on the ride-hailing side of the business. Data shows that Uber rides in the U.S. are estimated to have fallen by as much as 94%. Uber’s CEO has said rides in hot spots like Seattle are down as much as 70%.
The company’s Q1 2020 results are going to be bad; its second-quarter results possibly even worse. Like the virus itself, it’s overall business is going to get worse before it gets better.
The Company Has a Battle Plan
On March 18, Khosrowshahi told analysts that Uber had $10 billion in unrestricted cash at the end of February, giving it plenty to ride out the pandemic. He emphasized that even if its rides business drops by 80%, it will only burn 60% of its cash, leaving $4 billion coming out of the crisis.
“About two-thirds of our cost of revenue and operating expense, excluding stock-based compensation, is variable,” Khosrowshahi said. “If a trip doesn’t happen, many of these costs go away.”
So, in a counter-intuitive way, less is better in this instance.
Some analysts believe that the crisis will only strengthen Uber’s hold on the ride-hailing market. I would tend to agree with this prognosis. During economic difficulties, weaker businesses fade away while stronger players take market share—addition by subtraction.
In addition to having a fortress built on cash, Uber is using Uber Eats to grow its share of grocery deliveries in the UK, Australia, France, and elsewhere. It’s still early in the game, but if enough people try the service, once the world shakes off the coronavirus, that would likely mean permanent market share gains on top of its restaurant business.
All you can do is all you can do. It would appear that Khosrowshahi is pulling all the levers available to him at the moment. In the long-run, that should be good for Uber’s overall business.
The Bottom Line on Uber Stock
In my November article, I stated that the risk/reward for Uber stock was finally tilting in the investors’ favor. Four months later, while the near-term issues make significant gains nearly impossible for the foreseeable future, the analysts’ 12-month target price is $42.28, 66% higher than today.
While I still consider Uber stock a buy for aggressive investors, I could see its share trading in the teens at some point in the next 2-3 months, providing investors with a better entry point.
If you bought at $14, you got yourself an excellent deal.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.