Uber Technologies, Inc. (UBER) rallied 6% on Monday after it announced that it would acquire private rival Postmates for $2.65 billion. Uber expects the transaction to be completed in the first quarter of 2021, but it could face opposition from the government agencies for fear that ridesharing and delivery pushy control too much of the lucrative market of home delivery. Similarly, this claim is difficult to prove, because the company has not released a quarterly earnings since its entry into public in 2019.
The news comes just two months after Uber launched a failed bid for the public-Grubhub Inc. (GRUB), who has cut a deal with the British-owned it is to Eat Take-away food in mid-June. The Postmates acquisition, if approved, could be a game changer for Uber and home-delivery market, the reset of the objectives of the business as a result of the COVID-19 pandemic and its negative impact on carpooling.
The Consolidation Of The Industry
It will take approximately 84 million newly issued shares to complete the all-stock deal, adding to the Uber current of 1.73 billion shares outstanding. That should not be too much dilution, given the close synergy, with many drivers already to produce food for the two operations. The move is also likely to accelerate the consolidation of this growth in high-tech manufacturing, ultimately, what gives a handful of top level players. As we have seen with the rise of other tech giants, the rewards for shareholders can be extremely lucrative.
Uber has been on the cost and the size of cup frenzy since the declaration of a first quarter 2020 loss of $1.70 per share in May, 80 cents higher than expectations. Revenues increased 14% in the first quarter, despite the collapse of the tower-sharing of income, supported by the massive rise in home deliveries. A series of upgrades, follow-up mixed results, but the stock is still trading at the same price level now, as it did during the first session after the quarterly report.
Macroeconomic risks are growing for the ride-sharing industry, despite the hook-up, led by a California law that designates the drivers as employees, not independent contractors. The issues of the pending lawsuits are high due to the additional costs for benefits and salaries that could make the difference between profitability and bankruptcy. And looking to the east, the City of New York imposed a 20% cap on the cost of delivery, raising the odds that other municipalities will follow.
Uber Daily Chart (2019 – 2020)
The creation of the public company to $42 in May 2019, and has posted a record high of $47.08 less than two months later. The lower cut through the ipo of the opening print in July, adding to a downward spiral that continued into November low at $25.58. The buyers have emerged through the end of the year and in the middle of February, when the stock posted a lower high at $41.86, in the month of July breaking level. The stock is then sold with the global markets, the break-2019 support in a selling climax that ended a week later, at an all-time low in the mid teens.
The rebound in June blocked after piercing the .786 Fibonacci sale retracement level in the mid – $30, which gives a decline that has been testing the 50-day exponential moving average (EMA) over the past few months. The stock set up this barrier, for the first time since the 24th of June, after the news but closed lower than the open, revealing the skepticism about the deal. A sale by means of $30.50 would be bearish in this price structure, indicating that the shareholders are to walk in spite of the bullish outlook.
The balance volume (OBV), the accumulation-distribution indicator paints a more optimistic picture, of lifting in the pre-pandemic high in May. Minor distribution since this time could be the carving of the handle of the cup and handle pattern, with a break in the anticipation that prices will soon follow. Realistically, that probably will not occur until investors feel more comfortable about the pandemic’s trajectory, which is yet to have a major impact on the tower revenue sharing.
The Bottom Line
Uber acquisition of Postmates could be a game changer, but the ridesharing company may need to overcome the macro and policy headwinds to achieve the expansion goals.
Disclosure: The author has taken Uber shares in a trading account at the time of publication.