• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Technology

Uber's $2.65 Billion Postmates Deal Is Good News -- Up to a Point

The deal should put Uber's U.S. food-delivery operations on better footing. But generating substantial profits from the business could still be easier said than done.
By ERIC JHONSA
Jul 07, 2020 | 06:34 AM EDT
Stocks quotes in this article: UBER, GRUB, AMZN

Though the U.S. food-delivery market isn't consolidating in quite the way that bulls hoped, it's hard to blame Uber (UBER)  investors for being pleased that their company is buying Postmates, the market's #4 player, in a $2.65 blliion, all-stock deal. That is, up to a point.

The deal, which is expected to close in Q1 2021, should solidify Uber's Eats unit's position as the U.S. food-delivery market's #2 player, behind DoorDash. While market share estimates vary from company to company, Uber and Grubhub (GRUB) are generally seen as fighting for the #2 spot.

Spending data provider Second Measure put each company's May 2020 market share at a little above 20%, albeit while admitting that its stats exclude certain Uber Eats transactions. DoorDash was assigned a 45% share; Postmates was given a mere 8% share, though it's worth noting its share is much higher in metro areas such as Los Angeles (35%), Phoenix (19%) and Miami (16%).

Uber of course held buyout talks with Grubhub this spring, but backed off after politicians and regulars voiced concerns about its combined market share in a number of big metro areas. Grubhub then decided to ink an all-stock deal to merge with top European food-delivery player Just Eat Takeaway.com, which itself is the product of a recent merger.

A U.S. food-delivery market with three players probably won't be as profitable as one with just two. And acquiring Postmates, which has been carrying out layoffs as it struggles to turn a profit, probably won't do as much to boost Uber's bottom line as acquiring Grubhub, which in addition to being bigger gets a lot of high-margin revenue related to takeout orders and orders fulfilled by restaurants rather than Grubhub's own drivers, would have.

But it should still yield a better environment for Uber than the status quo, in which it's one of four players dealing with low transaction take rates amid intense price competition and promotional activity.

Uber is coming off a Q1 in which its Eats business -- in spite of seeing 52% annual bookings growth and 121% adjusted net revenue growth -- had just an 11.2% take rate, less than half of its ride-sharing business' 22.8% take rate. That's a big reason why the segment posted adjusted EBITDA of negative $313 million, even after backing out its share of company-wide G&A and R&D expenses, as well as stock compensation.

It's worth noting that Uber did disclose on a Monday call that Eats' bookings growth (excluding divested Indian operations) accelerated to 89% in Q2, thanks in part to COVID-19. That said, the business is also benefiting right now from Uber's decision to waive delivery fees for independent restaurants for the time being.

Aside from (probably) creating a less intense competitive environment, a Postmates deal should improve the profitability of Uber Eats' U.S. operations by boosting its economies of scale. Also, on the call, Uber talked up its ability to use Postmates' algorithms for deciding which order pickups and deliveries a particular driver handles to improve the efficiency of its operations.

Over the long run, the fact that Uber and DoorDash each have substantial in-house delivery operations could help both firms take share from Grubhub and Just Eat, which are trying to avoid making similar investments.

In addition, though it's worth keeping in mind that DoorDash is going in a similar direction, and that Amazon.com  (AMZN) could eventually use its burgeoning fleet of last-mile delivery vans to do the same, Uber sees an opportunity to handle a variety of local, non-restaurant deliveries. In April, the company unveiled Direct, a deliveries service for local retailers, and Connect, a peer-to-peer deliveries service.

That's the good news. The bad news is that -- as Grubhub highlighted in a late-2019 shareholder letter -- there are limits to the scale and efficiency benefits a food-delivery provider can obtain by a having a greater volume of orders to fulfill.

In the end, if a delivery driver has to take around 30 minutes of his or her time to pick up and deliver a $30 order -- that's close to Uber Eats and Postmates' average order value -- the cost of paying that driver for his or her time is going to equal a substantial percentage of the cost of the meal. And if higher order volumes and smart algorithms make it possible to bring the average time per pickup/delivery closer to 20 minutes, the average cost will still be substantial, albeit somewhat lower. And that's before accounting for expenses such as insurance, G&A, R&D, cloud hosting, marketing and customer support.

Though the big losses racked up by food-delivery players in recent years are partly due to no-holds-barred competition, one also can't overlook the role played by the underlying economics of food delivery. While it's possible that Uber, DoorDash and Grubhub/Just Eat will all have profitable delivery operations in time, generating high margins without carrying out major price hikes could be easier said than done.

Also, for the moment at least, DoorDash, which lost $450 million in 2019 and was reported in June to expect its operations to break even in Q2 excluding one-time costs, appears to be running itself more efficiently than Uber Eats.

For these reasons, Uber investors probably shouldn't get too excited just yet about the Postmates deal, particularly at a time when Uber's larger and higher-margin Rides unit is still recording (per Uber's Monday call) annual bookings declines of around 60%. While the deal is a positive for Uber, it's not exactly a cure-all.
Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Action Alerts PLUS, which Jim Cramer co-manages as a charitable trust, was long AMZN.

TAGS: Investing | Technology

More from Technology

Gravity Is Pulling on Apple

Mark Sebastian
May 23, 2022 2:32 PM EDT

Here's where I see AAPL going and how to play it.

How Zoom Is Positioned Ahead of Earnings

Bruce Kamich
May 23, 2022 8:52 AM EDT

Bullish divergences may finally generate a bounce, Here's how to trade it.

How to Move on MongoDB

Bruce Kamich
May 20, 2022 2:19 PM EDT

Let's take a technical follow-up look at MDB -- and give a word of caution on this software name.

I'm Cautious on Marvell Technology Ahead of Earnings

Bruce Kamich
May 20, 2022 11:52 AM EDT

Let's review the charts and indicators.

If You're Looking for a Hero in This Market, Don't Look to Apple, ARKK

Ed Ponsi
May 20, 2022 10:30 AM EDT

Folks are asking if it's finally time to buy the ARK Innovation exchange-traded fund or Apple. Let's check the charts.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 02:24 PM EDT PAUL PRICE

    An Interesting Chart

    I'm betting heavily that stocks will be way up aga...
  • 10:10 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    "Market Timing for Dummies"
  • 01:44 PM EDT STEPHEN GUILFOYLE

    Stocks Under $10 Portfolio

    We're making a series of trades here.
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login