Uber Technologies, Inc. (UBER) rallied 6% on Monday after announcing that it would acquire privately held rival Postmates for $2.65 billion. Uber expects the transaction to be completed in the first quarter of 2021, but it could face opposition from government agencies worried that the ride-share and delivery upstart will control too much of the lucrative home delivery market. Even so, that claim will be hard to prove because the company hasn't posted a quarterly profit since coming public in 2019.
The news comes just two months after Uber launched an unsuccessful bid for publicly held Grubhub Inc. (GRUB), which cut a deal with British-owned Just Eat Takeaway in mid-June. The Postmates acquisition, if approved, could be a game changer for Uber and the home delivery market, resetting company goals as a result of the COVID-19 pandemic and its negative impact on ride sharing.
It will take about 84 million newly issued shares to complete the all-stock deal, adding to Uber's current 1.73 billion outstanding shares. That shouldn't be too dilutive, given narrow synergies, with many drivers already delivering food for both operations. The move is also likely to hasten consolidation in this growing tech industry, eventually yielding a handful of top players. As we've seen with the rise of other tech giants, the rewards for shareholders can be extremely lucrative.
Uber has been on a cost- and headcount-cutting binge since reporting a first quarter 2020 loss of $1.70 per share in May, 80 cents higher than expectations. Revenue grew 14% in the first quarter despite the collapse of ride-sharing income, underpinned by the massive surge in home deliveries. A series of upgrades followed the mixed results, but the stock is still trading at the same price level now, as it did in the first session after the quarterly report.
Macro risks are growing for the ride-sharing industry despite the hook-up, led by a California law that designates drivers as employees, not independent contractors. The stakes of pending lawsuits are high because added costs for benefits and wages could make the difference between profitability and bankruptcy. And looking to the east, New York City just imposed a 20% cap on delivery fees, raising the odds that other municipalities will follow.
Uber Daily Chart (2019 – 2020)
The company came public at $42 in May 2019 and posted an all-time high at $47.08 less than two months later. The subsequent decline cut through the IPO opening print in July, adding to a downward spiral that continued into the November low at $25.58. Buyers emerged through year end and into the middle of February, when the stock posted a lower high at $41.86, right at the July breakdown level. The stock then sold off with world markets, breaking 2019 support in a selling climax that ended one week later at an all-time low in the mid-teens.
The bounce into June stalled after piercing the .786 Fibonacci selloff retracement level in the mid-$30s, yielding a decline that has been testing the 50-day exponential moving average (EMA) for the past month. The stock mounted that barrier for the first time since June 24 after the news but closed lower than the open, revealing skepticism about the deal. A selloff through $30.50 would be bearish in this price structure, indicating that shareholders are walking away despite the bullish prospects.
The on-balance volume (OBV) accumulation-distribution indicator paints a more bullish picture, lifting into the pre-pandemic high in May. Minor distribution since that time may be carving the handle of a cup and handle pattern, with a breakout predicting that price will soon follow. Realistically, that probably won't happen until investors feel more comfortable about pandemic's trajectory, which is still having a major impact on ride-sharing revenues.
The Bottom Line
Uber's acquisition of Postmates could be a game changer, but the ride-sharing company may need to overcome macro and political headwinds to achieve expansion goals.
Disclosure: The author held Uber shares in a trading account at the time of publication.