Shareholders Could Benefit From Uber Cutbacks

Uber Technologies, Inc. (UBER) made headlines on Monday, confirming the layoff of 3,000 employees as a result of "economic challenges and uncertainty" resulting from the COVID-19 pandemic. The news follows a May 6 announcement that 3,700 positions in customer support and recruiting would also be eliminated. Taken together with the end of some non-core investments, the company is building a stronger balance sheet in case things get worse in coming months.

The reductions could be a blessing in disguise for shareholders because the ride-share company will now focus more attention on core businesses, including UberEats. It has just taken an aggressive stance with ride share and delivery operations, announcing that drivers and customers must wear face masks. The current effort to acquire Grubhub Inc. (GRUB) also follows this theme, raising expectations for more pro-active moves in coming weeks.

Even so, the nascent industry faces growing challenges. California has just sued Uber and rival Lyft, Inc. (LYFT), insisting that drivers are employees, not independent contractors. The stakes are high because added costs for benefits and wages could make the difference between profitability and bankruptcy. New York City has imposed a 20% cap on delivery fees at the same time, and other municipalities are likely to follow.

Uber–Grubhub merger talks highlight the need for industry consolidation because the delivery landscape has now filled with competitors. Clearly, not all will survive in coming months, especially after Americans and Europeans return to restaurants in large numbers. However, the U.S. government isn't making the effort any easier, with members of the Senate already raising complaints about the potential merger.

UBER Daily Chart (2019 – 2020)

Uber came public to great fanfare in May 2019, opening at $42.00 and settling into a trading range between $36 and $45. A late June breakout posted an all-time high at $47.08 in the same session before turning tail and settling back in the range. The stock sold off through range support in August, entering a downtrend that carved a series of lower lows and lower highs into the November 2019 low at $25.58.

A recovery wave into February 2020 stalled at the .786 Fibonacci sell-off retracement level and IPO opening print, posting a lower high, followed by a vertical plunge during the pandemic panic. The decline broke the November low on March 12 before coming to rest at an all-time low just below $14. The stock remounted broken support near month's end and continued to gain ground, reaching 200-day exponential moving average (EMA) resistance at the end of April.

This week's layoff news triggered a buying spike above the moving average, but the lack of progress raises the odds for a failed breakout. The post-news uptick also reached the .786 rally retracement before reversing into the close, waving a red flag that also brings the rally's durability into question. The first downside target if the stock breaks new support lies at the unfilled May 7 gap between $28 and $29.50.

The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high in February and entered an aggressive distribution phase, dropping to a four-month low during the sell-off. Buying pressure since that time has been impressive, lifting OBV within a stone's throw of the prior peak. This accumulation should ease downside pressure during a pullback, with good odds for a higher low at or above $25.

The Bottom Line

Uber nearly doubled the number of expected layoffs this week, highlighting ongoing financial troubles as a result of the pandemic. However, this aggressive action could benefit shareholders in the long term, forcing the ride-share company to focus on core business objectives.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.