Although the skyrocketing inflation of last year heavily impacted ridesharing and food-delivery platform Uber Technologies (NYSE:UBER), “revenge travel” – stemming from collective cabin fever during the worst of the pandemic – lifted sentiment this year. Unfortunately, turbulence from the airliner industry could negatively impact the ridesharing industry. As a result, I am neutral on UBER stock.
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Airliner Underperformance Clouds UBER Stock
With the rapid adoption of ridesharing, people use Uber’s core business for various reasons. However, according to travel industry reports, the use of ridesharing services among frequent flyers to and from the airport has increased dramatically. Therefore, in many ways, the success of UBER stock relies heavily on demand for the airliners.
For instance, according to a HNTB Corporation America THINKS national public opinion survey in 2018, 37% of responding travelers stated that they use ridesharing platforms to get to (and back from) the airport. Also, the trend appears to be rising. For instance, a 2019 report by The New York Times stated that traffic at airports has increased significantly because of ridesharing apps like Uber.
To put some numbers to the phenomenon, Portland International Airport in 2019 reported that ridesharing pickups jumped to 106,000 from 48,000 just two years earlier. Combined with the surge from revenge travel sentiment, Uber has become accustomed to this growth trek.
Unfortunately, this connection may become a liability, moving forward. Recently, United Airlines (NASDAQ:UAL) suffered a major blow following the disclosure of its Q3-2023 results. On paper, the print itself was strong. For profitability, United posted earnings per share of $3.65, beating the consensus target of $3.38.
On the top line, the airliner rang up sales of $14.48 billion, also beating the consensus view (by $70 million). Further, management reported that the revenue spike was driven by a boost in passengers, which contributed $13.35 billion to the top line. However, it was the Q4 guidance that sank UAL and other airline stocks.
Due to the Hamas terrorist attack on Israel, United anticipates that EPS will fall to $1.80 if flights to Tel Aviv are suspended through October. Worryingly, this estimate dips to $1.50 if such flights are suspended through the end of 2023.
However, the volatility in the airliners probably isn’t just limited to the horrific terrorist attack. Several airliners, from the majors to those mostly specializing in domestic routes, printed lackluster performances last week. Fundamentally, economic pressures – such as high inflation – may finally be catching up to consumers.
Uber Needs All Cylinders Firing
When it comes to the broader business directive, Uber leaves little question as to what it’s doing. Last year, the company posted total revenue of $31.88 billion. Within this tally, the Core Mobility (i.e. ridesharing) business unit accounted for $14.03 billion. However, on the bottom line, Uber disclosed a net loss of $9.14 billion.
Theoretically, that’s not necessarily a bad outcome. Of course, the enterprise would rather be in the black – that much is obvious. However, in order to achieve profitability amid a competitive environment, Uber aims for a dominant market position. Eventually, the profits will presumably come.
However, the company also needs all cylinders firing to make such a gamble pan out positively in the end. That’s where the revenge travel impact against the airliners poses a threat to UBER stock. Back in pandemic-disrupted 2020, Uber posted total revenue of $11.14 billion, down from the $13 billion posted in 2019.
During that period, air travel was practically shut down for long stretches. To be fair, Uber’s food-delivery unit, Uber Eats, helped pick up the slack tremendously. And in subsequent years, the delivery unit has become a more important part of the overall business.
Still, if revenge travel sentiments falter, that could also impact this burgeoning division, thus possibly hurting UBER stock.
Not a Clear Bear Case
Despite some major concerns against the ridesharing firm and the overall industry, UBER stock doesn’t represent a clear bear case. Primarily, the underlying sector itself has significantly disrupted the traditional taxi service. While an economic downturn will generally hurt demand, the concept of hailing a ride will never go away.
Further, Uber’s decision to sacrifice profitability for growth might pay off, even with factoring in financial headwinds. Culturally, Uber has become synonymous with the ridesharing concept. Such brand recognition and trust may allow the company to grab a foothold with older generations, who may be more prone to using traditional taxi services.
Still, it’s difficult to state that fading airliner performance won’t affect UBER stock at all, which is why caution is appropriate.
Is UBER Stock a Buy, According to Analysts?
Turning to Wall Street, UBER stock has a Strong Buy consensus rating based on 29 Buys, one Hold, and zero Sell ratings. The average UBER stock price target is $58.68, implying 36..3% upside potential.
The Takeaway: What Hurts Airliners Might Hurt UBER Stock
With the distinct possibility that fading revenge travel sentiment may be hurting the airliners, those invested heavily in UBER stock should monitor conditions very carefully and perhaps adopt a wait-and-see approach amid the uncertainty. Because many frequent flyers are using ridesharing platforms to go to the airport (and back), a reduction in the total addressable market here may lead to lower demand for Uber.
