Uber's deal for Postmates shouldn't distract investors from its troubled ride-sharing business

Key Points
  • Uber shares rose 6% on Monday after the company announced the $2.65 billion all-stock purchase of Postmates.
  • While Uber is picking up market share in the fast-growing food delivery business, its main ridesharing unit faces plenty of uncertainty with Covid-19 cases rising in 36 states. 
  • By one analyst's estimate, Uber counts on work commuters for 25% of rides bookings. 

In this article

Dara Khosrowshahi, CEO of Uber, speaking at the 2019 DealBook Conference in New York on Nov. 6th, 2019.
Photo: Mike Cohen

Nothing Uber does in food delivery can conceal a critical quandary facing the company Covid-19 is wreaking havoc on its core business.

On Monday, Uber announced that it's buying Postmates for $2.65 billion, weeks after failing to acquire larger rival GrubHub, which opted to take a bid from Europe's Just Eat Takeaway. Uber said the Postmates deal will bolster its Uber Eats delivery unit, bringing in key markets like Los Angeles, Phoenix and Las Vegas and 10 million active customers.

With more consumers ordering food to their homes to avoid potential exposure to the coronavirus, Uber is tapping into a growing market where it already has a large presence. The problem for Uber is that those people are staying home, meaning they're not taking rides to restaurants, bars, parties, concerts or to work. Even as the meal delivery business grew in the first quarter and the rides business declined, Eats still accounted for less than one-third of total gross bookings and rides made up 69%.

And with coronavirus cases growing in 36 states and hotspots like Texas and Florida tightening their restrictions on businesses and residents, Uber investors have reason for skepticism, particularly because so many companies have said they won't be reopening their offices for the rest of the year. In a report last week, BTIG estimated that about 25% of Uber's bookings for rides came from commuters.

"Our take is that the Street under-estimated exposure to commute rides and the fact that workers in key markets aren't coming back anytime soon," wrote BTIG's Jake Fuller, who still recommends buying the stock. 

Initially, investors seem happy with the Postmates deal. Uber's stock rose 6% on Monday to $32.52 and is up 9.1% for the year, while the S&P 500 is down slightly in 2020. Uber said the combination will lead to more than $200 million in "run-rate synergies" within a year of close, a positive sign for Fuller and other analysts.

Uber shares this year

Michael Graham, an analyst at Canaccord Genuity, said in a report on Monday that the deal means 98% of the food delivery market in the U.S. will be controlled by Uber, GrubHub and privately held DoorDash. Graham is bullish because of "Covid-19 related tailwinds" and the "complementary geographic mix."

Uber CEO Dara Khosrowshahi said in a call with investors after the transaction was announced that the rides business has bounced back a bit of late. After falling 75% in the second quarter from a year earlier, it's now at less than a 60% decline from the prior year. Some countries are even seeing growth, he said. Meanwhile, Eats' bookings more than doubled in the second quarter, and Postmates' grew 67%, Uber said in its presentation.

"We're in the unique position of having the Eats business to significantly offset headwinds in our rides business," Khosrowshahi said.

It's far from a total offset, however. Twice in May, Uber announced jobs cuts of at least 3,000 employees, leaving it with about 20,000, according to the latest available headcount figures. The company also said it would be shutting or consolidating 45 offices.

Difficult projections

Additionally, Uber faces a lawsuit from California Attorney General Xavier Becerra, who alleged in May that Uber and ride-sharing rival Lyft have misclassified their drivers as contractors, violating a state law that went into effect this year. City attorneys from San Francisco, Los Angeles and San Diego joined Becerra in the lawsuit, which claims that the companies denied workers the right to overtime pay, disability insurance and other benefits. 

Postmates, which says on its website that it has more than 1,000 employees, wasn't exactly thriving before the coronavirus struck. The company laid off dozens of employees in December and closed its office in Mexico City. It had plans to go public, but was forced to reconsider after seeing investor response to Uber and Lyft and the near collapse of WeWork.

Uber expects the deal to close in the first quarter of next year. The company scrapped its guidance for this year in April, but analysts are projecting an 8% drop in revenue to just over $13 billion, according to Refinitiv. While analysts anticipate a reacceleration in 2021, that's based on the assumptions that food delivery will continue to grow and that rides will also pick back up. Given the trajectory of the coronavirus in the U.S., that's a pretty optimistic assumption.

An Uber spokesperson declined to comment.

WATCH: Uber buys Postmates

Uber to buy Postmates for $2.65 billion in stock
Uber to buy Postmates for $2.65 billion in stock