Uber is a great service but a terrible stock to own, this investor says

Uber’s (Uber Stock Quote, Chart NYSE:UBER) initial public offering fell flat earlier this month but the company hopes to impress with its earnings report Thursday where investors will be looking for light at the end of the tunnel as far as profitability goes.

But don’t bet on that outcome, says Don Lato of Padlock Investment Management, who argues that until autonomous vehicle technology gets up to speed, Uber’s business model is just too broken.

Uber’s share price is now down 11 per cent from its debut price of $45.00 on May 10, with much of that downside occurring on its first trading day where it lost 7.6 per cent. The company will have to prove itself worthy of its $67-billion market cap, although that evidence probably won’t come in its Q1 fiscal 2019 release today, as management has predicted a net loss of over $1 billion on revenue of between $3.04 billion and $3.10 billion. (All figures in US dollars.)

But even without rosy earnings —the company lost $2.2 billion in 2017 and $1.8 billion in 2018— management is firm in its belief of the company’s eventual move into the black, with CEO Dara Khosrowshahi comparing Uber’s public launch to those of Amazon and Facebook, both of which stumbled out of the gate from their IPO.

“Look at how [Amazon and Facebook] have delivered since,” wrote Khosrowshahi in a memo to employees earlier this month. “Our road will be the same. Sentiment does not change overnight, and I expect some tough public market times over the coming months. But we have all the capital we need to demonstrate a path to improved margins and profits. As the market sees evidence, sentiment will improve, and as sentiment improves, the stock will follow.”

But Lato says investors would be wise to look elsewhere.

“I love Uber. I’ve got the app on my phone and it’s a great service —the service is cheap but the stock is certainly not,” said Lato, president of Padlock Investment, to BNN Bloomberg on Wednesday. “It’s sort of a binary opinion. Some people think that this is a must-have and that it’s going to dominate the industry and that they’re at the forefront of so many things. The other side of the coin, I’ve read many articles that say it’s a flawed business model because the drivers are really not making a tonne of money and you can’t pay them more because the losses at Uber are going to be even greater if you pay them more.”

“When the company says in their prospectus that they don’t make money and they don’t see a day in the foreseeable future where they will make money, you just can’t buy the stock,” he says.

Lato says the comparisons to Amazon and Facebook aren’t accurate and, moreover, the problems for Uber extend to its main competitor in the ride-hailing sector, Lyft, whose IPO in March was equally disappointing.

“I suppose you could’ve said the same thing about Amazon ten years ago, but I just think that in Uber’s case where they’re waiting for autonomous drivers, it’s just too much risk in there for me,” says Lato. “The losses are getting bigger as they expand into new geographies. Uber is perhaps a little better positioned [than Lyft] in that they have UberEats and business transport as well, but stay away from both of them right now.”