Analyst updates outlook as Uber faces tough competition in the ride-sharing and delivery market.

It’s Nov. 7, 2023, and Dara Khosrowshahi is feeling pretty good. 

The Uber  (UBER) – Get Free Report chief executive is speaking with analysts after the ride-sharing company beat Wall Street’s third-quarter earnings and total bookings expectations.

Revenue came in light, but Uber said accounting changes contributed to the lower sales results.

“Our Q3 results and Q4 outlook demonstrate that Uber continues to draw profitable growth at scale. ” Khosrowshahi said. The CEO’s focus now is on ramping up Uber’s profitability.

His comments came just days after New York Attorney General Letitia James announced two landmark settlements totaling $328 million with Uber and ride-share competitor Lyft  (LYFT) – Get Free Report for cheating drivers out of hundreds of millions of dollars.

This backdrop likely has investors wondering what’s next for Uber’s stock, particularly since the company decided this month to shutter its popular Drizly alcohol delivery service.

Wolfe Research’s Deepak Mathivanan recently updated his analysis, resulting in a new outlook with Instacart that may raise eyebrows.

The 800 lb. gorilla and a Maplebear?

The settlement removes an overhang that’s weighed down Uber. Gone is the uncertainty over how much resolving the dispute would cost, providing Uber an opportunity to spend more time figuring out how to expand its business and boost its profit.

Related: Uber shutting down popular billion-dollar service

Meanwhile, over at Instacart CART — officially known as Maplebear— Chairman and CEO Fidji Simo was speaking to analysts on Nov. 8 as the grocery delivery and pickup service beat Wall Street’s expectations in its first earnings report since it went public in September.

“Our strengths are evident across our business, the breadth and depth of our retailer integrations, the quality of the experience and accuracy of our order, the size of our baskets, the increased order frequency and spend from our customers over time, not to mention our healthy unit economics,” he said. “We have a massive head start, and we are getting better every single day with every order.”

Both companies are examples of the gig economy, a term coined by journalist Tina Brown in 2009 to describe a workforce that engages in freelance and side hustles.

And both companies are in the delivery business, with Uber launching Uber Eats, an online food ordering and delivery platform in 2014.

Wolfe analyst Mathivanan sees merger possibilities in all of this.

He put out a research note on Jan. 17 entitled “What Do an 800lb Gorilla and a Maplebear Look Like Together?” suggesting that Uber could acquire Instacart for $40 a share and the two could gig together.

“Since going public in September 2023, CART shares have underperformed Mobility peers by 52 points due to concerns on the company’s top-line growth outlook,” he wrote.

Mathivanan, who upgraded Instacart to outperform from peer perform with a $35 price target, said the companies should consider merging due to rising competitive risks, as Uber, DoorDash  (DASH) – Get Free Report, and Amazon  (AMZN) – Get Free Report are all rapidly closing the product gap. 

Analyst: ‘Grocery a critical category’ for Uber

In addition, the analyst said that Instacart’s product initiatives aimed at reaccelerating gross transaction value — the value of products sold based on prices shown — have been “less impactful so far.”

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“While Uber’s fundamental outlook in Eats and rides is solid, we think grocery is a critical character category for Uber to sustain bookings growth over long term and competitors such as theirs are making progress,” Mathivanan said. 

“Uber is in a favorable position currently with healthy cash and balance sheet and valuation levels that could make the transaction accretive.”

He added that sentiment on Instacart is currently muted, and its shares are trading at depressed valuation levels since going public. The analyst said that press reports indicated Instacart was exploring a sale under a prior CEO in 2021

“The company has achieved significant progress under the current team, but admittedly, there are many unanswered questions on fundamental outlook,” he said.

Mathivanan is not the only analyst to raise concerns about Instacart. 

Back in September, David Trainer, the CEO of investment research firm New Constructs, said in a research note that the “expectations baked into Instacart’s stock remain overly optimistic.”

Trainer listed several reasons that the road ahead for InstaCart would likely be a challenging one. Notably, he said the company’s business model relies on partners that have started to turn into competitors. 

“The bottom line here is that while grocery stores have been good partners thus far, Instacart faces a growing brigade of formidable competitors, each with their own incentives that don’t align with Instacart’s,” Trainer said. 

“Many of the competitors have more than enough capital and expertise to further expand their own delivery options and box Instacart out of the market,” he added.

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