Investors are suddenly optimistic about Uber. Shares climbed over 9% on Monday and were poised to close above their $45 IPO price for the first time since June 2019, the month after the company went public. The move comes despite last week’s Q3 earnings report showing a second straight quarter of declining revenue, with another drop expected this period, and a cumulative net loss of $5.8 billion for the year so far. Monday’s rally came after drugmakers Pfizer and BioNTech indicated their Covid-19 vaccine is more than 90% effective, raising optimism that demand for consumer services like ride-sharing may soon return in force. The gains follow last week’s 34% jump, sparked by the passage of California’s Proposition 22, which will allow Uber to continue classifying its drivers as contractors instead of employees. Lyft shares soared 22% on Monday, following a 31% increase last week. However, while Uber’s stock has erased its post-IPO losses and finally generated some gains for investors, Lyft remains almost 50% below its debut price from last year. The difference between the companies is food delivery. Uber has partly offset declines in its core ride-sharing business business this year through Uber Eats. That service recorded gross bookings growth of 134% in the third quarter while Uber’s core ride-hailing division sank by 53%. Still, the delivery business lost $183 million on an adjusted bais, after a deficit of $232 million in the second quarter. Richard Kramer, an analyst at Arete Research, told CNBC in August that Uber was likely to “slip into a net debt position” in the next quarter because of its cash burn rate.
Reasons for optimism
Uber and its proponents believe the company’s profitability outlook is improving even with the challenges of the pandemic. The negative margin in the delivery business shrank to 16.1% in the third quarter from 26.2% in the second quarter and 59.4% in the first. Meanwhile, its positive adjusted margin in ride-sharing grew to 17.9% in the third quarter from 6.3% the prior period, though still down from 23.5% in the first three months of the year. Factor in those developments and then look to a not-too-distant future that includes open bars and restaurants, some live events, and workers commuting to and from the office, and there’s at least a sensible narrative for investors to bet on the company. “Ultimately, we view a rides recovery as ‘when’ not ‘if’ and now represents a source of upside in 2021 if/when mass availability of a vaccine can jumpstart travel/social-related ridesharing demand,” analysts at Guggenheim wrote in a report on Friday, before the latest update on vaccine development. They have a buy recommendation on the stock. Analysts at Canaccord Genuity, who also have a buy rating, take a similar view. They wrote last week that, “given recovery trends and a more optimistic outlook for Covid vaccines, it seems likely that Uber’s mobility business will be posting strong growth against easy comps by mid-2021, suggesting the stock may begin working more decisively.” However, should the economy reopen in a way that resembles the pre-pandemic world, what does that mean for Uber Eats, which is growing rapidly because consumers aren’t going to restaurants? As Arete’s Kramer said in August, “You either have people taking rides to restaurants or staying at home and ordering takeaway, but you don’t tend to have both at the same time.” Add it all up and Uber still has to show it can make money.