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Uber is 'definitely on the the right track', says analyst

Mizuho Americas' senior U.S./China internet analyst James Lee joins Yahoo Finance to discuss Uber's third-quarter results, and what the passage of Proposition 22 in California means for the company.

Video Transcript

JULIE HYMAN: --Uber are up by 6%. The company reporting sort of a mixed quarter, at least if you look at what's going on in its core business versus the Eats business. The Eats business sort of salvaging [INAUDIBLE], bookings more than doubling year over year for Eats. At the same time, gross bookings were down 53%. Still an improvement from the prior quarter.

Net losses narrowed for Uber, and revenue was down overall by 18%. Let's get more details on the Uber numbers with James Lee. He is Mizuho Group's senior US and China internet analyst. And our Pras Subramanian is joining us as well, who covers car stuff for us, I think we could say.

James, as you look at these Uber numbers, do you think that the company is sort of on the right track? I mean, given, of course, that there is the pandemic, is the mix in the business correct?

JAMES LEE: Yes, thanks for having me. I think they are definitely on the right track. I think the biggest surprise that we've seen here is the food delivery business, right? They continue to accelerate and gain market share.

You know, they started pretty well, up 90% year over year in April. And now they're up about 135% in October. And also unit economics is getting better as we see an increase in takeaway. Now we expect the takeaway to continue to improve with a more rationalized market. And also the introduction of advertising model, which will be very helpful for the takeaway, too.

The only international proxy we can see is China's Meituan, their largest food delivery company. Their takeaway is about 1 and 1/2%. I think with that introduction or advertising model, the company came out and very confidently said that they will be breakeven on the food delivery business in FY 21. In fact, 10 of the countries are already EBITDA positive.

PRAS SUBRAMANIAN: Hey, James, you know, on the call last night, Dra Khosrowshahi very you know, positive around Eats, and we're going to talk more about this, too. But, you know, saying that he thinks that that business is just as big as mobility. He won't say that it actually might even be bigger than that. I mean, but the margins are actually smaller for that business. So how do you see that take rate improving if they're counting on Eats to become a bigger part of the business?

JAMES LEE: Yes, that's right. And then, obviously, they have to work on the technology side to do better batching. Once you do better batching of delivery, unit economics gets better. I think that's a key acquisition. That's why they decide to acquire Postmates not only to, number one, consolidate the market, and number two, they have a great batching technology. Their batching technology is 2 times better than Uber.

Once that technology is being integrated onto Uber's platform, I think that will help to drive better unit economic and close the gap between the EBITDA of the mobility business and the food delivery business.

BRIAN SOZZI: James, I'm sure you know this, but from 2018 through the most recent quarter, Uber has lost $6 and 1/2 billion on an adjusted operating profit basis. Why should investors believe they are suddenly going to be able turn a profit, like they keep saying, by the end of 2021 during a health pandemic?

JAMES LEE: Yes. I think the company realized that, right? They have cut down, number one, their expansion plan by quite a bit. And number two, they have rationalized their cost structure, especially on the food delivery business, right? They have said last year, there were 18 markets that were outside of their category leading position. By that, I mean number one and number two. They exited a number of markets over the last 12 months, including India. That's an indication.

And number two, if you look at autonomous driving business, they're losing about $400 million a year. They'll continue to look way to rationalize that business, cutting losses, or potentially taking equity investment for someone to share the burden of the losses as well. I think management has definitely done a good job rightsizing the company and to get into EBITDA positive for next year.

MYLES UDLAND: And then, James, I guess, I just want to talk a bit about the mobility business, you know, I guess we call the core Uber business. Still down significantly over last year in major US cities. It's interesting the split, I guess, we see between the west coast cities and the east coast cities. But as we look out over the next several years, do you have an expectation on when they could return to, let's say, baseline 2019 type levels on that side?

JAMES LEE: Yeah, well, obviously, the business is pending on the situation of COVID-19, right? And despite, you know, the COVID-19 still-- we're still seeing rising cases in US and we've seen the mobility business actually improve quite a bit with negative 80% year over year in April. Now that's down to negative 44% in October.

And as we continue to seek solutions for COVID-19, possibly getting vaccine as economies start to open, get back to normal, you know, we can continue more that path, right? Because right now, before the European lockdown, actually, Europe was leading over US a little bit. Given the COVID-19 lockdowns and [INAUDIBLE], things are sitting back a little bit. I think that's a short-term setback.

I think over a longer term, if you look at China as a proxy, if you look at competitive company like Didi in China, they have recovered pretty well. They're down less than 25% year over year, probably on track to go positive at the beginning of the next year. I mean, US may be lagging a couple quarters behind that.

MYLES UDLAND: Yeah, so I guess, another way to drill down the question then would be, are you not concerned that maybe consumers have unlearned the behavior of calling an Uber during this time, as we've seen a lot of our lives upended? And that, you know, you're confident that-- and I guess the company be confident that people will go back to living something like the life they were living before the pandemic.

JAMES LEE: They seem very confident, right? We feel confident as well. But obviously, they have variability to the environment, right? So what the company has said is they optimize to the cost structure to a point. Even if the gross booking decline by 20% for mobility business, the overall business can get to profitability. So their path to profitability does not depend on mobility business to return to positive growth.

PRAS SUBRAMANIAN: Hey, James, sticking with mobility, are you concerned at all about the suburban versus urban mixing? It was touched on the call last night about how a lot of people have been leaving the urban environment for suburban environments. And there, it is a bit of a tougher business for them.

JAMES LEE: Yeah, your question's about suburban business. You lost me a little bit at the end, sorry.

PRAS SUBRAMANIAN: Sorry, but basically, how some of the mix of their customers moving to suburban environments where it's a bit harder to make-- you know, your take rate's a bit lower there as versus the urban environment.

JAMES LEE: True, true. That certainly could be the case, right? We'll continue to observe what's going on there. There's certainly some consumers are moving to suburban market. And therefore, you can make an argument that there's less of a need taking Uber rides.

But however, I think the company is preparing for that, right? Keep in mind, they're saying even if the gross booking is down 20% or so, they're still on a path of profitability. So they reorganized the organization, you know, for contingency on the mobility side of the business, for sure.

JULIE HYMAN: James, just quickly, I got to ask you about Prop 22, which we haven't mentioned yet. A big victory for Uber as well as for Lyft and other freelance heavy companies. How much does this sort of remove the regulatory overhang from Uber? Because it still has some battles to undergo in other places, other nations, for example.

JAMES LEE: Yeah, that's a good question. That's huge, right? You know, more than-- about 60% of people voted for Prop 22. And this is kind of consistent with our check, you know, prior maybe about a quarter or two ago, where drivers are really looking for flexibility of working hours, not unnecessarily full-time restriction, right?

And under Prop 22, they provide allowances for wage protection and also for healthcare and paid vacation as well. Now going forward, I think the state that we need to pay attention to is New York, right? I think New York right now has a very similar bill to AB 5. They're likely to vote it on as early as June 2021.

Certainly, you know, when you have a very progressive state like California supporting Prop 22, that bodes well for another progressive state like New York. Even if they were defeated, they can certainly set a path for another proposition, similar ballot as Proposition 22 in New York as well. So from that perspective, I think Prop 22 winning that sets a very good precedent for the rest of the country.

JULIE HYMAN: All right, James Lee, Mizuho Group senior US and China internet analyst, and our Pras Subramanian, thank you so much for taking a look in-depth at those Uber numbers.