Pandemic Puts Ridesharing Duopoly To The Test

The ridesharing duopoly got demolished this past quarter as the global quarantine kept customers and drivers at bay. Uber (UBER) reported earnings last night, and it was as painful as analysts anticipated. Mobility bookings (aka ridesharing) were down 75{c33c21346ff5e26ab8e0ae3d29ae4367143f0d27c235e34c392ea37decdb8bed} in Q2. The company was able to hedge its primary topline decline with a boom in its food delivery segment, which saw an over 100{c33c21346ff5e26ab8e0ae3d29ae4367143f0d27c235e34c392ea37decdb8bed} increase in revenues.

Uber’s unique food delivery, Uber Eats, was a tremendous hedge for the business, and its recent acquisition of Postmates has strengthened its leading positioning in key markets. Uber’s food delivery hedge is one that its primary competitor cannot boast of.

Uber shares fell over 5{c33c21346ff5e26ab8e0ae3d29ae4367143f0d27c235e34c392ea37decdb8bed} in today’s trading while its duopoly partner Lyft (LYFT) saw an over 8{c33c21346ff5e26ab8e0ae3d29ae4367143f0d27c235e34c392ea37decdb8bed} decline. This is adding to the year-to-date performance divide that we’ve seen. You can see this over 37{c33c21346ff5e26ab8e0ae3d29ae4367143f0d27c235e34c392ea37decdb8bed} stock performance deviation in my TradingView chart below (LYFT represented by candlesticks and UBER represented by the red line).

Lyft’s Upcoming Earnings

Lyft’s shares fell sharply today because of a larger ridesharing decline than conservative analysts anticipated in Uber’s Q2 report. Without the insulation of food delivery, the pure-play Lyft is overly exposed to the pandemic’s headwinds.

Lyft will be releasing its Q2 earnings after market close on Wednesday, August 12th, and analysts are projecting a disastrous quarter. According to Zacks Consensus estimates, EPS projections are sitting at -$1.56 on sales of $336.68 million, representing a year-over-year decline of 130{c33c21346ff5e26ab8e0ae3d29ae4367143f0d27c235e34c392ea37decdb8bed} and 61{c33c21346ff5e26ab8e0ae3d29ae4367143f0d27c235e34c392ea37decdb8bed}, respectively.

Considering Uber’s earnings last night, I think Lyft’s results could be worse than these already seemingly conservative estimates. Investors are pricing this pessimism into the stock today as the share price falls.

Uber Opportunity

This pandemic has created a rapidly digitalizing economic environment. Food delivery services have been taking center stage amid the global pandemic with the stay-at-home initiative advancing the adaptation of this space by what would have taken years in only a matter of months.

The exploding food delivery space catalyzed my addition of Uber (UBER) into our Headline Portfolio as the company secures an attractive deal with the Millennial & Gen Z driven Postmates.

Uber is getting ready to break out of its $30 – $38 per share range that it has been trading in for the past three months after reaching a lucrative agreement to acquire Postmates. The $2.65 billion all-stock purchase of Postmates propels Uber Eats into a decisive #2 positioning in the rapidly consolidating food delivery market and gives them good positioning in the grocery delivery segment.

Grubhub Snub (Best-Case Scenario)

Uber’s bid for Grubhub (GRUB) fell through after the two firms couldn’t reach an agreement last month, and this was honestly the best-case scenario. Grubhub would have cost Uber more than double what it is paying for Postmates, and it would not have created the same Millennial-focused image that the enterprise is looking for. Grubhub has been losing market share to its competitors for years, and its share price has been illustrating its inability to compete.

Postmates is a younger business with an enormous amount of growth ahead of it. Once again, Uber’s shrewd management team proves its ability to navigate the highly uncertain market in which it operates.

Postmates + Uber Synergies 

Uber’s management estimates that the acquisition will create $200+ million in run-rate synergies by the end of next year. Postmates will be bringing with it 115,000 restaurants, over 10 million loyal customers, and give Uber Eats a dominant positioning in critical markets like LA and Miami.

Investors and analysts are optimistic about the synergies that this acquisition will create for the combined firm, pushing UBER up 6{c33c21346ff5e26ab8e0ae3d29ae4367143f0d27c235e34c392ea37decdb8bed} immediately this acquisition announcement last month. This is an exciting anomaly for UBER traders and investors, as acquiring firms typically experience a share price drop after an acquisition announcement. The stock price rally illustrates that this deal was struck at a price that was far less than the combined enterprise’s anticipated synergies.

Uber Eats has been an excellent hedge for Uber’s overall business amid this pandemic. As ride-hailing revenues fell, food delivery sales surged. Postmates will not only support Uber’s proliferating food delivery service but its commanding position in the ridesharing business with its brand loyalty in the South and the West.

On a recent CNBC interview with Uber’s CEO, Dara Khosrowshahi, he explained Uber’s plan to become an everything delivery business from food to people. Postmates highly esteemed delivery platform will provide the business with an accelerated step in that direction.

The firm expects to reach profitability by next year, and Postmates is going to be a key component to making that expectation a reality.

Final Thoughts

I see Uber as an excellent buying opportunity, as these shares fall towards $30 per share. The long-term potential of this business is healthy, and these shares will see robust growth once people start heading back to work.

I think that Uber will see a tailwind once the economies fully open as more people utilize Uber’s leading ride-hailing service instead of exposing themselves to public transportation.

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