Uber (UBER) on track to tap recovery opportunities as delivery boom continues

When movement restrictions were imposed after coronavirus tightened its grip on the business world, it was natural for mobility service providers like Uber Technologies (NYES: UBER) to lose business. For the ride-sharing platform, which is yet to generate profit after going public more than a year ago, the pandemic could not have come at a worse time. However, the company brought cheer to shareholders last week when it reported better-than-expected bottom-line numbers for the third quarter.

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Read management/analysts’ comments on quarterly results

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Shares of the Silicon Valley tech firm peaked this week and are expected to flatten as the quarter progresses. The valuation, which remains moderate, offers a unique buying opportunity for long-term investors. The immediate prospects of the stock, which has a strong buy rating, is not very encouraging though. Besides the improvement in financial performance, the latest stock rally was also propelled by the favorable vote in California on the rights of drivers.

Cost Pressure

Having spent about $18 billion on COVID-related initiatives, the company might need to take steps to ease the cost pressure, given the high level of safety preparedness the business demands. In response to the unexpected COVID setback, the management had recently pushed back its turnaround goal by a year, to 2021. It claims to have positioned the mobility business for any emerging recovery scenario and to sustain the recent momentum in the delivery segment.

“All early evidence we see makes it increasingly clear that it’s a question of when not if our mobility business will recover. These trends give us the confidence that mobility will fully recover as the public health situation improves and as people return to Uber to get to work, go shopping or reunite with their friends or family. Finally, it’s important to note that we’re continuing to invest in product innovation to drive growth,” said chief executive officer Dara Khosrowshahi during his interaction with analysts after the earnings release.

The executives are confident that the new consumption pattern brought about by the shelter-in-place orders, wherein customers are rapidly becoming used to door-delivery services, will stay ever after the crisis.

Mixed Q3

The company strengthened its financial position in the third quarter of fiscal 2020, after a dismal first half that was marked by widespread disruption. Though it reported a loss of $0.62 per share for the most recent quarter, it was much better than the previous two quarters and slightly above the consensus forecast. Also, the slowdown in gross bookings was not as intense as estimated.

Meanwhile, revenues dropped 18% from last year to $3.13 billion and came in slightly below expectations. It is worth noting that all the other businesses except the mobility segment registered growth during the period, which was widely expected.

While we expect the recovery to continue, we would highlight two factors to consider in Q4. First, EMEA, which was our most recovered geography in Q3, started experiencing new lockdowns in October, including in France and UK EMEA mobility gross bookings declined 3% month over month in October. And FX will continue to be a drag on year-on-year trends, particularly with LatAm as our most recovered geography today.

Nelson Chai, chief financial officer of Uber

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Stock Rallies

The highlight of Uber’s third-quarter report was the rebound in international markets. Revenues grew in double-digits in the Asia Pacific and EMEA, while they contracted in the Americas. With the report clearly showing the company’s resilience to the virus crisis, the stock rallied and has gained about 14% since the announcement. At $48.01, the stock opened Monday’s session at an all-time high, with most of the gains coming in just one week.