Uber: newfound profitability will not roll on for long

Uber would like to think it is back in the driver’s seat. After all, on Wednesday the $53bn online taxi and food delivery company delivered sharply higher first-quarter revenues. Demand for rides rebounded and food deliveries held up despite restaurant reopenings.

Critically, the long-unprofitable Uber posted a positive adjusted ebitda, a modified profit measure that excludes stock-based remuneration and other expenses, of $168mn. That topped consensus expectations of $129mn.

But plenty of potholes mark Uber’s road to recovery. A driver shortage, rising gasoline prices and stiff competition all threaten consistent profitability. The 8 per cent slide in Uber’s share price on Wednesday underscores the market’s scepticism. Uber’s 13 per cent stake in Chinese ride-sharing service Didi does not help. Paper losses on Didi and other investments contributed to a $5.9bn net loss.

The cost focus is valid. True, Uber’s better than expected performance and its rosy outlook for the next quarter suggests it has dodged the problems that plagued Lyft during the first quarter. Shares in Uber’s rival collapsed by nearly a third on the day after warning of its struggle to persuade drivers to return to Lyft. It will spend more to incentivise them.

One reason Uber did not suffer from a driver shortage last quarter is because it had already spent big last year to entice them back. With Lyft promising to up its pay, Uber may have to fight back. Soaring fuel costs add to the pressure to keep drivers sweet. Petrol prices averaged $4.22 a gallon on Wednesday compared to $2.91 a year ago, according to data from AAA.

The good news is that Uber has one advantage over Lyft. Having a food-delivery unit — Uber Eats — could make it more appealing to potential drivers as they can shift to ferrying meals when ride share demand slows. Both businesses recorded higher gross bookings and revenues during the first quarter. The “take rate” — which measures how much of a fare Uber keeps — nearly doubled to 23.5 per cent for its ride business and was 29 per cent higher for its delivery unit.

So far Uber has managed to pass on any higher costs to customers via higher fares. But this is not sustainable and riders will eventually balk at these. Uber may well have to go back to squeezing its drivers’ incomes. Eventually something has to give way, most likely the share price.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.

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