Gig Stocks Aren’t Working but One Analyst Is Bullish On Uber and DoorDash

MoffettNathanson analyst Michael Morton observes in a research note Monday that from 2015 to 2022, public and private financing of gig-economy companies totaled $125 billion. He notes that since their IPOs, those companies have burned a combined $37 billion in free cash flow, and now have a combined market cap roughly equal to their total capital invested. Another way to say that would simply be that the group has created no stockholder value at all. (His calculations include an assortment of other gig companies beyond the big three, but the point is clear.)

“What happened? This is a hard business,” Morton writes in a research note. “A historical account of the city-by-city market share battles would fill the pages of The Iliad and The Odyssey. Beyond competition, the regulatory environment has proven to be less than conducive, insurance is prohibitively expensive, and sourcing labor is a constant pressure. At the end of the day, the gig-economy marketplaces turned out to be more capital-intensive, with less of a network effect, than its e-commerce peers.”

But Morton contends that “the bumpiest parts of the ride are in the rearview mirror,” with market winners becoming entrenched, marketing intensity declining and the U.S. market rationalizing through consolidation.

The analyst picks up coverage of both DoorDash and Uber stock with Outperform ratings, setting target prices of $79 and $47, respectively. He rates Lyft stock at Market Perform with a $15 target.

On DoorDash, Morton’s thesis is that gross order volume this year and next will be below Street consensus estimates, but he thinks profit margins will expand faster than investors expect. His view is that profitability in the core restaurants business will “inflect” and offset investments in new vertical markets and in Wolt, the European food delivery business the company bought for $8.1 billion in stock.

Morton thinks DoorDash can generate $1.2 billion in adjusted Ebitda, or earnings before interest, taxes, depreciation, and amortization, in 2024, above the Street consensus at $966 million. He’s particularly focused on the earnings power of the company’s restaurant business, which he considers to be underappreciated.

“We appreciate it is difficult for investors to get comfortable with the company’s aggressive investment strategy and (historical) lack of interest in near-term profitability,” he writes. “The Wolt acquisition and ability to consume considerable capital certainly does not help.”

But Morton sees reason for optimism.

“We cannot look past the track record of unrivaled execution from the management team at DoorDash,” he writes. “These are rational owner operators with a track record of operating success. We are braced for volatility but believe DoorDash’s operational prowess will enable the company to continue consolidating the market for local commerce logistics in the U.S. and Europe.” 

For Uber, Morton again reports that his model is below Street consensus for bookings, but above on profitability. The analyst expects $3.4 billion in adjusted Ebitda this year, above consensus at $3.2 billion, with $5.2 billion in 2024, above guidance at $5 billion and consensus at $5.1 billion.

“2022 was Uber’s year, with human mobility exploding as global vaccination campaigns were completed in 2021, planned events resumed, and the world came back to normal,” Morton writes. “Measuring human mobility, domestically and internationally, suggests there’s still room for the reopen trade to run.”

That said, he’s cautious on the near-term outlook, noting that “elevated ride prices, driver-supply pressures, and macro weakness are limiting factors to mobility use cases.

As for Lyft, Morton says that “unit economics remain challenging.” He reports that the company is losing more than $1.50 a ride when you include stock-based compensation and insurance costs.

“Driver incentives are the top culprit for these challenges, as the company has struggled to keep up with soaring demand postpandemic amidst the tight U.S. labor market, with rapidly rising insurance costs a close second,” he writes. “While the stock is cheap…we believe Lyft is cheap for a reason given the concerns we have on the company’s unit economics. We await proof points on Lyft improving its unit economics without ceding market share before becoming more constructive.”

On Monday, Lyft stock is off 2.5%, Uber stock is 0.7% lower, and DoorDash stock is down 1.8%.

Write to Eric J. Savitz at eric.savitz@barrons.com