(Bloomberg) -- Uber Technologies Inc. rose as analysts said its decision to sell its India food delivery unit to local rival Zomato improves the outlook for the company eventually turning a profit.
The $172 million deal to offload Uber Eats in India, which struggled to gain traction in a market largely dominated by local competitors, is being interpreted as another step toward meeting Uber’s goal of becoming profitable on an Ebitda basis in 2021.
Newly public companies once regarded as unicorns have faced mounting pressure as investors turn their focus to profitability after years of prioritizing growth at any cost. Uber, for example, has slumped 20% since its initial public offering in May.
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Uber rose as much 3.6% on Tuesday, pushing the stock to its highest intraday since Aug. 13.
Here is what analysts had to say:
Wedbush, Ygal Arounian
The sale “ends a dark chapter for Uber Eats in India, which has struggled to gain share vs entrenched domestic competitors Zomato and Swiggy.” The domestic rivals together control roughly 80% of the food delivery market in India, Wedbush said.
Moves like these will likely be more commonplace as Uber Chief Executive Officer Dara Khosrowshahi and his team further rationalize the company’s Uber Eats food delivery business.
“Taking a step back, we believe investor optimism on Uber is starting to finally perk up after a dark period since the IPO last year.”
Maintains outperform rating and price target of $45.
New Street, Pierre Ferragu
“This move is coherent with the strategy the company has highlighted various times, of pulling back in immature markets with the least potential for the firm to accelerate its pace towards profitability.”
New Street sees food delivery likely evolving into a duopoly, like ride-sharing, though it could be a three-player market in some circumstances.
“As international ride-sharing and food delivery markets mature, we expect Uber’s profitability to increase over time and reach 6% Ebitda margin in 2024.”
SunTrust Robinson Humphrey, Youssef Squali
“Uber has effectively converted an asset that was burning ~$20m/month into a 10% stake in the leading local food delivery player,” he said, citing a cash burn number from an article by the India Times.
The deal was a “smart, strategic” move and “shows strong execution on the part of Uber management, who has said repeatedly that unless Uber is #1 or #2 in a given market, or on a clear trajectory to get there, it would exit that market.”
It gives the firm “increased confidence” in the company’s ability to hit adjusted Ebitda profitability in fiscal 2021.
Maintains buy rating and price target of $56.
What Bloomberg Intelligence Says:
“Uber’s sale of its Eats business in India makes sense, and echoes a similar step in South Korea as it cuts ties with unprofitable markets. Pulling out of India could kick up a 500 basis-point headwind to the Eats segment’s sales growth yet deliver a 10 percentage-point boost to its Ebitda margin, which remains substantially lower than those of peers such as Just Eat and Grubhub.”
-Analyst Mandeep Singh
-Click here for the research
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