Uber Technologies (UBER) stock surged 5.5% on December 16 following news of a possible sale of the company’s Uber Eats operations in India. According to the Wall Street Journal, the company might sell its home delivery business to local rival Zomato Media. The Wall Street Journal indicated that a deal could be disclosed this week.
Why Uber might sell Uber Eats India
The food delivery business has grown rapidly in India. However, Uber Eats hasn’t been profitable in the country due to intense competition from competitors such as Swiggy and Zomato. The food-delivery division’s take rate improved sequentially to 10.7% in the third quarter.
However, on Uber’s third-quarter conference call, CFO Nelson Chai mentioned that Uber Eats India had had a 0.4% drag on the division’s take rate. In November, the Economic Times mentioned a valuation report by KPMG affiliate BSR, as per which the company expects Uber Eats India to be profitable by 2026.
A TechCrunch report cited sources and indicated that Uber Eats India might be sold for $400 million. It also mentioned that the company might invest $150 million–$200 million in Zomato as part of the deal.
The possible sale of the food delivery business in India might help the company reduce its exposure to a loss-making business. The company has previously exited unprofitable operations in other countries as well. In 2016, Uber sold its China business to Didi Chuxing. The company also sold its Southeast Asia business to Grab in 2018.
Aside from an unprofitable Uber Eats India, the company has several other issues to tackle. The Indian government plans to cap the commissions earned by cab aggregators such as Uber and Ola at a maximum of 10% of the total fare.
Last month, the ride-sharing company lost its license to operate in London, one of its key markets. Regulator TFL (Transport for London) denied the ride-sharing company a license due to passenger safety concerns. This setback comes at a time when rival Ola is gearing up to launch its services in London. On December 13, the company submitted an appeal against TFL’s decision. Uber drivers can continue to operate in London until the completion of the appeals process.
Concerns about profitability
Investors are concerned about how long Uber will take to become profitable. The company’s third-quarter revenue rose about 30% YoY (year-over-year) to $3.81 billion. It posted a deeper adjusted EBITDA loss of $585 million in the third quarter of 2019 than its adjusted EBITDA loss of $458 million in the third quarter of 2018. However, its results were better than analysts’ expectation of revenue of $3.69 billion and an EBITDA loss of $814.9 million.
In comparison, rival Lyft’s (LYFT) third-quarter adjusted EBITDA loss narrowed to $128.1 million compared to an EBITDA loss of $263.2 million in the third quarter of 2018. Lyft’s revenue rose 63.4% YoY to $955.6 million.
Uber Eats’s third-quarter performance was a matter of concern. The division’s adjusted EBITDA loss deteriorated 67% YoY to $316 million despite a 105% rise in adjusted revenue. The division’s exit from unprofitable markets makes sense in this scenario.
CEO Dara Khosrowshahi expects Uber to be profitable by 2021 based on its EBITDA. Uber stock has fallen about 28% since it started trading as a public company in May. In comparison, Lyft stock has fallen 39% since its IPO in March.