Uber losses may slow as Eat accelerates

Rational pricing may not win a rational earnings reaction, as options point to sharp rise in volatility

Key points to watch

Investors will breathe a sigh of relief tonight if the self-styled transportation and logistics group meets expectations and reports the loss of ‘only’ about $1.46bn in the third quarter on an operating basis. That’s far narrower than losses of some $5bn posted in Q2.
The stock has dropped around 30% since its previous quarterly results early in August, so whilst a series of one-off circumstances boosted costs in the quarter in a way that compounded Uber’s routinely high expenditure, a relatively smaller loss in the past quarter is likely to—paradoxically—help underpin the shares.
The $52.5bn group had in fact begun a programme of ‘rationalisation’—in more ways than one, in the second quarter. Without the distraction of a bigger than expected bonfire of cash, investors ought to have the headspace to focus more on progress in a move to ‘rational’ pricing as well as job cuts and other cost controls.
In terms of growth, Uber Eats is where it’s at as expansion in food delivery appears to accelerate at a higher pace than in ride sharing. Still, ride sharing will continue to contribute the bulk of gross bookings, suggesting that Uber’s market share remains relatively stable.
The table excerpt below shows ride sharing is expected to have contributed 75.33% of gross bookings in Q3. That would be up from a 74.2% contribution in the quarter before. Uber Eats growth is forecast at a stonking 84.5% relative to the same quarter in 2018 vs. Ride sharing is seen rising 19.5% rise. But Eats still contributes less than a quarter of total bookings.

Ridesharing & Uber Eats: Q2 2019 growth and contribution

Source: Bloomberg

Uber is expected to have deployed fewer promos in terms of rider subsidies, whilst placing a greater onus on profitable niches, e.g. shared rides and corporate deals. Together with a trend of higher prices in some major cities, rider growth will almost certainly slow.
California’s push to classify drivers as employees, under state legislation known as the AB5 bill, has massive cost implications and will be a major focus during the post earnings conference call. Adjusted revenue forecast: $3.39bn, up 15% year-on-year.

Key forecasts (Bloomberg Consensus)

Q3 revenue: $3.39bn, up 18% qtr.-on-qtr., up 15.3% yr.-on-yr.

Q3 operating loss: $1.46bn vs. $5.48bn loss in Q2

Q3 pre-tax loss: $1.485bn vs. $5.24bn loss in Q2

Q3 Adjusted loss per share: $0.626 vs. $0.477 in Q2

Possible stock reaction

Obviously, with the shares down around 30% from August peaks and still below their IPO prices, sentiment is likely to be bolstered if Uber’s Q3 report meets expectations, or preferably better. However, options pricing suggests a bearish set up is a foot, making a volatile reaction regardless of how well results map against expectations. Options expiring at the end of this week point to a 14% post-earnings move. However, puts (bearish trades) outnumber calls (usually bullish) by more than 2-to-1, whilst Monday’s mild decline marks a third straight day of Uber stock selling. Current implied volatility is elevated at 165%, more than three times the 90-day historical average of 46%.

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