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Uber's Postmates Deal Brings Market Share, But Not Necessarily Profits

The combined entity would capture roughly one-third of the restaurant delivery market, but stiff competition could still dampen profits.

Uber's bid for Postmates will give it a significant chunk of the restaurant delivery market, but it's not clear what the deal will mean for the ridehailing giant's bottom line. 

Uber confirmed on Monday its bid for Postmates, which offers local delivery of restaurant meals and other goods, in a $2.65 billion all-stock deal. Uber  (UBER) - Get Report shares closed 6% higher on Monday at $32.52 amid a broader market rally. 

In a press release, Uber hailed Postmates as an early leader in local deliveries and complementary of Uber's "growing efforts in the delivery of groceries, essentials, and other goods." The ridehailing firm's interest in a food delivery acquisition was no secret, with an earlier negotiations to buy Grubhub falling apart. 

In a note, Wedbush analyst Ygal Arounian called the Postmates deal the "right acquisition at the right time," with consolidation in food delivery rapidly unfolding. The all-stock deal was a "fair price," he said, and gives Uber roughly one-third of the restaurant delivery market. DoorDash, the industry leader, commands about 44% of the market according to Wedbush. 

Arounian is bullish on Uber's ecosystem of services, which includes ridehailing, food delivery, scooter and bike rentals and emerging initiatives like grocery delivery. Wedbush maintains a $47 price target on shares and an Outperform rating. 

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But in the near term, there are several factors that are likely to dampen profitability in the restaurant delivery space as a whole, which is highly competitive -- and even more so during COVID-19 lockdowns, with demand for home delivery riding high. Uber reported an adjusted loss of $313 million in its Eats segment in the first quarter. 

Third-party delivery services "have both deferred or waived fees to restaurants and have increased discounts, loyalty rewards, and free/discounted delivery fees to battle for the acceleration in diner growth and order volume," Arounian noted. Some local governments are also pressuring companies to limit fees on struggling restaurants. 

Uber's rivals are also well-capitalized. DoorDash, Uber's main rival, recently raised $400 million in Series H financing. JustEatTakeway, which just acquired GrubHub, is also likely to invest in its new U.S.-based division. 

In its first quarter earnings release, Uber reported 53% growth in its Uber Eats business along with a very steep drop in ridehailing demand in April. Uber CEO Dara Khosrowshahi told investors that its core ridehailing segment was down 80% at the end of the first quarter, and the company says it can't predict when it will return to pre-COVID levels. 

Uber is due to report its second quarter results in the coming weeks, and will likely say more about the Postmates acquisition at that time. 

Shares of Uber are up 3% year to date.