My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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"New Tech" / WFH Companies: Week 2

DISCLAIMER: This article contains my opinions on two stocks: LMND and UBER. I am not a research analyst or a registered investment advisor, and the information in this article is not a recommendation to buy or sell shares. It is just my two cents. I do not currently own shares in either company.

 

This is the second instalment of a look at some of the “new tech / WFH” companies, which includes two companies reporting earnings this week: Lemonade (LMND) and Uber Technologies Inc (UBER).

As a reminder, the 21 companies that I will be discussing in the coming weeks are listed in the table to the right, noting two changes from the list I included in last week’s update: i) Salesforce.com dropped, and ii) Fastly and Sea Limited added.


In one way or another, all of these companies tend to be disrupters and many have benefited from the pandemic. Some have been listed only recently, and most are still losing money on the bottom line. Nearly all of the shares have outperformed the S&P 500 recently. Valuing these companies using traditional valuation metrics is impossible in most cases, so you need to first get your head around what really makes these companies tick. Valuations aside, you might find one or more of these companies attractive should there be a market pullback or if one of these companies stumble (for understandable, short-term reasons) on this round of earnings releases. As these stocks are all particularly vulnerable to substantial downside corrections should overall risk sentiment change (and rest assured that it eventually will), you need to take a long-term view on the attractiveness of each company.


Last week I presented MTCH, PTON and PINS. All reported their earnings last week, and all met or beat expectations. I updated the earnings and share performance of these three companies in the “comments” section of last week’s article, which you can find here: “New Tech” / WFH Companies, Week 1.


The reporting dates of some of the companies have changed, so here is how the list looks by reporting week as of now:

Below is table with company financial and share performance of the two companies reporting earnings this week: LMND and UBER. At the end of the second table, I have included analysts’ consensus sales growth and earnings for 4Q2020 so you can track these at release, along with FY2021 projected earnings and revenues for each company, very relevant in supporting their valuations as we roll out of the pandemic.




Lemonade (NYSE: LMND, investor website here):


Here is what Lemonade does, extracted from their investor website:


“Lemonade offers renters, homeowners, pet health, and life insurance in the United States, contents and liability insurance in Germany and the Netherlands, and renters insurance in France, through its full-stack insurance carriers. Powered by artificial intelligence and behavioral economics, Lemonade set out to replace brokers and bureaucracy with bots and machine learning, aiming for zero paperwork and instant everything. A Certified B-Corp, Lemonade gives unused premiums to nonprofits selected by its community, during its annual Giveback. Lemonade is currently available for most of the United States, Germany, the Netherlands and France and continues to expand globally.”


The company was started in 2015 by three individuals who had decided that there was an opportunity to disrupt the insurance business, which had not changed in many years. In addition, they felt that insurance generally was not customer-centric, and as result, was a much-loathed but required product by most consumers. Prior to going public last summer, LMND had raised several rounds of private financing from some very prominent investors, including Sequoia, Aleph (both seed), Google affiliates, Allianz SE, Sound Ventures, SoftBank Group, Thrive Capital and several others. The company’s business model is very transparent – 25% of premiums go to the company (to pay administrative costs and eventually profits) and 75% is used to pay claims and purchase reinsurance. LMND buys reinsurance from Lloyds of London. If there are unclaimed premiums, they go to a non-profit selected by the insured. The claims process is simple and transparent, and it is based on AI using a sophisticated app that is “bot based.” If you have 30 minutes and want to hear more about LMND, check out this video from their website.


The company’s stock has increased five times since its IPO in early July 2020, increasing the company’s market value to nearly $8 bln. However, the shares are well off their highs of just a few weeks back.



In addition, I would be remiss were I not to point of the substantial short interest in LMND, which is a huge 26.48%, suggesting that many investors think that the company’s valuation had gotten ahead of itself. With an enterprise value of 80x expected FY2020 revenues and 70x expected revenues for this year (FY2021), to say the stock looks expensive compared to incumbent insurance companies is an understatement. Based on a couple of articles I read, the bears / shorts point to the fact that LMND is not so much an insurance company as a “gimmicky” consumer conduit. The reason is that LMND reinsures 100% of its policies and has no real underwriting expertise per se, so it has brought nothing to the table as far as disruption to the heart of insurance, which is underwriting. Also, bears highlight that lock-ups began to expire at the end of 2020 and this will (and apparently has) put downward pressure on the stock price. The company had $575 million of cash on its balance sheet at the end of September, so it has liquidity to fund the growth of its business in the coming quarters. However, LMND simply cannot afford to disappoint even the slightest because the shares will otherwise get hammered. Time will not be LMND’s friend, so it needs to quickly prove to investors that its innovative model can eventually be profitable.


