Tech

Uber stock surges after it offloads food delivery in India in bid for profitability

Key Points
  • Uber announced Monday it sold its food delivery business in India to competitor Zomato.
  • Uber executives have said they would look to exit markets where they couldn't be the No. 1 or No. 2 player.
  • The company has been seeking to carve out a path to profitability under the pressure of investors.
Dara Khosrowshahi, chief executive officer of Uber Technologies Inc., speaks on a webcast during the company's initial public offering (IPO) on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, May 10, 2019.
Michael Nagle | Bloomberg | Getty Images

Uber just cut back from another market where it doesn't dominate.

On Tuesday, the company announced it sold its Uber Eats food delivery business in India to Zomato, its competitor backed by Alibaba affiliate Ant Financial. The all-stock deal gives Uber a 9.99% stake in the business.

The deal could leave Uber out of a significant chunk of the food delivery market. Asia's market has become the largest for online food delivery in the world, with over $45 billion in revenue in 2018, according to an October report from Frost & Sullivan. India holds the second-largest percentage of that market share at 13.2%, after China's 73%, according to the report.

But Uber's decision falls in line with its stated strategy to dominate or ditch, and Wall Street cheered the move, sending Uber's stock up 7% Tuesday, adding more than $4 billion to its market cap. Uber's market value is now $64.1 billion.

In a November earnings call, CFO Nelson Chai told analysts that Uber would "look at both disposing as well as using M&A as potential levers" in markets where they are not already one of the top two players.

"Our commitment is to lean in if we think we can win or be one or two," Chai said. "And if we think we can't, we're going to be good stewards of capital, and so we will make the appropriate choices."

Uber has taken on this aggressive strategy as investors continue to push for a path to profitability. The company still reported over $1 billion in net losses in its latest quarterly earnings report and has announced hundreds of layoffs. Uber will report its results for the fourth quarter of 2019 on Feb. 6.

In a note Tuesday morning, Raymond James analysts said Uber's sale "demonstrates discipline" given the road to food delivery domination in India "would likely take years and significant investment." The move frees up funds for Uber to invest in other, more promising markets, the analysts wrote.

"It is increasingly clear that Uber has a strong ride-sharing business and a food delivery business that is rationalizing," they wrote. "As Uber continues these initiatives over the next 12 months, we anticipate both positive revisions and multiple expansions."

CNBC's Jim Cramer also praised the move Tuesday morning on "Squawk on the Street."

"This stock is undervalued," Cramer said. "As they get out of bad Uber Eatses, it is just going to go higher because it's an ecosystem."

It's not the first time Uber has scaled back in a market it's failed to top. In September, Uber said it would end its food delivery service in South Korea. The company did not manage to crack rival Woowa Brothers' 75% market share in the South Korean food delivery space, according to Reuters. While its ride-hailing business faced legal trouble and pushback from the taxi industry in the region, Uber has continued to operate that service, as it will in India.

Uber's market exits aren't always its choice. Uber will end operations in Colombia at the end of the month, the company said, after a local judge sided with the country's competition authority, which found the company broke market rules with its ride-hailing business, as Reuters reported in December. The crackdown followed protests against Uber and similar services by taxi drivers who contended the services received an unfair advantage due to lack of regulation.

In London, Uber was stripped of its license to operate in November after the city's transport regulator said the company had displayed a "pattern of failures," putting riders at risk. Uber has appealed the ruling and is still currently operating in the region.

— CNBC's Saheli Roy Choudhury contributed to this report.

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