Uber: Revisiting The Profitability Forecast, And It’s Only Worse

Summary

Uber originally aimed to have a break-even in adjusted EBITDA by 2021, but the first two quarters have that figure down $181 million YoY.

Rides bookings are down 73.88% since Q4 2019, while contribution to adjusted EBITDA is down 92%.

Eats bookings have grown 122% YoY, but adjusted EBITDA for the segment is still negative.

Travel in the 1 to 25 mile range has not shown any signs of recovering through July.

While Eats is the bright spot for Uber, extra incentives had been 45% of revenue in 2019 and is likely still high, compared to .4% for rides.

Back in April, Uber’s (UBER) vision of breaking into profitability by 2021 already had seemed at stake to me (read here) – albeit late March had the most drastic declines in passenger travel, impacts to trips and a shift towards Eats was not expected to be enough to support that vision. Uber had seemed overly optimistic then in regards to the potential developments and shocks to the industry, of which we have seen now – a $2.9 billion Q1 loss and another $1.8 billion loss in Q2.

As the coronavirus situation does not seem to be clearing soon, Uber has come to find a surge in growth within the Eats (Delivery) segment, as ridesharing (Mobility) is still hampered. While some might look at that and think that when ridesharing recovers, so will Uber, and profitability can come back on track, the issue is Uber’s excessive growth in Eats as it is not a major driver of adjusted net revenue even with high quarterly growth.

Less Travel (Still)

Back in April’s article, passenger traffic had fallen off a cliff, and fast, as nationwide lockdowns were enforced rapidly. As much of that is no longer the case, people are free to travel by car again – but whether or not they do so is up to them.

And less travel seems to be the case, especially within the most heavily traveled 1-25 mile range – this range is also most likely the range with the highest proportion of trips for Uber, as <1 mile is almost unnecessary for the cost and >25 or >100 miles will cost more than a pretty penny, especially with surge pricing.

Rides are still down, and there does not look to be much recovery even shaping up within travel trends.

Source: Bureau of Transportation Statistics

Although April 12 had the low for all of the trips per day categories, overall trip volume in the middle range distances are still significantly off of 2019’s levels. Trips over 100 miles are relatively unchanged, as those are more likely to be discretionary (vacation); trips less than 1 mile are still down over 100 million per day, while trips 1 to 25 miles are down over 500 million per day.

500 million trips per day in general is no small gap to fill and will take time to recover. Much more so if the virus situation does not get cleared up, and certain restrictions are still in place. There will be individuals who still avoid travel unless necessary due to health reasons or fearfulness, which would be amplified in traveling in a car with a complete stranger. Uber needs trips in that mile range to uptick meaningfully, as it likely does not capitalize on the extreme categories (<1; >100) for overall booking volume, of which it lost 940 million trips YoY.

Eats Growth is There, But Overlap is Still Rife

Back in February, the meal delivery environment was split between four key players – DoorDash (DOORD) taking 39% share, Grubhub (GRUB) taking 30%, Uber Eats taking 20%, and Postmates 10%.

Which company is winning the food delivery war? - Second Measure

Source: Second Measure

While the overall indexed sales has spiked, the picture still remains similar – DoorDash has increased its share up to 45% of total sales, Grubhub has slipped to 22%, while Uber Eats has a 4% share gain to 24%.

Source: Second Measure

While Uber has managed to take itself organically up to 24% of the market as it rapidly expanded, its $2.65 billion acquisition of Postmates is barely giving it a higher market share than what Grubhub had back in February. But the key lies not within the share of the market that Postmates had – it lies within tendencies of customers to still order from competitors. While Uber had targeted its acquisition of Postmates to consolidate the market, gain market share, and aim to boost profitability, it doesn’t matter – customers have chosen and still choose to order from those other competitors.

Source: Second Measure

DoorDash emerges as the winner of the customer overlap, with 4 in 10 customers who use competing platforms also ordering from DoorDash. UberEats barely gets 1 in 4 customers who order from Grubhub or DoorDash – a stark difference to DoorDash, and the reason why DoorDash is controlling nearly half of the market.

Uber Eats also took its highest share of customers from Postmates, and vice versa; now that the two will be merged, how much overlap will they be able to take from DoorDash and Grubhub? Postmates lagged far behind in customer overlap, barely getting 1 in 8 to its platform from Grubhub and DoorDash.

While Uber Eats is trying to consolidate the food delivery market into three – itself, DoorDash and Grubhub, customer overlap is not likely to change due to the overall nature of the sector. Uber Eats is also not likely to eclipse DoorDash for the top spot in market share due to DoorDash’s dominance in customer overlap.

