I’ve been pretty hard on Uber (NYSE: UBER) stock and Lyft (NASDAQ: LYFT) stock since their IPOs earlier this year. So far, their horrendous performance has vindicated my skepticism.
However, as bearish as I have been, there are others out there who are even more pessimistic. Former hedge fund manager Enrique Abeyta recently laid out his case for an Uber bankruptcy within 18 months. In my opinion, Abeyta is being a bit too harsh on Uber stock. But there are plenty of examples throughout history of companies in similar financial situations that fell victim to a market downturn.
Why Uber Stock Price Could Fall to $0
Abeyta recently recommended shorting Uber stock during a presentation at the Stansberry Conference. His argument is that the recent wave of “unicorn” IPOs, including UBER and Lyft, is exactly the same as what was happening during the dot-com bubble in the late 1990s.
“The only difference is that this time, private-equity investors have funded most of the craziness, rather than individual investors,” he says.
Uber stock bulls point to metrics such as monthly active platform consumers and gross bookings growth. But Abeyta says the critical metric is profit. Uber lost $8.1 billion in the past four quarters. As the company has grown, its losses have as well.
To make matters worse, a new California law is threatening to make the profitability climb even steeper for Uber and Lyft. This new law requires that ridesharing drivers be classified as costly employees rather than independent contractors. Abeyta says the law would be a crushing blow for UBER stock if Uber’s business model wasn’t already broken.
Abeyta says Uber’s difficulties have led him to reach a startling conclusion.
“I wouldn’t be surprised if we look back in 18 months and Uber has filed for bankruptcy,” Abeyta says.
“Eventually, I think Uber will likely join the likes of Excite, the Globe, boo, and Pets.com on the junk heap of history.”
A Worst-Case Scenario
I agree with many of Abeyta’s points about Uber. It’s troubling that UBER is losing more and more money as it grows. The fact that those who are bullish on Uber stock are ignoring the company’s losses and focusing on its users is very reminiscent of the dot-com craziness. Back then, investors were ignoring profits and hyping web page visits.
But I also agree with Abeyta when he says that his bashing of Uber’s business model has nothing to do with its awesome service. I love how easy taking an Uber ride is. It’s a great service. The company just doesn’t happen to be profitable at the moment.
So for now, UBER will continue to pile up losses and hope something changes over time. When it needs capital, it can borrow money. Today, with interest rates low and falling, there are plenty of investors who are willing to step in and provide capital. As long as the economy is on stable footing, this pattern can continue. The problem will occur when the credit markets tighten.
If the economy tanks and Uber cannot rely on the credit market to fund its operations, things can go south quickly for UBER stock. Fortunately, I don;t think the most likely scenario for Uber is bankruptcy, but a takeover by a cash-flush company like Alphabet (NASDAQ: GOOGL), General Motors (NYSE: GM) or Apple (NASDAQ: AAPL) at the right price. As a result, Uber stock price essentially has a floor. But whether that floor is at $20, $10 or $5 is difficult to determine.
Pick Your Poison
Even down 29% from its IPO price, Uber stock still isn’t worth buying unless the person buying it also shorts Lyft stock. I recently argued that Uber stock is in a better position than Lyft stock because Uber has less exposure to California. UBER also has a more diversified business thanks to its projects like Uber Freight and Uber Eats.
Uber stock bulls are also hoping that automation may be the lifeline that ultimately gets it to profitability. That may very well happen. But I have always believed that fully autonomous vehicles are much farther away than everyone seems to think. Last year, GM said it would have self-driving robotaxis in service by the end of 2019. I’m guessing that won’t happen for at least another two years.
Abeyta says Lyft looks more attractive today, since its losses are smaller and shrinking. I say it ultimately doesn’t matter how much money a company is losing if it doesn’t have a path to profitability.
For now, as long as Uber and Lyft continue to hemorrhage cash, investors should pick their ridesharing poison and pair it with a short position in the competing company.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.