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Shares in Uber rose 6% to over $36 in pre-market trading after the company secured its right to operate in London for another 18 months. This is an important victory for the company and removes a significant regulatory overhang, but the pandemic continues to exert an enormous drag on earnings and present management with a significant headache over the business model.

We should also note that this is not a permanent pass – the mayor of London indicated that Uber would face continuous scrutiny, whilst the company faces ongoing competition in the capital from the likes of India’s Ola and Estonia’s Bolt. But the decision today unquestionably is a good news story for Uber as it tries to stop its cash burn.

London was and, thankfully for investors, still is a big deal for Uber – with about 3.5m users, it was the largest market in Europe for the ride-hailing app. London has been dubbed one of the group’s ‘fab five’ cities – along with New York, San Francisco, Los Angeles and Sau Paulo – which account for around a quarter of global revenues. Or at least, they did before the pandemic wrought havoc with the business model.

Rides down, Delivery up

Gross bookings at the core Rides division (now called Mobility) were down by three-quarters in the second quarter as the people stayed home, offices remained shut and lockdowns in several locations remained in place.

But while we are travelling a lot less, we are ordering in a lot more:  Eats (now dubbed Delivery) rose 113%. Mobility revenue declined 67% year-over-year and Delivery revenue grew 103% year-over-year.

The group’s net loss was $1.8bn for the quarter on revenues that were down 27% on a constant currency basis to $2.2bn – the resilience of Delivery/Eats is not enough to stop the ongoing cash burn. Indeed, excluding stock-based compensation costs, the net loss rose by a fifth when compared with last year.

Cash on hand fell under $8bn which is about what it burned through last year alone.

Plans to offload its stake in China’s Didi may help raise cash but this will only go some of the way to mitigating the shift in bookings to Delivery from Mobility. Weakness in the latter division is likely to exert ongoing pressure on earnings.

Uber still facing regulatory challenges

Moreover, whilst Uber seems to be riding out the pandemic thanks to being able to do home deliveries, regulatory overhang remains. The list of legal issues either historic or ongoing is long and broad both in scope and geography.

For instance, in California and in Britain it is fighting lawsuits that would force the company to treat drivers as employees. These present ongoing overhang for the stock as, whilst there have been problems about corporate culture and vetting of drivers, by and large the run-ins with the regulators and policymakers pertain to the very structure of the business itself and how it operates; taxation, labour laws and consumer safety are the milking stool of regulatory instability.

As noted almost a year ago, from Chicago to Los Angeles, New York to San Francisco, there have been all kinds of legal roadblocks in the way. Some are resolved, some not. City authorities have been alarmed at the rise of Uber and have pursued a range of legal and regulatory avenues to stymie the company.

Already in a number of key markets, including Argentina, Germany, Italy, Japan, South Korea, and Spain, the company’s ridesharing business model has been blocked, capped, or suspended, or Uber has been required to change its business model.

Ultimately, Uber can probably navigate regulatory minefields without losing all its limbs, but the pandemic makes a positive free cash quarter look even further away. How long are investors prepared to wait?

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