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RBC initiates Uber at ‘outperform’, says profit potential underappreciated by the market

The Canadian bank said while Uber's losses were currently very sizeable, the business model suggested some potential for profitability going forward

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Uber's shares flopped initially at its IPO last month

Ride hailing and food delivery giant Uber Technologies Inc (NYSE:UBER) is having its profit potential underappreciated by the market according to analysts at RBC, who on Tuesday initiated the stock with an ‘outperform’ rating and a target price of US$62.

In a note, the Canadian bank said the company, which flopped on its initial public offering (IPO) on the New York Stock Exchange last month, had a dominant position in the global ridesharing and takeaway delivery markets which had helped it generate “unusual” levels of scale and growth.

READ: Uber posts US$1bn loss in first set of results since disappointing flotation

While there was controversy around the company’s profit potential, mainly due to an expected US$4bn loss (LBITDA) for its 2019 financial year, RBC said the company could achieve profitability through its long-term pricing power, a reduction in driver and rider incentives as competition reduces, and using scale to leverage insurance costs and reduce other operating expenses.

“Uber’s current losses are clearly very sizeable, and we expect the company’s losses to remain very high (EBITDA losses of US$3bn+) for the next two years before beginning to improve in 2021.”

“While it is rare to see companies go public with losses of this magnitude, we believe there is some evidence of leverage in the model supporting a potential path to profitability”, RBC said.

Analysts also said they saw “significant option value” for the company in new businesses such as freight.

In pre-market trading in New York on Tuesday, Uber shares were 0.4% lower at US$41.10, a 34% discount to RBC's target price.

Quick facts: Uber Technologies Inc

Price: 26.75 USD

NYSE:UBER
Market: NYSE
Market Cap: $45.63 billion
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