The world’s largest ride-hailing service, Uber Technologies Inc. (NYSE:UBER), is treading a precarious tightrope since its dismal initial public offering last month. It has to show quickly that it’s worth more than what its stock is trading at. But that task isn’t an easy one when growth is slowing, sales are dropping, and losses are widening.
That’s the message investors got from the company’s first earnings report since its IPO, released on May 30, which made it clear that the road to profitability for Uber will be a long and tough one. Though the results were largely in-line with analysts’ expectations, they showed that the company doesn’t have much room to maneuver in the cut-throat, competitive environment in which it operates.
Its shares are reflecting that downbeat assessment: they've dropped almost 3% since the much-vaunted IPO on May 10, having plunged more than 10% during their very first trading session. While they gained 1.5% on Friday, to close at $40.41, they've slipped -0.5% in after-hours trading over the weekend.
Slowing Growth
Uber's Q1 results showed that revenue from its core ride-hailing and food-delivery services grew 10% year-over-year to $2.62 billion, much slower than the same period a year ago, demonstrating a consistent downward trend. Net revenue growth on its core platform fell from 125% in 2017 to 39% in 2018.The contribution margin on the core platform, representing sales revenue minus variable costs, was 18% a year ago, but it fell to negative 4.5% in the first-quarter.
Growth of gross bookings, a key measure of what customers spend with Uber, is slowing too. They totaled $14.7 billion in the quarter, an increase of 34%, compared with 37% in the fourth quarter. Monthly active platform consumers expanded to 93 million, up just 2%. That is down from growth of 3% sequentially in the first quarter of last year and an average of 14% over the previous 11 quarters reported.
These weaker numbers and the company’s escalating costs were responsible for producing a whopping $1.01 billion quarterly loss, which was among the largest of any public company. A loss in an explosive growth phase isn’t unusual, but it’s hard to give that benefit of the doubt to Uber when growth is already decelerating and the management doesn’t seem to have a solid answer to satisfy its wary investors.
In post earnings comments last week, Uber tried to instill some life into its beaten-down share price by saying that Uber plans to cut costs by reducing the amount of money it spends on customer promotions and marketing, according to Uber’s Chief Financial Officer Nelson Chai. But that cost cutting intention conflicts with his statement in the earnings press release:
“Our investments remain focused on global platform expansion and long-term product and technology differentiation, but we will not hesitate to invest to defend our market position globally.”
To be sure, Uber’s leadership in the ride-hailing business is unquestionable. It offers more services than any of its competitors, including food delivery and logistics, with a much larger reach globally. It operates in 700 metropolitan areas on six continents. But still, it’s not the right time to invest in the stock when expansion is slowing and the shares clearly have more room to fall..
Bottom Line
Uber’s stock is still a name to avoid. Decelerating growth is signalling that there's a long road ahead for Uber investors before they see a sustainable improvement in its business. With a fast deteriorating macro environment for growth stocks and the competition taking its toll, we don’t think it’s a good time to go long on Uber.