The popular ride-hailing services provider Uber Technologies, Inc. (UBER) operates through four segments: Mobility, Delivery, Freight, and its Advanced Technologies Group (ATG) and Other Technology Programs. Although shares of UBER have rallied 58.4% over the past nine months as the demand for ride-hailing–which fell off during the pandemic–has recovered more quickly than expected thanks to good progress with the nation’s vaccination drive, the stock lost 12.5% over the past month. UBER’s stock is currently trading at $48.82, which is 23.8% below its $64.05, 52-week high.

The company missed analyst expectations in the first quarter. Furthermore, its mobility gross bookings declined 38% year-over-year to $6.77 billion. Also, the company’s recent decision to reclassify its U.K. drivers as workers could be a major hurdle in its growth path in the most important European market because it could significantly increase the company’s  costs.

Here is what we think could influence UBER’s performance in the near term:

Reclassification of U.K. Drivers as Employees Could Increase Costs

In February, the United Kingdom’s Supreme Court upheld a ruling that UBER’s drivers should be classified as workers and not independent contractors. Even though this only includes a group of former drivers who claim that they are entitled to employment rights, such as holiday pay and a minimum wage, the court’s  decision could negatively impact UBER’s business model in the crucial U.K. market.

In March, the company announced that it would begin treating all 70,000 of its drivers in the U.K. as workers. They will be entitled to a minimum wage, holiday pay and pension plans. The move could significantly affect UBER’s  profitability, and UBER may well  exit markets that are less profitable. The drivers’ compensation will  lead to higher costs for the company.

Weak Financials and Profitability

UBER’s revenues declined 10.6% year-over-year to $2.90 billion in the first quarter, ended March 31, 2020. The company reported an adjusted EBITDA of negative $359 million. Also, its net loss came in at $108 million, while its loss from operations was t $1.52 billion for this period. UBER’s loss per share was  $0.06. The company’s revenue under its mobility segment declined 65% from its  year-ago value to $853 million, while its adjusted EBITDA under the same segment decreased 49% year-over-year to $298 million.

The company’s 0.3% trailing-12-month asset turnover ratio  is 55.4% lower than the 0.8% industry average. Also,  its trailing-12-month ROE, ROA and ROTC came in at negative 31.6%, 11.4% and 12.8%, respectively.

Stretched Valuation

In terms of trailing-12-month EV/Sales, UBER is currently trading at 8.89x, 308.4% higher than the 2.18X industry average. Its 5.84 forward Price/Sales multiple  is 242.7% higher than the 1.70 industry average. Also, the stock’s 121.46 forward Price/Cash flow ratio  is 658.5% higher than the 16.01 industry average.

POWR Ratings Reflect Bleak Prospects

UBER has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. UBER has a D grade for Value, and a C for Quality. These justify the stock’s premium valuation and low profitability.

UBER  has a C grade for Growth. This is in sync with the company’s inadequate growth prospects.

In addition to the grades we’ve highlighted, one can check out additional UBER ratings for Sentiment, Stability and Momentum here.

Of the 72 stocks in the D-rated Technology – Services industry, UBER is ranked #50.

There are several top-rated stocks in the same industry. Click here to view them.

Bottom Line

UBER’s monthly active platform consumers dropped 5% year-over-year to 98 million in the first quarter of 2021. Driver employment rights could be a significant near-term setback for the company’s prospects in the U.K. market, thereby preventing it from capitalizing on the recovering demand for ride-hailing. Furthermore, UBER lacks fundamental and financial strength currently, and thus could be a speculative bet. Therefore, we think it is best avoided now.

UBER shares were trading at $49.66 per share on Monday morning, up $0.84 (+1.72%). Year-to-date, UBER has declined -2.63%, versus a 12.55% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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