Though it may be famous, Uber’s ride-hailing business isn’t profitable, nor is its food delivery subsidiary, UberEats. Over the years, Uber has tried numerous ways to turn itself around financially, from exiting loss-making markets such as Southeast Asia, Russia, and China to investing in the development of self-driving cars. This time, however, Uber is “very confident” that its acquisition of food delivery service Postmates in July of 2020 will be able to provide a much-needed boost to help it achieve profitability by 2021.
In an interview with CNBC, Uber CEO Dara Khosrowshahi said the company has enough of a diversified portfolio to make such a statement with confidence, even as the COVID-19 pandemic takes its toll on the company’s ride-hailing business.
On July 6th, Uber Technologies Inc announced that it would buy Postmates in an all-stock deal worth $2.65 billion. This would result in the merger of Postmates — the fourth-largest food delivery service by market share in the US, according to Edison Trends and Second Measure — with UberEats, the second-largest company after DoorDash. The deal would likely be finalized in the first quarter of 2021 and would help bring UberEats’ market share to above 30%, ahead of GrubHub’s 20% share and just behind DoorDash’s 45% share.
According to Uber, the Postmates deal would also strengthen its food delivery business in key markets such as Las Vegas, Los Angeles, and Phoenix, bringing in an additional 10 million active customers.
This deal came weeks after Uber unsuccessfully tried to purchase GrubHub, which has instead been acquired by European company Just Eat Takeaway for $7.3 billion.
Morningstar Inc analyst Ali Mogharabi praised this move by Uber and Postmates, saying that the consolidation of the food delivery market will lead to long-term pricing stabilization while simultaneously increasing Uber’s lead over GrubHub.
In the days following the announcement, Uber’s stock rose by around 7%, though this still wasn’t enough to bring it above the initial public offering (IPO) price of $42.
Mogharabi, however, noted that Uber’s stock price — which has been trading at around $30-$33 per share in July of 2020 — is undervalued, and believes that $48 per share is a fair value.
Uber went public in May of 2019 and was among the largest and most highly-anticipated IPOs of the year, but its stock price fell by more than 7% on its first day of trading. It has since been described as a “flop” by observers.
In January of 2020, Uber announced that it expects to be profitable by the fourth quarter of 2020 on an earnings before interest, taxes, depreciation, and amortization (EBITDA) basis. By May, Uber had withdrawn this claim as the COVID-19 pandemic took its toll on the economy and the company.
Uber lost $2.94 billion in the first quarter of 2020 as the pandemic forced many people to stay at home, causing the company’s ride-hailing business to slow down dramatically. According to a BTIG report, 25% of Uber’s riders are commuters traveling to work.
Uber’s stock also fell by 10% in the first quarter, though it has since rebounded by at least 5%. Gross bookings fell by 75% from the previous year in the second quarter. Khosrowshahi told investors in a call shortly after the Postmates deal was announced that this has since improved by about 60%.
Though Uber’s ride-hailing business has been struggling, UberEats saw its bookings more than double in the second quarter. This, according to Khosrowshahi, would “significantly offset” headwinds in the company’s rides business.