eThe merit season always brings its share of seemingly nonsensical reactions to results. Usually, this means that you lost something, not the market. Maybe you’re focusing on disappointing earnings per share, for example, but there could be encouraging revenue numbers and/or optimistic guidance for the next quarter or year. Or perhaps there is an excuse for the bottom line to fail, a one-time thing or improvement that can be expected, and without that, the core numbers are pretty good. Sometimes, though, the stock reacts illogically, and try as hard as I can, I can’t figure out why.
Take Uber, for example. As I write, the stock is trading more than 11% above yesterday’s close in the primary market, after they released their third-quarter earnings this morning.
They reported a loss for the quarter of $0.61 per share, which beat the consensus estimate of a loss of just $0.17, on revenue of $8.34 billion versus expectations of $8.12 billion. It is clear that traders focus on outperforming the revenue and discounting the large error in the actual profits as a one-off. In fact, the company gives this impression, as they say that the business is rebounding, and that a lot of the losses are due to writing off losses on equity investments.
The problem, however, is that the math doesn’t just indicate that the revenue win must outweigh the total loss.
Let’s start with investment losses. The net loss totaled $1.2 billion, with Uber attributing $512 million of that to a “reassessment” of its equity investment. This means that bad investments account for about 42% of the losses, leaving 58%, or about $0.35 per share, that remains to be accounted for. In case you’ve forgotten, the forecast was for a loss of $0.14, still twice and a half the expected loss for the quarter.
Then there are two more problems:
First, it appears that Uber is still in a position to lose more money the more business it does, making revenue outstrip expectations and less optimistic forecasts of revenue growth than it might seem at first glance. It would be nice if scaling up the business would have significant profitability advantages, but how many economies of scale are left to be reaped when revenue actually reaches more than $8 billion per quarter?
Second, consider me picky, but I’m not sure I want to invest my money in a company whose logic runs something like “Don’t worry, we lost a lot of money just because we made some terrible investment decisions!” Making investment decisions is what senior executives do, and it’s especially important for companies whose value depends on growth. Poor decisions may justify the present loss to some extent, but they hardly give one confidence about achieving optimistic goals for the future.
In addition, this future still has a serious obstacle to overcome. Uber’s model relies on temporary job workers, but there is a growing push around the world to organize this type of hiring. You might say that workers have the right to work as they see fit, and that no one is compelled to work for Uber. Or it might refer to the fact that leadership for a company is, for many people, just a side job, so they neither need nor want regular job protection and benefits. You may be right either way, but that’s not the point.
Governments, whether local or national, are not always organized on the basis that we are all intelligent adults, able to assess a situation and make decisions in our best interests. They do this to protect people from themselves, or perhaps from a company they see as taking advantage of a situation unfairly. Whatever their motives, regulators regulate it. It’s their reason for being, and regulations are coming in in some parts of the world. Companies like Uber use contract workers instead of traditional employees to keep costs down, so it stands to reason that regulations that force them to treat even a fraction of their drivers as employees would raise costs.
So, back to what Uber earnings tell us before we get down to the analysis and excuse. The company did more business than expected last quarter, and in doing so, it lost more money than expected, even after accounting for its miscalculation. They already have a cost problem, so the ill effects of any cost increase would be exaggerated.
Profit may be the purpose of companies’ existence, but earnings season is filled with examples of companies whose stocks move based on things other than a simple bottom line. This makes sense in most cases, but not always. With Uber, it seems that traders have been looking for reasons to buy. Of course, they did find some, but they seem to ignore the obvious: Uber lost more than expected in the last quarter, even after allowing for a one-time write-off, and it continues the pattern of losing more money as it raises more revenue. A quote that cautions against over-analysis, often wrongly attributed to Sigmund Freud, says, “Sometimes a cigar is just a cigar.” Investors are tempted to jump on the Uber bandwagon based on these earnings, and they might well be doing just that to keep that in mind.
The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.