The Ratings Game: Uber’s cost cutting path to profitability welcomed by Wall Street

The Ratings Game

Another round of layoffs at Uber to arrive faster at break-even status is playing well with Wall Street

Uber CEO Dara Khosrowshahi has announced 6,700 job cuts the past two weeks as the ride-hailing service races to profitability.


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Another mega-round of layoffs at Uber Technologies Inc. to cut $1 billion in annual expenses and arrive faster at break-even status is playing well with Wall Street.

Uber Chief Executive Dara Khosrowshahi dropped the hammer for the second time in less than two weeks Monday. In a memo to employees, he announced 3,000 job cuts on top of 3,700 already disclosed. This represents about a fourth of Uber’s workforce. The end game, in the opinion of two analyst research notes, is more centralized operations and structure, with less pricey long-term investments.

See also: Uber shares rise 3.6% on latest layoff news

“Uber continues to mature, with a more focused scope of operations and fewer non-core endeavors,” BofA Securities analyst Justin Post wrote in a note Tuesday. “We would not be surprised if Uber is looking at strategic options for Freight, despite costs cuts being still focused on selected growth initiatives. Actions such as incorporating public transit in the mobility app, and expanding Eats to ‘Delivery’ including Grocery and Direct delivery.”

Post, who maintains a buy rating and price target of $42, sees “some upside potential” with 6,700 jobs eliminated and the shuttering of 45 Uber facilities. “We think these changes underscore a more focused and mature Uber and will likely result in an accelerated path to break-even if end markets recover,” he wrote.

Uber’s race to profitability should occur next year as it and other gig-economy players such as Lyft Inc.
LYFT,
+1.74%

and Airbnb Inc. pare their workforces, notes CFRA analyst Angelo Zino.

“We applaud [the cost savings] as it will allow the Rides segment to be profitable at a much lower run rate,” Zino said in a note Monday that maintains a buy rating on Uber stock. “We anticipate a tempered recovery in the ridesharing market without a vaccine for Covid-19, with the segment unlikely seeing previous peak volume over the next 2 years.

“That said, we see UBER being profitable on an adjusted EBITDA basis by the second half of ‘21. We believe the moves (includes office reductions) will allow UBER’s cost structure to become more variable.”

Uber shares, which inched up 1% in late-afternoon trading Tuesday, are up 14% this year. The broader S&P 500 index
SPX,
-0.60%

has declined 8.5% in 2020.

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