The Profitability Picture Lies with Rides, Not Eats

Uber’s 2021 profitability forecast is a projected break-even in adjusted EBITDA taken from its 2020 investor presentation. Given that we now have two quarters of earnings under the belt, that picture can now be scrapped, from the combination of unlikely recovery in trips per day in a key trip distance range and delivery’s lack of contribution to adjusted EBITDA. Keep in mind that Uber takes adjusted EBITDA as a % of adjusted net revenue.

Source: Uber 2020 Investor Presentation

Uber has posted two of its three largest quarterly net losses since 2017 in the past two quarters, as ridesharing net revenue has tanked. From Q4 2019 to Q2 2020 (using Q4 instead of YoY as Q4 represented the peak), ridesharing adjusted net revenue has fallen 73.88%, down to $793 million, as bookings have fallen $10.5 billion. And while that may sound bad enough, adjusted EBITDA for the segment fell over 92% to $50 million, down from $742 million in Q4 2019.

Uber acknowledged that it “aggressively managed costs” to post a positive ridesharing adjusted EBITDA, in part by cutting its workforce. But it still made acquisitions, with Postmates the most notable. Yet Eats is barely making any impact on adjusted EBITDA.

Eats has seen rapid growth, with bookings up 122% YoY, and adjusted net revenue up 163%. But even as bookings have grown to nearly $7 billion, adjusted EBITDA is up only $54 million YoY – a pretty poor story of capitalizing on growth (although it is half of what it had been at ($461 million) in Q4 2019).

While much of the $181 million YoY decrease in adjusted EBITDA surfaced from a drastic decline in Mobility EBITDA, Delivery EBITDA did absolutely nothing to offset that decline. But it’s not like adjusted EBITDA is better – it’s down $225 million QoQ.

As current trends with travel could continue, Uber is still ultra-reliant on Eats to drive its gross bookings, taking nearly 70% for the quarter. But Eats is not contributing to adjusted EBITDA amid high growth, as the segment’s adjusted EBITDA is still ($232 million).

As stated in my previous article in April“[a]ny 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.”

That has happened – Uber is actually farther to its projected profitability as of now, with adjusted EBITDA deeper in the red than 2019. Uber still has to incentize Eats drivers significantly more than rideshares – 2019’s extra incentives for Eats reached about 45% of revenues, while rideshare extra incentives were not even .4%.

Another important factor in the rest of the year surfaces within drivers’ classifications as independent contractors and not employees – for one, drivers can’t get unemployment benefits and therefore could be forced to drive to earn money if those individuals need extra income. But with rides bookings down heavily, those drivers won’t just drive for nothing – those extra incentives are likely to remain a similar percentage, or higher, as drivers might not be as willing to drive within the new circumstances.

Uber is facing lawsuits about driver classification, which could easily put the brakes on any steps towards projected profitability – while the outcomes are hard to predict, if Uber is forced to classify drivers as employees instead of independent contractors, Uber’s expenses are likely to rise as a result of that re-classification.

All in all, Uber’s 2021 forecast of profitability needs more than a miracle to occur on its adjusted EBITDA basis. The pandemic has decimated the ridesharing business, while delivery is finding itself a massive boost to bookings. But that won’t help Uber. Extra incentives for drivers in Eats are way too high, given the underlying factors that reduce overall driver-take from driving for Eats instead of rides, and adjusted EBITDA has barely shown any progress YoY even with bookings more than doubling.

Uber’s acquisition of Postmates is not likely to be a significant driver of market share, although it will provide a much needed boost; DoorDash controls nearly half the market already and is the winner in customer overlap, which Postmates was barely prominent in. The acquisition does not seem to be able to change the flow of customer overlap, as DoorDash has seen the highest uptick (from 27/28% to 40% from Grubhub and Uber Eats), while Uber Eats is landing 23% from DoorDash and Grubhub, up from 17% and 15%, respectively.

Ridesharing is Uber’s necessity. It won’t become profitable at this rate without it recovering. But travel numbers are still down significantly in the predominant distance range, and Uber is down nearly 1 billion trips YoY on the quarter. Recovery will take time, and time is what Uber can’t afford in its steps towards profitability. There’s still high competitiveness in ridesharing, with Lyft (LYFT) taking its fair share of the market.

With Eats dominating Uber’s growth for the past two quarters, adjusted EBITDA still slipping farther in the red, quarterly net losses widening, and ridesharing down significantly with no signs of a quick recovery, Uber’s profitability projection is more likely to arrive a few more years down the road. However, shares are likely to trade higher as hopes of recovery start to emerge within rides bookings, even if the profitability picture does not change by much.

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