Uber’s lackluster IPO at the end of April was on the heels of the disastrous Lyft (LYFT - Free Report) IPO that came the month prior. Lyft was initially priced at $72 per share and immediately jumped 8.7% when it hit the exchanges to over $78 a share. The public was excited to see a big ride-hauling company, especially a name they’re familiar with, open up its ownership to the public. LYFT was down over 26% from its high when Uber went public and the investing community was much more conservative with its pricing on the ride-hailing frontrunner.
Uber went public on the 4/26 for $45 a share for $82.4 billion, over 4x the value that was given to Lyft on its IPO. Since then UBER has lost initial investors roughly 10% but is up 9% from its trough 9 trading days ago.
Ride Hailing Stocks
Both Uber and Lyft went public at a massive bottom-line deficit, with no profits in sight. There are a few problems with pricing these types of unicorn investments, one being that profits are not in the foreseeable future for either of these firms. The other issue is there are no comparable firms that investors can use as a benchmark. In other words, the ambiguous nature of valuing these firms makes them more or less a crapshoot.
In my opinion, there will only be one winner in the ride-hailing application battle, and it’s going to be the one that can sustain losses for the longest. As of now, Uber has significantly more capital than Lyft and has a seemingly endless line of credit. They will be able to outlast Lyft if it’s a race to the end of their capital.
Driverless cars are what Uber is banking on and has invested over $1 billion in this segment since 2015. The division is being valued at $7.25 billion today. Autonomous vehicles are what Uber believe will be their saving grace. Taking out the variable driver cost on every ride and having almost pure profits sounds pretty good. The issue with this plan is that legislation in the US is far from letting these things roam the streets unmanned, and secondly riders might not be uncomfortable with no driver at the wheel. Competition in autonomous cars is steep with Google (GOOGL - Free Report) , Telsa (TSLA - Free Report) , and Ford (F - Free Report) , who is partnering with Lyft, all working on their own driverless vehicles.
Uber and Lyft have effectively created a duopoly, and this can be very profitable if the firms aren’t competing only on price. Pepsi (PEP - Free Report) and Coke (KO - Free Report) have been able to compete side by side with each other for a century and gain profitability and economies of scale together. The difference is that they are competing on more than price; they each had their own unique cola. Granted, neither of them are pure-play cola makers anymore, but that is how they began.
There is no distinct difference between using Uber and Lyft, in my eyes, other than pricing. That is why we have seen these firms use predatory pricing to gain riders and attempt to poach each other’s drivers, costing them even more. This won’t change unless they decide to collude and price rides and driver takes at prices where they can both be profitable. Since they both are attempting to gain more market share, I don’t see this happening. This will be a fight to the finish with only one survivor, which as of now looks like it’s going to be Uber. The company is still going to have to hemorrhage a significant amount of cash to get there, making the valuation even more ambiguous.
Lyft’s Q1 Earnings Results
Lyft reported its first-quarter earnings last week and it had lost more in Q1 than it had in the entire year of 2018. The firm did spend over 6x more on R&D this quarter than any other, but even if you adjust for that expense this would still be the worst quarter they’ve had by a significant amount. They did almost double sales from Q1 last year but at the expense of increasing their deficit by almost 5 fold. The more Lyft spends the more they lose.
Lyft’s recent earnings may not be indicative of what to expect from Uber’s next week, but they are a good benchmark for how this industry is panning out. Uber has been able to lose a relatively leveled amount as they grow revenue. I would still be very wary of investing in either UBER or LYFT until they have a solid plan for profitability. If I were forced to put a position on these right now I would short LYFT and long UBER and collect on the spread.
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