Uber Hits the Market
Uber UBER shares finally hit the public markets today and investors were not thrilled to jump into the largest IPO of the year. The stock opened up on the New York Stock Exchange at $42, 6.6% below its IPO price of $45. UBER rallied above $44 temporarily, then broke back down to $41.60 where it closed the day, a 7.56% drop from the IPO price.
Uber is the second ride-hailing IPO this year and investors are hesitant to buy this capital hemorrhaging firm after seeing the stock performance of Lyft (LYFT - Free Report) over the past month.
Lyft’s IPO price was $72 and opened up to the public markets above $78 on the hype of the first ride-hailing application service opening up ownership to the public. Since its debut the stock has fallen 30% and continues to dive, being down 7.4% just today.
Investors saw Lyft’s IPO as a failure to price the security fairly. Investors are much more conservative when assessing the risk/reward balance with Uber.
Ride Hailing Battle
Both of these firms have a proliferating top line. Lyft has grown sales 150% annually since 2016 while Uber has been able to expand its sales by 71% annually over the same time frame. The issue lies with these companies operating losses, which have not improved. Uber is losing more than $3 billion annually in operations while Lyft’s annually deficit has expanded to just under $1 billion in 2018 from the $692 million loss in 2016.
The concern with these ride-hailing firms is whether or not they will ever be able to turn a profit. My theory is that this is going to be a race to the end of these companies’ capital. They are currently pricing these rides in a very competitive environment that is causing them to lose money on a lot of their trips. I ask my Uber/Lyft drivers from time to time how much they are making on this ride and it is typically more than what I am paying.
This counter intuitive discrepancy is because they need to pay these drivers an appropriate amount to attract a sufficient number of drivers, knowing that there is competition between ride-hailing services for drivers. On the other side of the equation, the ride-hailing services need to price competitively to attract riders who are checking multiple services before choosing.
This predatory pricing is going to bleed these firms dry until there is only one survivor. Other outcomes include price collusion where these firms decide to play fair and price rides where all firms involved could be profitable or possibly consolidation within the industry. If autonomous cars become commercially viable, that may be the saving grace of this niche industry.
Uber Competitive Advantage
Uber currently controls a majority of the market share for ride-hailing applications. As of March of this year, Uber controlled 69% of the market, while Lyft has captured 29%. Uber has the brand advantage. You always hear people say “I’m about to call an Uber” or “let’s just Uber there,” etc. even if they are actually using a different service like Lyft.
Uber is also an international business operating in 63 countries which gives them a considerable advantage over other competitors. Their total addressable market is extensively larger than the solely domestic players.
Uber has a broader portfolio of products than Lyft’s pure-play strategy. Uber’s portfolio includes UberEats (which I can admit to using at least once a weekend), Uber freight as well as e-bikes and e-scooters. Uber is also at the forefront of autonomous driving which will change the ride-hailing game.
Uber is making a big bet on autonomous driving and hopes that it will be the future of the business. This would significantly cut variable costs and allow the company to reach profitability much quicker. This is all under the pretense that Uber can not only create a completely safe and reliable autonomous vehicle but that autonomous vehicles will be legalized in the United States for commercial use.
Lyft’s Recent Earnings
Lyft released earnings on Tuesday of this week and reported its highest sales since inception combined with its worst quarterly loss. LYFT has fallen about 15% since this release and I expect this will continues.
A large portion of that loss was due to the substantial increase in R&D spending, which I suspect is being put towards autonomous car development. R&D spending for Q1 was 6.5x the amount they had spent in the prior period.
Regardless, even without the increase in R&D spending, this quarter still would have been their biggest loss. This illustrates an inability to scale properly. The more Lyft makes the more they lose, leading me to have very little confidence in their ability to ever be profitable.
This battle between ride-hailing powerhouses, Lyft and Uber, may end up being a fight to the death. The predatory pricing that both firms have put into place is hemorrhaging their funding, and the firm with the largest bankroll is likely to be the victor.
As of now, my bets are on Uber to be the survivor of the fittest. Both of these firms have a very similar trailing twelve-month price to sales, right above 7x. I am not sure how much more these stocks will fall before we find a fair value, but as an investor, I would wait until the dust and volatility settles before putting on a position.
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