Uber Earnings: Sometimes a Cigar Is Just a Cigar

Earnings season always brings its share of seemingly illogical reactions to results. Usually, that means that you have missed something, not the market. You are maybe focused on a disappointing EPS, for example, but there might be encouraging revenue numbers and/or upbeat guidance for the next quarter or year. Or maybe there is an excuse for a bottom-line miss, something that is a one-off or can be expected to improve and, without that, the underlying numbers are pretty good. Sometimes, though, a stock reacts in an illogical way and, try as I might, I can’t see why.

Take Uber (UBER) for example. As I write, the stock is trading more than 11% above yesterday’s close in the premarket, after they released their Q3 earnings this morning.

They reported a loss for the quarter of $0.61 per share, way over the consensus estimate for a loss of only $0.17, on revenue of $8.34 billion versus expectations for $8.12 billion. Clearly, traders are focusing on the revenue beat and discounting the big miss on actual earnings as a one-off. Indeed, the company gives that impression, as they say that business is picking up, and that much of the loss was down to writing off losses on equity investments.

The problem, though, is that the math just doesn’t indicate that the revenue beat should outweigh the overall loss.

Let’s start with the investment losses. The overall net loss totals $1.2 billion, with Uber attributing $512 million of that to a “revaluation” of their equity investments. That means that the bad investments account for around 42% of the losses, leaving 58%, or around $0.35 per share, still to be accounted for. In case you forgot, the forecast was for a loss of $0.14, so that is still two and a half times the anticipated loss for the quarter.

Then there are two other problems:

First, Uber still seems to be in the position of losing more money the more business they do, which makes the revenue beat and optimistic outlook for revenue growth less of a good sign than it might first appear. It would be fine if scaling the business would have big advantages in profitability, but how many economies of scale are left to be garnered when revenue is already running at over $8 billion a quarter?

Second, call me picky, but I’m not sure that I want to put my money into a company whose logic runs something like “Don’t worry, we only lost so much money because we made some terrible investment decisions!” Making investment decisions is what senior executives do, and it is particularly important for companies whose value is predicated on growth. Bad decisions may excuse the current loss to some extent, but they hardly give one confidence about hitting optimistic goals for the future.

In addition, that future still has a serious hurdle to overcome. Uber’s model is based on gig workers, but there is an increasing push around the world to regulate that kind of employment. You might say that workers are entitled to work however they see fit, and that nobody is forced to work for Uber. Or you may point to the fact that driving for the company is, for a lot of people, just a side job, so they neither need nor want regular employment protections and benefits. You might even be right in both cases, but that isn’t the point.

Governments, whether local or national, don’t always regulate on the basis that we are all intelligent adults, capable of assessing a situation and making a decision in our best interests. They do so to protect people from themselves, or maybe from a company that they see as taking advantage of a situation unfairly. Whatever their motive, regulatory bodies regulate. It is their raison d’etre, and regulations are coming in some parts of the world. Companies like Uber use contract workers rather than traditional employees to keep costs down, so it stands to reason that regulations that force them to treat even just a fraction of their drivers as employees will raise costs.

So, we go back to what Uber’s earnings tell us before we start to analyze and excuse. The company did more business than expected last quarter, and in doing so, lost more money than expected, even after accounting for their poor judgement. They have a cost problem already, so the ill-effects any increase in costs will be exaggerated.

Profit may be what companies exist for, but earnings season is full of examples of companies whose stock moves based on things other than the simple bottom line. That make sense in most cases, but not always. With Uber, it seems that traders were looking for reasons to buy. Of course, they found some, but they seem to be ignoring the obvious facts: Uber lost more than expected last quarter, even after allowing for a one-off write down, and are continuing the pattern of losing more money the more revenue they collect. A quote cautioning against over-analysis, often misattributed to Sigmund Freud, goes, “sometimes a cigar is just a cigar.” Investors tempted to jump on the Uber bandwagon based on these earnings may do well to keep that in mind.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.