Uber and Lyft Might Never Be Profitable. Investors Are Waking Up to That.
That was a quick turn. Investors are veering from mild enthusiasm for ride-hailing to questioning whether the business model makes any sense. Uber Technologies shares on Friday were at $42, down 7% from their initial-public-offering price of $45. Lyft stock at $54 is 25% below its March IPO price of $72.
The problem: the two levers the pair can pull to boost profits—cutting driver payments and raising prices—could hurt growth, wrote Davidson analyst Tom White. This marks a break with the pre-IPO mind-set, when investors focused more on the huge market and less on profitability. Both Uber and Lyft are mired in red ink. Uber lost $1 billion in the first quarter, and the smaller Lyft expects a $1.1 billion loss this year.
“Over the past few days, we’ve noticed significantly more interest/inquiries from investors about the unit economics for ride sharing,” White wrote. “At a high-level, we believe the market is wrestling to understand the interplay between 1) the key levers to achieve profitability in ride-sharing, and 2) whether pulling those levers might restrict the addressable market opportunity.”
Most believe that Uber deserves a premium to Lyft because it’s larger and has global scale, stakes in overseas ride-hailers, and businesses like Uber Eats. White isn’t so sure. Uber revenue growth slowed to 20% in the first quarter from 69% in the March-2018 quarter. Lyft’s sales rose 95% in the first quarter. White’s not totally negative. He has a Buy on Lyft with a $72 price target and a Neutral on Uber with a $53 target.