Uber Upgraded To Outperform at RBC
Investors of ride-hailing giant Uber (NYSE: UBER) gained a noteworthy bull this past weekend when RBC Capital Markets were out with their top picks for the new quarter. This will surely help them sleep a little better at night as the stock tries to consolidate its three-month rally from the lows of March.
After cruise companies and airlines, the likes of Uber and Lyft (NASDAQ: LYFT) were among those who saw their business and revenue streams shut down seemingly overnight. With non-essential businesses like restaurants closed indefinitely and many office workers told to work from home for the rest of the year, no one was calling an Uber for the fun of it through much of March, April, and May. However, by the middle of June, reports from China had ride-share volume back at pre-COVID levels and this tied in with the overall market rally that saw shares recover much of their lost territory.
So despite being on the front line of stocks that took big hits during the social restrictions and lockdowns of Q1, Uber shares have undone much of that quarter’s damage. And with the bell still ringing for the second half of the year, they look set to continue that trend.
Fighting For Profitability
In a note to clients last week, RBC analyst Mark Mahaney noted that they “believe investors largely agree that Uber faces a very large TAM (total addressable market), has a leading competitive position, and benefits from an experienced management team”. This is all good stuff to hear for a company that has led the digitalization and technology revolution of the taxi industry but that has struggled to turn a consistent profit since IPO’ing last May. Uber holds the unenviable title of the largest loss profile of any IPO in recent years with a $3 billion EBITDA loss in 2019.
Despite this, Mahaney is quick to point out that things are going in the right direction. Over the past three years, Uber’s operating expenses as a percentage of revenue have declined from 99% in 2016 to 66% in 2018 while driver subsidies as a percentage of bookings have also been dropping consistently.
Still, this won’t hide the fact that investors are still waiting for a black print in a quarterly earnings report. Unsurprisingly, May’s Q1 report had an almost 100% miss on the EPS, with a -$1.70 print coming in way below the -$0.80 consensus. It’s hard to even argue that this is a once-off. While they managed to beat analyst expectations for EPS in February’s Q4 release, at -$0.64 it was still a juicy loss with no coronavirus to point fingers at.
To be fair, revenue was up 37% year on year in the same report and this momentum in growth was strong enough to continue through COVID with a 14% year on year jump registered in May’s report - no mean feat when you consider that rides in April were down 80% compared to April 2019. And even as management laid off a quarter of their employees in an effort to save $1 billion a year, they were bold enough to make a move for food delivery giant GrubHub (NYSE: GRUB), even if it would end up not being successful. This would have removed a major competitor from their UberEats business which has been one of their shining stars in recent quarters.
Management didn’t stop there though. Reports on Monday morning confirmed the rumors that had been building last week of another acquisition, this time successful. For $2.65 billion, Uber is buying food delivery service Postmates. With efforts and moves like this, management is clearly positioning themselves for future success even if confidence in 2020’s original forecasts is low and market volatility is likely to remain for some time.
RBC’s Mahaney sees four key pillars driving them towards profitability in the coming months; “1) better competitive dynamics leading to fewer subsidies; 2) long-term pricing power; 3) insurance leverage from a shift in business to non-ridesharing verticals and international; and 4) expense leverage as the company scales.”
Given shares are up 25% from the lows and at their January levels, albeit not their January highs, momentum is with them and it’d be a brave investor to bet against them right now.
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7 Energy Stocks to Buy On This Historical Dip
It may seem hard to believe, but the current chaos in the energy sector, and oil stocks, in particular, will pass. The novel coronavirus that has birthed a global pandemic is being compared to the Spanish Flu of 1918.
Of course, when you have once in a century event, it’s difficult to look back in history and make an apples-to-apples comparison to our current situation. This isn’t to minimize our current situation. It’s simply to say that the market is forward-looking, but it’s also emotional. And it also hates uncertainty.
In a typical economic downturn, demand decreases, and investors are advised to “buy the dip.” But in the current environment, demand has been destroyed. Millions of Americans are being asked, and in some cases ordered, to stay home. And this simply means that oil demand is down. And investors are looking at prices that are, in some cases, at all-time lows.
The trading app Robinhood is frequented by millennial investors. And according to the latest information, many investors are trying to buy the dip on old guard oil stocks. That may be a mistake.
But the energy sector is about more than just oil stocks. There are several companies that are holding their own in the current environment. And that means when the economy opens up, these companies will be well-positioned for further growth.
Currently, the volatility and uncertainty surrounding energy stocks make them a poor choice for growth investors. However, many of these companies in this presentation offer a secure dividend that, along with the potential for capital appreciation, can make them a solid play for income investors.
View the "7 Energy Stocks to Buy On This Historical Dip".