Uber (UBER), the largest of the ride-sharing businesses, has set itself a goal of profitability by 2021. Over the past few years, the company has seen incredible growth in rides and revenues, and forecasted a continuation of that trend to bring it to profitable territory by the year end of 2021. Yet, the current coronavirus outbreak could put that hopeful estimate at stake, with 2020 proving already to be a tougher year than expected.
Less Travel (A Lot Less)
Social distancing and stay-at-home orders for hundreds of millions of Americans, combined with business and school closures, have caused the number of trips on both public transport, personal transport, and shared transport to plummet.
Planned trips in 7 major cities have fallen to a fraction of what they were at the beginning of March. People are opting out of travel to stay safe at home, and the total number of ride-shares on Uber and Lyft (LYFT) could suffer dramatically, with drivers choosing not to drive in order to preserve their own well-being or enforcement of social distancing, and passengers booking less rides as well. As April brings new rules to many major cities (like Miami, for example) and attempted stricter enforcement of social distancing, ride-shares still have room to fall.
(Source: The Micromobility Newsletter)
Total travel in passenger vehicles for the month of March has been, at its high, just under 50% of travel from the month before. Although in the beginning of March this had been 10-20% of February’s travel, the last week has still struggled to break above 50% of February’s daily travel. Travel in passenger vehicle will most likely not reach February’s levels again until mass social distancing and nonessential travel restrictions start to be lifted, which could extend into May and later.
Uber’s rides accounted for 76% of its total bookings, which numbered 7 billion trips for 2019 – a 32% growth from 2018. Uber has been successfully growing its trips and gross bookings rapidly since 2016. Riders have averaged 5.7 trips per month – if the number of average trips falls in half, Uber’s total trips as well as bookings could fall dramatically. Passenger travel, as seen above, has dropped significantly off February’s levels and will take more time to grow back, especially as more states are implementing more stay-at-home orders by the first weekend in April. Uber’s drivers fall in to the passenger vehicle category, and if average drivers are cut in half (from the fall in total passenger vehicle traffic), ride availability and, therefore, passenger rides per month will fall in accordance.
From its 10-K, Uber has outlined quarterly trips (shown above), with about 110-120 million more each quarter of 2019. With the current declines in passenger traffic, Q1 trips could show a decline from Q4’s 1.9 billion, and Q2 could fall below 2019’s 1.67 billion, representing Uber’s first YoY decline in quarterly trips. Trip growth has been steady but had no prior shocks to supply and demand as have occurred within the past month and a half, and the impact on trips per Q1 and Q2 could be unexpectedly large.
UberEats Facing Competition
With Eats accounting for 22% of total bookings, Uber has a significant market share, with DoorDash and Grubhub being the two other key players. As nearly the whole restaurant industry shifts to take-out, drive-thru and delivery, UberEats could see a boost in bookings, as the three have cut delivery fees to zero. It’s hard to say as of now whether deliveries through UberEats will increase or decrease, depending on the overall deliveries purchased throughout the segment – although it does seem to be increasing currently.
(Source: Second Measure)
In addition, major cities are split with what delivery service has the majority market share. Northeastern cities are dominated by Grubhub, and the Midwestern and Southeastern are split between DoorDash and UberEats, with DoorDash having a greater market share in all but Miami. One interesting thing to note is that in cities where UberEats has its highest market share – Atlanta, Miami, Dallas – coronavirus-implemented social distancing and stay-at-home orders just recently began intensifying. UberEats is facing a two-edged sword – one, if drivers are less willing to drive (as independent contractors they cannot be forced to), then delivery bookings could fall; and if restaurant delivery orders rise with dine-in options closed, the number of deliveries could rise.
(Source: Second Measure)
Just like typical ride-sharing, competition between food delivery remains fierce. On average, DoorDash receives service from 1 of every 3 to 4 customers who come from a competing platform; 1 in 5 of UberEats users ordered from Grubhub, and over 1 in 4 ordered from DoorDash. No one platform can exert dominance, and all have to share the same customer base, and lose and steal customers from one another often.
