Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Should Uber acquire Grubhub?

Predictably, coronavirus is causing a desperate struggle for survival among digital platforms. For example, Uber (NYSE: UBER) is trying to relevant by buying Grubhub (NYSE: GRUB).

To its credit, Grubhub rejected Uber’s offer of 1.9 Uber shares for each share of its stock, Axios reports. Uber wants Grubhub because takeout delivery is one of the few growth businesses in the Coronavirus age.

To explain, people trapped at home by stay at home and social distancing order more takeout. However, the same people are not travelling or going out to bars. Consequently Americans are taking fewer Uber rides.

Uber imitates Amazon

Meanwhile, Uber imitates Amazon’s mindless growth business model. To explain, instead of trying to generate a profit, Jeff Bezos pursues more and more growth in the hope Amazon (NASDAQ: AMZN) will grow fast.

Additionally, Bezos shares Warren Buffett’s belief that growth is a critical part of a company’s margin of safety. Hence, Uber is trying to expand its margin of safety by acquiring Grubhub.

Both Uber and Grubhub are in big trouble coronavirus has halted or reversed economic growth. To explain, people with no jobs and no money cannot afford to order takeout or take an Uber ride.

Thus, I think the gig economy could collapse because gig economy success requires a large middle class with a lot of disposable income. However, we could soon return to a 1930s economy where only a minority has disposable income.

Can Coronavirus Kill Uber?

The financial numbers show Coronavirus is hurting Uber. Uber’s quarterly revenues fell from $4.069 billion on 31 December 2019 to $3.543 billion on 31 March 2020.

Therefore, fewer people are taking Uber rides and Uber is making less money. Uber’s quarterly gross profit fell from $2.142 billion on 31 December 2019 to $1.757 billion on 31 March 2020.

Strangely, Stockrow estimates Uber’s revenues are still growing. Uber reported a 36.82% revenue growth rate for the last quarter of 2019. In contrast, Uber had a 14.33% revenue growth rate for the first quarter of 2020.

These figures show Uber’s business shrank as coronavirus spread. Notably, Uber’s biggest US market; New York City, is ground zero for coronavirus in America.

Uber generates Enormous Amounts of Cash

Uber needs help because it loses a lot of money. For example, Uber reported an operating loss of -$1.263 billion and a common net loss of -$2.936 billion for the first three months of 2020.

Conversely, Uber’s business generates enormous amounts of cash. Impressively, Uber reported an ending quarterly cash flow of $9.529 billion on 31 March 2020. In contrast, Uber reported a negative operating cash flow of -$463 million.

Consequently, Uber had $9.189 billion in cash and short-term investments on 31 March 2020. Thus, I conclude Uber has the cash to survive coronavirus. For all its faults, Uber is a cash-rich company.

Grubhub loses Money

Similarly to Uber, Grubhub (NYSE: GRUB) is a publicly-traded platform that loses money.

Grubhub reported a quarterly operating loss of -$45.91 million on 31 March 2020. Grubhub also reported a net common loss of -$33.43 million for the same quarter.

However, Grubhub’s quarterly revenues grew slightly in the first quarter of 2020. Grubhub reported quarterly revenues of $341.27 million on 31 December 2019 and $362.98 million on 31 March 2020.

Conversely, Grubhub’s quarterly gross profit fell from $121.78 million on 31 December 2019 to $121.78 million three months later. Thus, Grubhub could be making less money from rising sales. Stockrow credits Grubhub with a revenue growth rate of 12.11% in the first three months of 2020.

I think Uber wants Grubhub because Grubhub’s business is capable of growth in a pandemic. On the other hand, only part of Uber’s business, Uber Eats can grow in a pandemic.

However, Grubhub’s growth is dependent on customers with lots of disposable income and little time to cook. Unfortunately, the coronavirus economy produces the opposite situation, a middle class with no discretionary income but lots of spare time.

Grubhub Needs Cash

Uber has one thing, Grubhub desperately needs; cash. Grubhub reported a quarterly operating cash flow of $37.53 million and an ending cash flow of $563.31 million on 31 March 2020.

However, Grubhub’s cash flows experienced major growth over the last year. Grubhub reported a quarterly operating cash flow of $13.94 million and an ending cash flow of $194.27 million on 31 March 2019. In addition, Grubhub’s cash and short-term investments grew from $204 million on 31 March 2019 to $597.07 million a year later.

Thus, Grubhub is experiencing cash-flow growth; which is another reason why Uber is interested in acquiring it. Uber needs to add growth to its business to survive the pandemic and Grubhub is growing.

Should Uber buy Grubhub?

I think Uber needs to avoid Grubhub (NYSE: GRUB) because Mr. Market overprices it. Mr. Market paid $57.67 for Grubhub shares on 18 May 2020 to $56.89 on 22 May 2020.

In 2020, Grubhub’s share price grew from $47.24 on 2 January 2020 to $57.67 on 18 May 2020, and $56.89 on 22 May 2020. Thus, Grubhub’s share value grew slightly in 2020.

In contrast Mr. Market paid $34.37 for an Uber (NASDAQ: UBER) share on 22 May 2020. Uber’s share value also grew in 2020 rising from $30.99 on 2 January 2020 to $33.62 on 18 May 2020 to $34.37 on May 22, 2020.

Thus, I conclude Uber’s share value is safe. However, I do not see how buying Grubhub can help Uber. Uber already has its own successful food delivery service Uber Eats.

I think a better course of action for Uber is to invest cash to expand Uber Eats and upgrade its technology. As for acquisition, Uber needs to think outside the tech box and look for companies with resources that can give it new capabilities and sources of cash.

One good possibility is a car-rental company. Car Rental companies are cheap now. For example, Mr. Market paid $14.75 for shares of Avis Budget Group (NASDAQ: CAR) on 18 May 2020. Owning a car rental company will give Uber a fleet of vehicles, the Zipcar short-term rental fleet, and hundreds of maintenance facilities around the world.

Will Berkshire Hathaway Buy Uber?

Finally, Uber itself could be acquired by Berkshire Hathaway (NYSE: BRK.B). Warren Buffett admires Uber CEO Dara Khosrowshahi and loves cash. Uber is cash rich but its stock is cheap. Interestingly, Buffett admits he considered investing in Uber’s debt in 2015, CNBC reports.

I do not think Uber and Grubhub are good stocks for ordinary investors. However, Uber and Grubhub stock are interesting investments for people who can afford to lose money and take a risk. I think both Uber and Grubhub will survive and make money but they face serious problems in the near future.

Investors that cannot afford risk need to stay far away from both GRUB and UBER.