Can Uber Stock Maintain the Lift From 3,500 Layoffs?

Uber Technologies Inc. (NYSE: UBER) has run out of ways to attract riders while the spread of COVID-19 requires safety rules, most prominent among them being social distancing. Drivers cannot be easily tested. Revenue has collapsed.

The most recent reaction by management is to lay off 3,500 people. That is about 14% of all its workers.

What Happened?

San Francisco-based Uber was part of the trio of technologies that were to change the transportation industry. Uber and Lyft Inc. (NASDAQ: LYFT), its smaller competitor, were the foundations of the so-called mobility platform.

This tech, joined with autonomous and electric vehicles (EVs), would overhaul the industry in a way it had not been in over a century. The two ride-sharing companies each became public. Uber and Lyft stocks had promising starts, but high expenses took their toll on each.

Like many other very highly valued startups (called unicorns), Lyft and Uber lost billions of dollars. They would, investors believed, outgrow the losses via much higher revenue. It was a good thought, but it turned out not to be practical.

Over the past year, the S&P 500 has been close to flat. The Dow Jones industrial average is down 6%. Rival Lyft is off 36% and Uber has fallen 23%.

Uber’s first-quarter results show that the thinking about future profitability is flawed. Revenue rose 14% to $3.5 billion.

Therefore, the notion that Uber is a growth company was shot down with the earnings announcement. Uber had a quarterly loss of $2.9 billion. It lost $1 billion in the same period a year ago.

Rides adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was a loss of $1 billion. Overall adjusted EBITDA was $192 million.

Dara Khosrowshahi, the CEO who replaced much-maligned founder Travis Kalanick, said as the figures were released:

While our Rides business has been hit hard by the ongoing pandemic, we have taken quick action to preserve the strength of our balance sheet, focus additional resources on Uber Eats, and prepare us for any recovery scenario. Along with the surge in food delivery, we are encouraged by the early signs we are seeing in markets that are beginning to open back up.

The Rides part of the business, simply put, is picking up people and dropping them off with the aid of simple GPS and smartphones. The Eats business is the delivery of food. The stay-at-home orders set down by state governments have kept people sequestered.

Why Not Drive Your Own Car and Get Your Own Food?

The fundamental theory behind Uber and Lyft is that people do not want to drive their own cars — anywhere. People do not want to drive to work, to parties or to school. Drive-through, in this view of the world, is dead. The notion challenges the models of both Ford Motor Co. (NYSE: F) and McDonald’s Corp. (NYSE: MCD).

The model has several flaws, which appeared before the spread of COVID-19. The challenges to the mobility model also have spread to autonomous cars and EVs.

The first challenge is that Americans have not stopped buying gasoline-powered cars. And these cars have steering wheels. Until the current recession, the auto industry sold 17 million a year for each of the past five years.

As an aside, EV sales have been, and remain, modest. Lithium-ion battery cells with a next-generation “single crystal” NMC 532 cathode and a new advanced electrolyte have not replaced gas engines in great numbers.

Cheap fuel has made car ownership an especially attractive option. Gas prices, which hovered below $3 a gallon for years, have dropped well below $2. Although, people stopped driving as the pandemic spread.

However, there is evidence that they have begun to move back onto the roads. People would rather drive in their own cars than ride in one that might have an infected driver.

Additionally, food delivery is overrated if people can drive and get their own. Uber charges for the service. People who drive for takeout eliminate that cost. Suddenly, Uber’s value is undermined, as both a way to get somewhere and a way to eat something.

What About Cash and Cash Equivalents?

Uber’s balance sheet tells an unfortunate story. Its cash and cash equivalents were $8.2 billion. That is down from $10.9 billion in the same quarter a year ago.

In other words, Uber is burning cash. Layoffs may help slow the process, but only revenue reverses it.

Nelson Chai, Uber’s chief financial officer, made a puzzling comment:

We have recently exited eight unprofitable Eats markets, significantly reduced the size of our customer support and recruiting teams, and merged our JUMP unit into Lime. Building on the steps we have already taken, we are continuing to look at all levers to ensure our core Rides and Eats businesses emerge from this crisis stronger than ever.

Is getting smaller really a way to get bigger? The crisis may only mask a much deeper problem.