Uber Stock Falls After Arete Research Downgrades, Citing “Earnings Quality” Concerns

Uber Stock

Uber Stock (NYSE:UBER)

Arete Research, an investment firm, downgraded the ride-sharing business Uber Technologies (NYSE:UBER) on Thursday, citing concerns about the “earnings quality” of both Uber and its primary rival, Lyft. This caused Uber stock to fall by more than 2%.

Since the company’s growth rate in the past three quarters was boosted by one-time “business model modifications,” which do not seem to be in the cards for 2023, analyst Richard Kumar downgraded Uber (UBER) to neutral from buy and dropped the price objective to $26.

“Uber’s delivery competitors already report decreased orders, as they ‘concentrate on earnings,’” Kumar said in a message to customers. “While we believe the Mobility margins are accurate, we found it difficult to see Uber achieving growth and profitability in the Delivery business. Both [businesses’] pricing increases will put price elasticity to the test.”

Thursday’s midday trading saw a 2.8% drop in Lyft shares.

In addition, Kumar pointed out that for Uber and Lyft to achieve their goals, they will require operating leverage and accelerated growth, and that, with incremental margin improvement being seen as “unrealistic,”, especially for Lyft, it is difficult to envision how the companies will achieve their goals.

Kumar also said that the subscription package offered by Uber (UBER) seems appealing to users, but that very few people are really paying for it.

The fact that 12-month deferred revenue (classified as contract obligations in Uber’s accounts) fell in the third quarter while expanding into new territories is more evidence that Uber One isn’t gaining many net new subscribers, as pointed out by Kumar.

The analyst also stated that the decline in the COVID-19 epidemic has affected the company’s delivery business, which has been called a “pot of gold.”

As an additional impediment to advertising demand, Kumar said, “with a ‘cost-of-living crisis’ from inflation in major regions, we see a risk that demand would be poor in the short future.”

In a major regulatory victory earlier this month, a New York judge stopped a possible rate rise from New York City’s Taxi and Limousine Commission, giving Uber and Lyft a boost.

Featured Image: Freepik @ antibydni

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