Try as it may, Uber (NYSE:UBER) can’t seem to get traction from investors. I’ve struggled with the long-term case for Uber stock for some time. Back in August, I wrote about how the company’s business model was not designed to employ full-time employees. And yet, it’s looking increasingly likely that Uber is going to have to change how it recognizes and compensates its drivers.
Having to manage higher costs is one thing. But the coronavirus is exposing what may turn out to be an existential threat to Uber’s long-term growth. What happens if nobody wants a lift?
It Seemed Like Such a Simple Concept
The appeal of ride-hailing companies like Uber and Lyft (NASDAQ:LYFT) was easy to understand. It was a simpler, cooler way to hail a taxi. And it looked like it was going to revolutionize the way Americans went to work, went to the airport. It was even going to eliminate that awkward question of who the designated driver would be.
And the company had a willing base of drivers who were looking for a side hustle. Work by day. Drive by night or on the weekend. Drivers get a side hustle. Uber gets happy customers. What’s not to like?
But it turned out that some of those who were driving for Uber decided they wanted more. More hours, higher pay, benefits. And, as InvestorPlace contributor Dana Blankenhorn describes, that’s a model that won’t work for Uber.
But I see a much more fundamental threat facing Uber: the threat of demand destruction.
Ride-Hailing May Be So 2019
In February, Uber CEO Dara Khosrowshahi said the novel coronavirus was not having “a significant effect on the business overall.” This sentiment was echoed by Lyft CFO Brian Roberts in March. According to Roberts, the company had not seen a change in demand due to the virus. In fact, Roberts regarded the business as “extremely strong.”
But that tune is changing. In late March, a ride-hailing startup, Alto, was reporting a steep decline in demand. And Uber acknowledged that the bulk of its work was being slid over to its food delivery service, Uber Eats, which is already a money losing venture for the company. To emphasize that point, our own Will Ashworth points out that Uber is acknowledging a 94% drop in demand for its traditional ride-hailing service.
And the real problem for the company is how much of that demand will come back. I’m not saying there won’t be a market for Uber’s services. City workers still need to get to offices. Once consumers feel safe flying again, I presume Uber will still be a convenient choice to get to the airport. And I imagine many younger customers will not allow the potential risks involved to get in the way of a good time.
A Vaccine Is Still a Year Away
Still, social distancing is going to be around in some capacity until there is a vaccine for the novel coronavirus. And with that being up to 18 months away, that presents a significant challenge for Uber. Plus, there’s speculation that an increasing number of workers may realize they actually like working from home. That would cut into the core business.
And then there’s a question that’s harder to answer. What will the psychological hangover be? Speaking for myself, I know who’s been in my car; I don’t know who’s been in an Uber. If I have a choice, I may simply see my personal vehicle as being a safer choice.
Or, it may open the door for a different model such as Kyte, a San Francisco-based rental app that delivers a rental car to you. The company has seen bookings increase by 50% since January as more people prefer to get around in a car that they can drive.
What’s Next for Uber Stock?
Uber stock is down approximately 35% from its 2019 initial public offering. The legal issues surrounding Uber’s responsibility to its drivers will be enough of a headwind to keep the stock from growing in the near term.
But Uber has a strong balance sheet that should get them through the initial first wave of the pandemic. However, if the economy doesn’t really open up until fall, it could be devastating.
The novel coronavirus is going to change our economy. It’s impossible to know just how significant that change will be. But I can’t overlook the fact that Uber was already facing problems with demand before the current pandemic destroyed its core customer. Until there is compelling evidence that those customers will return, there’s no compelling reason to own Uber stock.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
