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The Uber Eats business has been a resilient part of the Uber model especially during the pandemic: Analyst

Ygal Arounian, Wedbush Uber analyst joins the Yahoo Finance Live panel to discuss Uber’s latest earnings report.

Video Transcript

ZACK GUZMAN: But we are still watching company specific results coming in here in this third quarter. We got the update from Uber there. Its shares are in the green after that company showed its ride business still taking a continued hit. But Eats continues to impress there as well. So let's break down that mix a little bit further here with our next guest.

Ygal Arounian is Wedbush Uber analyst. He joins us now. And Ygal, when we looked at Uber's performance, it was enough for you to boost your price target on Uber to $49 a share, up from 41. You maintained your outperform rating. So you must be buying this thesis that the boost in the Eats side of the business is enough to offset that [INAUDIBLE]. So talk to me about why that is.

YGAL AROUNIAN: Yeah, certainly. So, you know, and then there one other thing that happened this week that I think is really important and--

ZACK GUZMAN: Sure.

YGAL AROUNIAN: --is a key part of why the stock is trading higher and serves a higher multiple. And that's that AB5 passed in California. Uber is not going to have to change their entire business model there. That has really big implications. And I think that was actually the most important thing that happened this week.

Earnings wise, within the quarter, look, we're going to have volatility as long as the pandemic aside is around on the mobility side. There's going to be demand issues around rides and people going to work and traveling and all those things. That will probably work its way out over time.

And then, on the other side, the Eats business has just been phenomenal in terms of volume coming on that's pulled forward a lot of demand and trends on that side. That will likely subside partially over time as well, as people start to go out. But it's certainly been a resilient part of the model. And I think it's given a really good cushion to Uber during the pandemic.

AKIKO FUJITA: Ygal, when you talk about Prop 22, what is the expectation moving forward? I mean, sure, Uber and all these app-based companies don't have to classify their workers as indepen-- or as full-time employees anymore.

But there's still a lot of question marks about what the health benefits should look like. You know, whether cities could individually fight this and raise the fees for individual rides or for some of these companies. How do you see that risk, even if the cloud, as you've described it, has been removed?

YGAL AROUNIAN: Right. So that's a good question, and I don't think the story's over there. There's going to be a lot more kind of evolution to what happens and how people get paid over time. But the model that California was trying to implement really had a big challenge structurally to how Uber and these companies could operate their businesses. They would have had to kind of pull apart how they work right now and really change their entire model. And the fact that they're not going to have to do that I think is a big win for them.

The other thing that they'll do is, they'll take this framework and they'll start to be proactive about it with other states and other cities and kind of highlight, hey, this is what happened in California. The California voters really spoke out and said that this is what they want. This is what drivers want. And here's our proposal, which gives extra benefits and does a lot more for drivers than under the current model. And this is why we should go in this direction. So now they could be proactive about it. And I think that does a lot for them as well.

ZACK GUZMAN: Yeah, I mean, we talked about-- we saw the boost that both Uber and Lyft saw after we saw the results come in on Prop 22. But I just want to go back to the rides business, too, because, you know, that's obviously a very competitive space when you think about the competitors there and DoorDash. And we know Lyft doesn't really have a food segment of the business. But there are plenty out there.

When we talk about that, they did say they expect to reach profitability in that segment by next year. How realistic is that, though, when we see this race to the bottom in the delivery space? I continue to see it being very hard to differentiate your services when it's just bringing the food to your plate.

YGAL AROUNIAN: Right, and I don't think it's a guarantee or a given. That's certainly their target. You know, the thing we have to realize in the food delivery business is that there are models out there that are working profitability.

Grubhub itself in its third quarter, you know, they had really strong demand also. It wasn't as high as Uber's was. But they were profitable in that quarter. Just Eat that's acquiring Grubhub, they're profitable in many of their markets internationally. Even Uber Eats is profitable in certain markets as well.

There's going to have to be rationalization in that business. And, you know, the discounting and kind of all that stuff is going to have to work its way through the system. There are certain questions around how it all does play out. But I think as the business matures, you're going to see-- that's how you're going to see it play out and develop. You know, ultimately, we're going to have to find the right balance and they're going to have to work towards profitability. But there are real life examples of it happening. And I think that's what you can really pin that hope on.

AKIKO FUJITA: And Ygal, finally, that Eats side that you're talking about, certainly a big beneficiary during the pandemic, as so many of us stayed home and did food delivery. Looking beyond the pandemic-- of course, we don't know when it's going to end. But how sticky do you think this is going to be, or is there an inevitable dropoff as things start to open up and people don't have a significant need for delivery?

YGAL AROUNIAN: Right. There is-- I think there is definitely an inevitable dropoff as restaurants open up. As you said, whenever that is. Who knows when it's going to be? But as restaurants start to open up fully, you know, people like to go out. There's an experience behind it. And as people do that, there is the volume of eat-in and dine-in is probably going to go away, to some extent.

But I think, you know, again, it's one of these kind of consumer behavior habits that are forming during the pandemic. That means a good portion of it is going to stay around. Part of what I really like around an Uber strategy as well is, through their Postmates acquisition, they acquired this Latin American grocery delivery company, Corner Shop. They've been building out some of their own products and grocery delivery as well. And they're moving towards not just being a food delivery company, but food and groceries and other products.

They highlighted being on a $1 billion kind of a bookings run rate in that business, expecting it to be multiples of that next year. And so you're mixing in restaurant and you're mixing grocery and other things. And it becomes a lot bigger of a business than just food delivery. It can rely on multiple pieces to drive it.

ZACK GUZMAN: Yeah, and even with the pop today, about five bucks still to go to your price target. We'll see what happens. Wedbush's Ygal Arounian, appreciate you taking the time.

YGAL AROUNIAN: Thanks.