Drivable services have become an important indicator of the resurgence of normal life in this pandemic economy. Their bookings collapsed during the first quarter as the rapid spread of the virus forced governments to institute lockdowns and mass closures of businesses and offices.
That situation put stocks of Uber Technologies (NYSE :), the world's largest taxi service, and competitors under pressure, causing them to collapse. But as economies around the world continue to cope with the virus, which has drastically changed our travel routines, it is becoming clear that some transportation companies can survive in this digital world.
After falling 50% in March, Uber stock has since increased by 144%. Shares of the San Francisco-based company closed at $ 36.78 in New York on Wednesday, up more than 20% over the year.
Uber 1-year graphics.
But other players don't see the same powerful rebound. Shares of LYFT (NASDAQ :), Uber's biggest rival in North America, are down 38% this year.
What separated Uber from other players during this global health crisis was the diversification of the company. The company's food supply boomed during the pandemic, helping to lessen the blow caused by people taking fewer trips.
In the second quarter, Uber generated more revenue from delivering food than from transporting people. Revenue fell 29% to $ 2.24 billion, but delivery revenue was up 103% and is now at the heart of Uber's growth strategy. This year, Uber further strengthened its position in the delivery industry by acquiring Postmates in a $ 2.65 billion deal. The US-based ready meals on-demand delivery service operates in nearly 3,000 cities across the country.
Uber has also started delivering other items, including groceries, recipes and packages. Uber now includes UberEats, the food delivery service, as part of the delivery category. After the deal with Postmates, Uber has 37% of that market, second only to DoorDash (45%). enabled drivers to repurpose drivers during COVID-19 and keep more users engaged, potentially reducing post-pandemic marketing and promotional spend.
At an investor conference last month, Uber CFO Nelson Chai told stakeholders that perhaps the worst is over in the ride-hailing unit as gross bookings improve. For example, in August gross posting volume was down less than 10% year-on-year, compared to a 12% decline in July and 36% in the second quarter.
As Stifel Nicolaus analyst Scott Devitt said on Sept. 8, repeating his Uber buy review and stepping up his target price from $ 40 to $ 41:
"For a longer term horizon, we continue to recommend Uber stock as an investment idea for a recovery scenario with a stay-at-home deepening in food delivery."
Uber & # 39; s rapid cost-cutting efforts, as a way to address the pandemic decline in its ride-sharing service, is another factor that is keeping investors calm during this crisis. Uber has announced a series of measures to reduce costs, including ending food delivery operations in more than half a dozen countries and cutting about a third of the workforce in its Middle East car rental company known as Careem. In May, Uber announced it would lay off 14% of its workforce.
One potential threat facing Uber and other gig economy companies is government-driven. The California legislature passed a law last year that aims to force Uber and other operators to reclassify workers, who are now independent contractors, as employees. This step makes them eligible for benefits, which could be a significant addition to the company's top cost.
If Uber reclassified drivers, fares in San Francisco would rise by as much as 30% and, according to an analysis by Uber, as much as 120% in less populated areas of California where demand is scarce. Uber opposed this, but was ordered by a state judge in August. An appeals court will hear the arguments in the case on October 13
Bottom Line
Uber's business model has proven very resilient during one of the greatest economic shocks of our time. That strength and diversification makes it an attractive buy for long-term investors watching the post-pandemic economic recovery and for companies well positioned to take advantage of it.
