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Ridesharing's Race To Profitability

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Uber (UBER - Free Report) and Lyft (LYFT - Free Report) have been battling it out in the streets of every major city and now the financial markets. Lyft was first to debut its shares to the public at the end of March last year, and the markets quickly priced out venture capitalist overzealous valuation.

When Uber IPO’ed about a month later, public investors were much more conservative on their initial pricing. UBER traded sideways until its massive Q2 miss, which sent these share tumbling alongside its partner in crime, LYFT. These ridesharing stocks have been making a comeback since the beginning of the year as their valuations ripen. UBER is up almost 40% and LYFT is up only 14%, due to the share price break down following its Q4 earnings.

Q4 Earnings

Both UBER and LYFT reported robust Q4 results to round out their first year as public companies, but their shares went very different directions.

Uber met its expectations when it released its full-year results on February 6th, but it didn’t hit expectations out of the park. The big news was a shortened timeline to profitability with CEO Khosrowshahi promising a positive EBITDA by the end of this year instead of its original goal of 2021. This excited investors and UBER jumped over 7% the following day and has continued to rally since.

Analysts across the board raised their estimates and price targets on the news of the advanced profitability timetable, pushing UBER into a Zacks Rank #2 (BUY).

Lyft reported excellent financials last night (February 11th), not only breaking through the $1 billion quarterly revenue mark but destroying EPS estimates by 28%, narrowing its losses. The company beat on every metric, and management raised its guidance for 2020. This seemingly good news wasn’t good enough for investors, and LYFT has fallen almost 10% in morning trading.

For these unprofitable ridesharing companies, forward guidance is much more important than past quarter results. Uber and Lyft have been pushing growth no matter what the cost since their inception, now investors want to see this growth turn a profit. These firms can’t continuously burn cash as they have in the past. It’s time for these ridesharing giants to show their savvy management ability and demonstrate profitable growth.

Lyft’s earnings disappointed investors because of the high they were riding following Uber’s profitable growth story it depicted in its Q4 earnings call. Investors wanted more from Lyft’s earning, specifically its timeline to profitability, which now sits behind Uber’s.

Conservatism is what Lyft does best with a big top and bottom-line beat on its last 3 earnings reports. I don’t think that the shares’ massive drop off is warranted, and this could be a buying opportunity. I see Lyft and Uber hitting profitability at similar times based on how these firms have progressed and Uber’s lack of conservatism.

Take Away

Ridesharing’s race to the end of their capital may no longer be the central issue. Now it is a race to profitability. Once these companies start to see a positive bottom-line, their shares are going to run.

The markets appear to be putting their bets on the larger of the ridesharing duopoly, Uber, with its diverse portfolio, broader operation, and more capital to burn. But Lyft’s (nearly) pure-play strategy could end up being its competitive advantage with Uber’s other segments only producing more substantial losses.

Both companies will continue to develop their strategies, and I see both of these stocks as reasonable long term investments, though I would limit my exposure considering the volatility.

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