What Happened

Uber Technologies announced Q3 2019 earnings after market close on November 4th, 2019. The company had smaller losses and higher revenue than expected. This failed to please investors as its losses, while better than the enormous quarterly loss in the 2nd quarter, were still substantial. The stock dropped more than 5% in after hours trading.

Uber's free cash flow (FCF) moved in the right direction. FCF losses went from $1.1 billion to $1 billion. That said, $1 billion a quarter is still quite a clip to be burning through cash, so keep that in mind when investing.

(Below is Investopedia's original earnings preview, published 10/31/19)

What to Look For

Ride hailing service Uber Technologies Inc. (UBER), one of the most highly-anticipated IPOs of 2019, has been a disappointment to many investors. Its stock has declined sharply since going public. And Uber burned significant sums of cash in the first two quarters of the year, as indicated by the company's large negative free cash flow. Investors will want to see whether this key metric improved in Q3. Analysts are forecasting that Uber will show improvement in Q3 as losses narrow sharply from the previous quarter and as revenue rises by 16%.

As of the close on Wednesday, Uber's share price was down by 25% from its initial offering price of $45 in May.

Total Return for S&P 500 and Uber since May 10 IPO

Uber Stock Graph
Source: TradingView.

In Q2, Uber delivered the largest quarterly loss in its history, mostly due to stock-based compensation resulting from its IPO, a common expense for companies that recently went public. A one-time "driver appreciation award" related to the IPO was another added expense in Q2. Both revenue and EPS in Q2 were worse than expected by analysts, delivering negative surprises of -6.6% and -47.9%, respectively.

  Q3 2019 (Estimate) Q2 2019 Q1 2019
Earnings Per Share -$0.85 -$4.72 -$0.61
Revenue (in millions of dollars) 3,676 3,166 3,099
Free Cash Flow (in millions of dollars) N/A -1,070 -851
Sources: YCharts, Uber

Bank of America Merrill Lynch is anticipating improved profitability in Q3 for Uber's core ride hailing business, coming from select price increases and lower incentives. Preliminary sources indicate to BofAML that Uber's U.S. market share in ride hailing will rise from 70.9% in Q2 to 71.1% in Q3, while its Uber Eats food delivery program sees a decline in share from 16.7% in Q2 to 15.0% in Q3. "While industry risks have grown, we continue to assume Uber's net rev. can reaccelerate, with contribution margins also increasing on lower excess driver incentives," the report says.

A crucial milestone for young companies such as Uber is reaching the point where they begin to generate positive free cash flow on a consistent basis going forward. At this point, they become self-sustaining enterprises that do not need additional infusions of capital from investors to maintain their current levels of operation.

Free cash flow takes cash flow from operations and subtracts capital expenditures (capex). The presumption is that capital investments maintain and upgrade the business, and thus are a necessary use of cash. To assess the underlying health of free cash flow, analysts and investors often watch to see if the level of capex might be too low, too high, or not delivering sufficient value for the money.

According to Uber's 10-Q report for Q2, its cash and cash equivalents equaled $11.7 billion, up from $6.4 billion at the end of 2018. The free cash flow figure for Q2 indicates that Uber consumed over $1 billion of cash in that period. At that burn rate, the company still has sufficient cash reserves to keep it afloat for the foreseeable future before it must tap the equity and debt markets again.