June 6, 2019

Breakingviews: Uber analysts ride dreams to common destination

by Breakingviews.

Uber Technologies analysts are riding disparate dreams to a common destination. They expect the $70 billion ride-hailing app to lose money for years but see various grounds for optimism, from cross-platform synergies to flying cars to demographics. Yet most roads lead to a forecast price upside of around 25%. It’s Wall Street’s form of herd immunity.

Investors haven’t been particularly impressed with Uber. The company sold shares at $45 each, far below what backers had hoped to achieve only a few months earlier. And the stock has lost about 6% since.

Yet analysts, including those at underwriting banks who were barred from publishing research until Tuesday, want investors to look beyond decelerating growth, massive cash burn and frightful competition in the U.S. and abroad. Of the 24 recommendations that have been made to date according to Refinitiv, about 80% say investors should buy, and none recommend selling.

The reasons vary. Researchers at Goldman Sachs talk about the massive opportunity in disrupting various parts of the $7 trillion global mobility market, including everything from flying cars to “potential symbiotic relationships” with rental-car firms. Barclays says Uber’s dominant size is a key advantage because “scale begets scale.” And Deutsche Bank opines that synergies between ride-hailing, meal-delivery and freight services should “feed a flywheel of supply and demand.” Bank of America says those qualities mean Uber should trade at 5 times 2020 revenue compared with 4 times for rival Lyft.

They don’t agree on when the company will generate free cash flow or profit. Barclays thinks it might go into the black in 2022 while Deutsche Bank estimates the company will still be losing money in 2025.

All of these different justifications, addressable markets estimates, varying premiums compared to rival Lyft and breakeven targets should yield wildly variable results. Yet most analysts have target prices clustered a few dollars above or below $55 per share. Sure, there are a few mild rebels, such as Citigroup at $45. But it’s a Panglossian crowd, disagreeing only on how sunny results will be.

For sell-side analysts, John Maynard Keynes had it right – it’s better for reputation to fail conventionally than succeed unconventionally.


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