If it weren't Real Money's 'Stock of the Day', some might accuse me of beating a dead horse writing about Uber (UBER) again so soon after listing it as a stock to watch on January 17th. Or noting it on December 31st at $29.81. Or strategizing a long trade on December 24th when the stock sat at $30.75. With shares touching $37 this morning, I'd say the horse is far from dead.
Uber shares are getting a boost on the news it sold its Uber Eats food ordering business in India to competitor Zomato. In return, Uber will receive a 9.99% stake in Zomato. Although it only accounted for a small, single-digit percentage of bookings, this segment of Uber's business accounted for 25% of its adjusted operating losses. While getting cash for the business would have been great, I see this deal as the next best thing.
Addition by subtraction. Uber maintains the potential to recover losses, loses very little revenue, cuts a huge portion of its adjusted operating losses, and is better positioned to focus on the segments of its business in which it excels.
Zomato trails Swiggy as the number two in the Indian food-ordering business. Uber sat as a distant third. By removing one of the top three competitors, both Zomato and Swiggy see increased odds at success, despite both losing hundreds of millions of dollars currently. Fortunately, both are backed by deep Chinese pockets with Swiggy having behemoth Tencent (TCEHY) in its corner and Zomato relying on Ant Financial.
For Uber, 10% of something is better than 100% of nothing, or in the case of a money-losing segment of a business, less than nothing. We've already seen domestic numbers improving in the ride-sharing business for both Lyft (LYFT) and Uber. Concentrating on what's working, or at least what's not draining the bank account, is a smart move for a company eyeing free cash flow and profitability sooner rather than later.
Uber has other battles to focus upon as well. The situation with contractors in California or permission to operate in London are far more crucial to the long-term success of Uber rather than delivering food in India. In fact, I'd love to see UberEats spun off or sold. However, with GrubHub (GRUB) having no success selling itself, don't count on that happening any time in the near future.
Shares have seen the reward versus the risk equalize over the past few weeks after the 20%+ run. The next resistance levels appears to be $40 with support at $34, so that gives us $3 upside versus $3 downside with momentum, trend, and volume all supporting the bulls but the "easy" money has been made. Nothing is truly ever easy as Uber saw plenty of false breakouts. Both September and October proved disappointing for traders chasing a breakout.
I would continue to hold, but set tight trailing stops. If I held no position, then I would look for a retrace to $34, without a break below, for an entry opportunity. Should the stock hit $40, I would certainly take profits or purchase a collar (long put, short call) or a protective put.
Earnings are set for February 6th. The stock has been a big loser the past two reports, so keep that in mind on this one.
Overall, the news today is a huge positive, so I would look to continue riding this on the long side with no interest in a short position. Alternatively, Lyft has the look of Uber right before its recent breakout. That's where I'm looking long.
