Analysts Still All-In On Uber Despite Mixed Q1 Results, Coronavirus Environment

Like rival Lyft Inc LYFT, Uber Technologies Inc UBER reported mixed first-quarter earnings with a big bottom-line miss and significant top-line beat.

But by and large, analysts offered glass-half-full interpretations.

The Details

Morgan Stanley celebrated 20% rides bookings growth in January and February. The metric fell 40% in March and 80% in April but consistently grew in the last four weeks. Still, MKM sees weakness in the environment.

“Uber's active riders declined Q/Q despite strong Jan and Feb, hinting at growing pains to acquire new riders,” analyst Rohit Kulkarni wrote in a note. “We are now modeling Q/Q declines in active riders over the next 4 quarters.”

The very environment that’s hurt Uber’s core business has lifted another segment: Uber Eats bookings grew 89%, and Bank of America anticipates continued growth in the second quarter from $4.9 billion to $5.9 billion.

“Importantly, Uber is maintaining driver and user engagement with Eats, which should aid an eventual rides re-engagement when cities open for business,” analysts Justin Post and Michael McGovern wrote.

Morgan Stanley cited potential for Eats margins improvement in larger average order values, a higher small-business mix, batching, and demand efficiencies.

See Also: One Year Since Uber's IPO: A Look At The Stock's Bumpy Ride

New Markets

In the meantime, Eats is leaning into a new utility.

“Uber Eats, once engaged in capital destruction, finds itself faced with unforeseen demand for new service lines of grocery and convenience,” Wells Fargo analysts Brian Fitzgerald and Robert Coolbrith wrote. “We think that, taken together, these actions reduce downside risk in the stock and set up a leaner high growth company one to two years down the road.”

Needham anticipates continued declines in rides and increases in Eats bookings, while MKM expects Eats to account for an increasing proportion of bookings.

“We believe the closing of the [Latin American] Cornershop acquisition will further accelerate grocery ambitions in both South America and North America,” SunTrust analyst Youssef Squali wrote.

Model Strength

Uber is widely seen as the industry leader, and it’s expected to stay that way.

“While UBER management framed profitability as a '21 event, we believe prudent actions are being taken to align the demand environment and long-term investments,” UBS analyst Eric Sheridan wrote. “Beyond COVID-19, we view UBER as levered to key themes that remain intact.”

Those themes include global scale, a strong balance sheet, secular shifts from car ownership to ridesharing, and nearing profitability. Wells Fargo considers smartphone penetration another key factor.

“We think Uber's value remains tied to growth trends that will play out long after coronavirus-driven disruptions have subsided,” Fitzgerald wrote.

Financial Health

In response to the 80% decline in ridesharing demand related to the pandemic, Uber announced marketing cuts, layoffs, the sale of its scooter segment, and the exit of UberEats from nine countries to generate $1 billion in annualized fixed cost savings.

“We think Lyft is planning to cut costs across the board, including R&D and Marketing,” Kulkarni wrote. “This could translate to difficulty growing the business in 2021.”

Nonetheless, Kulkarni added that healthy EBITDA margins for rides “should put the long-term profitability debate to rest.”

SunTrust acknowledged a margin-protecting variable cost model and strong financial liquidity to weather further demand decline.

See Also: 5 Analysts Weigh In On Lyft's Mixed Q1

The UBER Ratings

Morgan Stanley moved its EBITDA profitability estimate up from the fourth quarter of 2021 to the second quarter, although Bank of America expects positive EBITDA in the back half of 2021.

“Profitability is now expected only a few quarters later than planned, with a cash flow inflection still on the horizon (we expect 2022),” Post wrote. “While the downturn is distressing for the industry and destructive to capital, we expect a more rational rides competitive landscape upon a rebound.”

• Bank of America maintained a Buy rating and raised its target from $40 to $42;
• MKM maintained a Buy rating but cut its target from $45 to $38;
• Morgan Stanley maintained an Overweight rating and raised its target from $43 to $47;
• Needham maintained a Buy rating and raised its target from $36 to $42;
• SunTrust Robinson Humphrey maintained a Buy rating and raised its target from $42 to $50;
• UBS maintained a Buy rating and $38 target;
• Wedbush maintained an Outperform rating and raised its target from $30 to $38; and
• Wells Fargo maintained an Overweight rating and a $41 target.

“We believe UBER remains the name to own not only as an acutely hit COVID-recovery story but also as the leading mobility platform in its infancy of adoption,” Needham's Brad Erickson wrote.

“While Rides volumes continue even below our recently lowered estimates, Eats is taking the stage with its outperformance, the overall profitability narrative continues improving in spite of COVID and with more major expense reductions coming, we anticipate a stock price recovery as Rides volume improves from its current anemic level over the coming months and quarters.”

Uber's stock traded higher by 5% to $32.44 per share at time of publication.