(Source: Second Measure)
(Source: UBER 2020 Investor Presentation)
Uber has predicted 2021 to be its breakeven year, with 2019 averaging an adjusted EBITDA of -21.75% adjusted net revenue, offsetting a weak Q1 in terms of EBITDA.
Adjusted EBITDA for 2019 fell to -$2.725 billion from -$1.847 billion in 2018, with an adjustment of $878 million attributed mainly to non-ride investments. Even adjusting for stock-based compensation from the IPO puts adjusted EBITDA lower for 2019. Expecting to cut that figure in half in 2020, and then to zero by 2021, seems exaggerated given current conditions for the end of Q1 and Q2, which could easily dampen 2020’s adjusted EBITDA.
Uber’s annual interest, depreciation and amortization payments are small with regard to revenue, and it has marginal income tax provisions due to operating at a loss. Taking a look at the company’s costs as a percentage of revenue shown below shows that EBITDA can only improve with an increase in revenues with constant costs, or a decrease in costs relative to revenues.
(Source: 2019 10-K)
Uber’s cost of revenue still stands at a whopping 50% of revenues, and when combined with a general increase in costs for 2019 (concentrated in R&D), puts the company’s total expenses up 34% to 161% of total revenue. Uber needs to decrease its costs basis, especially when revenues from passengers might struggle this year, if it wants to shrink its adjusted EBITDA closer to its breakeven point. EBITDA-related expenses only hit 7% of total revenue, so the focus should be on cutting costs to increase adjusted EBITDA, as only marginal increases come from related expenses.
Because Uber takes its EBITDA as a % of adjusted net revenue, it is important to note that although Eats contributes 22% of total bookings and just over $2.5 billion in revenue for 2019, adjusted net revenue (shown below) for that segment sat at 55.09%. In comparison, rides adjusted net revenue was 98.85%.
(Source: 2019 10-K)
Assuming that passenger rides have decreased coinciding with a decrease in total passenger traffic, and UberEats deliveries remaining constant (since the effect of free delivery and restaurants transitioning to dine-in free dynamics), ANR for Eats will still struggle. Any increases in revenue for Eats will not set Uber closer to profitability by ANR measures, since the incentivizing factor needed to get drivers to deliver for Eats (poor tipping, cheaper prices, and 25% going to Uber) will not be nearly enough to compensate for declines in passenger rides.
Liquidity will not help Uber attract more riders, though its $11 billion in free cash will help it pay some current liabilities and long-term debt. Uber’s fragility in terms of riders for net revenue generation will hurt the company this quarter, with passengers and drivers alike less willing to expose themselves to the virus. There is a case in which drivers remain driving, as a portion of drivers do indeed drive to make a living; due to Uber classifying them as independent contractors, loss of rides (and loss of income) can motivate drivers to continue to drive, as they are ineligible for unemployment benefits.
Uber’s projected breakeven by 2021 seems at risk, with coronavirus developments shutting traffic down and with changing consumer behavior day by day. As of now, passengers might be less willing to get into cars with people that they don’t know, especially with chances of viral transmission increased in a small, closed space. Adjusted net revenues used in calculating EBITDA in Uber’s path to profitability prediction come from rides, with Eats only contributing half of its revenues to ANR. With passenger ride numbers at risk of declining YoY, and food delivery increasing, the company’s revenues still remain dependent on rides, not Eats, and that will not change through the end of this year.
Driver incentives for Eats remain about 45% of revenue, with drivers less likely to drive in a less profitable segment for them, although Eats traffic seems to be the only positive Uber might have in the period from the end of March through May. Strong competition between food delivery platforms can certainly cause more harm than benefit, with UberEats having large market share in cities currently entering shutdown phases. Customer willingness to shift to competitors remains high, even in ride-shares, and Uber’s extra-high surge pricing in comparison to Lyft could also hurt if passenger numbers dwindle.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.