Did Uber Take Down Avis Stock 12%?
Missing market expectations on an earnings report can be devastating, as Avis Budget Group, Inc. (NASDAQ:CAR) learned this week. Avis stock got pummelled as investors pushed CAR stock down more than 14.2% at the time of writing.
What’s causing this massive decline in Avis stock? Is Uber Technologies Corp responsible? These were the first questions to pop into my head when I saw Avis stock falling like a ton of bricks. After all, Uber is now the most highly valued startup in history, crossing the $50.0 billion watermark without ever going public.
Over the next few days, we’re bound to see a bunch of articles attributing the nosedive of Avis to the rise of Uber, but I’m not convinced. After all, Uber isn’t really posing a direct threat to Avis, because its true competition is the taxi industry.
In fact, go take a closer look at Avis’s quarterly earning. There is no trace of Uber’s handiwork on the corpse of Avis. The massive drop in the value of CAR stock was just the market overreacting as usual.
Is this the End of Avis Stock?
Just in case you think I’m being flippant about the mass exodus from Avis stock, let’s run through some numbers from the quarterly earnings. The stock earned $1.77 per share in net profit during the last three months, edging up 1.72% from the same period last year. (Source: “Avis Budget Group Cuts Guidance,” Wall Street Journal, November 2, 2015.)
Revenue rose by 1.4% to $2.58 billion. However, the performance of Avis stock was slightly damaged by currency rate fluctuations. Once currency losses were accounted for, the real increase in revenue to was up by eight percent.
So if the fundamentals of Avis stock are improving so dramatically, how can we reasonably argue that Uber is killing the rental car industry? The truth is Uber provides transportation between locations. That’s it; no more, no less.
Going forward, Uber is looking to make an impact in driverless technology, but the implications of that investment are unclear. Commercializing driverless tech is still too far down the road to know how it will impact Avis.
Perhaps Uber will eliminate the need for taxis altogether. But right now Uber poses no threat to Avis.
Forget Uber, Look at Avis Stock Fundamentals
After looking at Avis’ quarterly results, we return to the core question: why is Avis stock down more than 12%? I’m afraid the answer is underwhelming.
Markets can overreact, it’s that simple. The consensus estimate from analysts predicted higher revenue growth and more income, so Avis stock took a hit for coming up short. But if no one had bothered to cook up an estimate, the news may have been received differently.
Think about that: market expectations are calibrated by analyst predictions, but those predictions are rarely ever correct. Then why do we use them? It doesn’t make sense to use analyst estimates to measure Avis stock when they are quite literally educated guesses.
In the end, even a company that performs well—like Avis—can be punished because its reality differed from the story we bought into.