Motley Fool has LMND on its distinguished list of 10 stocks to buy, whilst The Equity Summary score (amalgamation of analysts’ opinions) in Fidelity has LMND rated 0.6 (on a scale of 1 to 10), or “very bearish”. That’s quite a difference in opinion but is enough to make this stock concerning for me and one to avoid at these lofty price levels.


Lastly, I should point out that I do not consider this a pandemic stock, so my opinion is that it will neither suffer nor prosper as the pandemic ends.


Uber Technologies Inc (NYSE: UBER, investor website here):


Uber doesn’t really need much of an introduction because the company is global and – at this point – is fairly well known around the world. It is also well known that the company has suffered immensely in its core taxi business because of the pandemic, although its food delivery business (Uber Eats) has flourished along with other food delivery companies. Uber continues to look for ways to grow and diversify its business, announcing just last week that it would acquire alcohol-delivery company Drizly for $1.1 billion in cash and stock (press release here). With the pandemic and its effect on Uber’s core business, the stock has performed as you might have expected at least until recently, as you can see in the graph below.


The stock fell as low as nearly $13/share intraday in March 2020 as the pandemic led to a broad market selloff, and then recovered to the mid-$30s area by the end of 2Q20 where it remained until early November. Off the back of better-than-expected 3Q2020 results, Uber’s stock seemed to gain some new momentum and moved steadily to above $50/share.

Revenues are still not back to pre-pandemic levels, but the losses have reversed direction and are heading in the right direction (albeit still substantial). Mobility (taxi) bookings are increasing gradually, but the food delivery business has of course thrived, partially blunting the effect of the company’s core business. Whereas the mobility business had triple the bookings (by revenues) of the food delivery business in 4Q2019 before the pandemic, the food delivery business generated around 45% more revenues than the mobility business in 3Q2020.


As the relative business mixed shifted to delivery during the pandemic, keep in mind that the operating profit on the mobility business is positive, whilst operating profit is negative on the food delivery business (and remember this when we discuss DASH in a few weeks).


Uber is an obvious recovery play, as far as its taxi (i.e. mobility) business. The jury remains out on the delivery business, as it does for peers like DoorDash (DASH), but I would suspect that the growth of this business will moderate considerably once the pandemic ends and restaurants reopen. The company has done a good job in diversifying its revenue streams. Maybe the way to look at it is that UBER might offer some of the best and the worst of the post-pandemic period – time will tell. The stock has certainly benefited from a substantial uplift the past couple of months as investors look out to a more robust economy as the pandemic winds down.


The issue I have with Uber is that it loses a lot of money, both at the operating profit level and the bottom line. The company had $7.3 bln of cash on hand at the end of its 3Q20 (Sept 30th), but it lost over $10 bln in the last four quarters, a substantial amount. Even using adjusted EBITDA (with the usual liberties this affords), Uber had an adjusted EBITDA of -$2.8 bln the last four quarters. These are big numbers, especially for a company that is now valued at around $100 bln. The company’s value to revenue ratio looks decent, but I am most worried about the company’s lack of profitability, and its ability to see its way to consistent profitability in the future. I would suspect an additional equity or debt offering might be in the cards post-earnings. The company is rated B2/B- and its current debt is yielding between 5-1/2% and 6%, so a debt offering at these levels would not be a bad idea post-earnings.


One final thing is that investors often look at ride-hailing company LYFT as a comparable to UBER. LYFT is considerably smaller than UBER ($17 bln market cap vs $100 bln market cap for UBER), but is trading at 5.5x EV/Sales whilst UBER trades at 8.3x EV/Sales. With UBER, you are getting a company that is substantially larger, more geographically diversified, and has a more diversified business mix. However, from the perspective of playing the post-pandemic recovery in ride-hailing, LYFT arguably offers better value because it is substantially cheaper and it offers a “pure play” on the economic recovery without a drag from other businesses that might suffer as the economy reignites. For reference, LYFT reports its earnings on February 9th, the day before UBER, and its earnings will offer some insights into what to expect when UBER reports the following day.


I do not recall Motley Fool ever having Uber on its list of targets. The Equity Summary score (amalgamation of analysts’ opinions) in Fidelity is “bearish” at 1.7 (scale 0-10), perhaps a reflection of Uber’s stock strong performance since early November. (For reference, The Equity Summary Score of Lyft is also “bearish” and only slightly better at 2.5.)

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