Uber and Lyft – Parting of the ways

Uber and Lyft go in different directions.

• Lyft and Uber go in different directions as Uber’s food business and its much larger size allow it to deal with the difficult operating environment much more effectively.
• Lyft Q1 2022 revenues / EPS were $875.6m / LOSS$0.57 compared to forecasts of $851m / LOSS$0.55 but it was the outlook for profitability that really shook confidence in the company.
• Here the company plans to spend more money on driver incentives in order to attract them to the platform meaning that profitability will take a hit.
• Q2 2022 EBITDA will now be $10m – $20m way below forecasts of $88m which is what triggered the 30% collapse seen in the share price on 4^th May 2022.
• On the other hand, Uber fared much better with Q1 2022 revenues / adj-EBITDA of $6.9bn / $168m ahead of estimates of $6.1bn / $135m.
• Uber went on to forecast bookings and adj-EBITDA for Q2 which was ahead of expectations.
• These results are a clear demonstration of how important scale is in networked based businesses.
• RFM’s rule of thumb states that a network-based business needs around 60% market share or to be twice the size of its nearest competitor in order to make money.
• This is because when one reaches this level of scale one becomes the go-to marketplace to effect a transaction.
• This tends to mean that one can charge a little bit more to both buyers and sellers than competitors can which becomes the source of profits and cash flow.
• This is why Lyft has to add driver incentives in a tight labour market and Uber does not.
• This is further exacerbated by Uber offering both food delivery and freight as it means that the opportunity for drivers to be engaged while they are working for Uber is better than it is for Lyft.
• Hence, without incentives, a driver will make more money per hour working for Uber than he or she will working for Lyft.
• This puts Lyft in a very difficult situation and adds weight to the argument that when it comes to valuation, one should pay more for Uber than one should for Lyft.
• This is what was priced in yesterday as Lyft is now trading on 1.4x 2022 EV / Sales while Uber remains on 2.1x.
• Given that the outlook that both companies face remains difficult from the point of view of generating profits for investors, I continue to be pretty ambivalent about this sector.
• If one had to have one over the other it would be Uber given its much stronger position.
• One company I do like in this sector is Airbnb but its valuation at 11.1x 2022 EV / Sales remains in the stratosphere meaning that its outlook is more than priced in already.
• I am waiting for something to go wrong temporarily that triggers panic selling before having a serious look at this one.