Uber vs. Lyft Q4 2022 – Chalk and cheese

The inevitable trend begins to emerge.

• Lyft reported weak results and guided badly in strong contrast to Uber which is a sign that Uber’s superior size and network effect are finally beginning to turn the screw on Lyft.
• Q4 22 revenues / adj-EBITDA of $1.2bn / LOSS $248m which was broadly in line with consensus but guided badly for Q1 23.
• Here Q1 23 revenues / adj-EBITDA are expected to be $975m / $10m compared to the revenue estimate of $1,100m.
• This is in strong contrast to Uber which earlier this week reported record results and talked up its outlook in a results announcement that could not have been more different.
• Uber’s ride-hailing business is 4x-5x larger than Lyft’s which I have long argued will end up being a death sentence for Lyft.
• This is because both Uber and Lyft are essentially marketplaces which facilitate transactions between buyers (riders) and sellers (drivers).
• This means that these companies rely on the economy of the network to derive their value and make a profit.
• Metcalf’s Law of networking states that the value of a network is the square of the number of devices that are attached to it which is why these companies have for years been focused on acquiring users at all costs.
• The essential problem here is that barriers to entry are very low meaning that competition will be brutal unless one player is significantly larger than all of its rivals.
• A company in this hallowed position then becomes the “go-to” place for the service in question and it is then that real monetisation can begin.
• The rule of thumb that I have applied for the last 6 years is:
• A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making a profit.
• This combined with Uber’s excellent execution during the pandemic in creating and now maintaining a logistics business is why Uber is making money and Lyft is not.
• This is not a sustainable state of affairs and Lyft now risks going into a death spiral where losses force cuts which then cause revenues to fall meaning more losses and so on.
• At this juncture, losses in the income statement are not the issue as the only thing that I think matters is cash flow from operations.
• This saw an outflow of $237m in FY 2022 compared to a $101m outflow for FY 2021 which now must be the focus of Lyft’s finance department.
• Lyft has $1.8bn of cash on its balance sheet of which $1bn is net cash meaning that Lyft has time to stop the ship from sinking.
• The market has other ideas with the shares falling 30% after hours and once again flirting with their all-time low.
• Once cash flow from operations can be sustainably positive, then one can consider what the equity might be worth, but I would not want to get involved at any point before that time.
• Uber is now in a very strong position as it can turn the screws on Lyft just enough to ensure that it does not threaten its dominance but at the same time does not disappear entirely.
• Lyft leaving the market would be bad news as it would almost certainly trigger regulatory oversight which would cause even more problems.
• Hence, I think Uber will do best with Lyft being around but never quite strong enough to mount a real challenge.
• Metcalfe’s Law seems to imply that it is almost impossible that Lyft or anyone else will be able to mount a challenge, but it is not completely unheard of.
• I am not that keen on Uber either which looks to be trading somewhere around 18x 2023 PER which does not put it into the value category although it could get interesting if it falls below $30 per share.
• I remain pretty indifferent to Uber but would not own Lyft under any circumstances.