Uber and Lyft Reshaping the Rideshare Narrative

The U.S. rideshare industry is dominated by two players, Uber Technologies (NASDAQ: UBER) and Lyft (NASDAQ: LYFT). Both companies were dubbed “Unicorns” during the white-hot private funding rounds as Uber reached a $68 billion valuation with hopes of transcending north of $100 billion on its much-anticipated IPO, despite accumulating over $6 billion in losses. The rideshare model looks brilliant on paper. Create an app platform to connect independent contractor drivers with passengers while taking a cut of the fare (take-rate) for facilitating the transaction as the middleman. Use this platform to build a network of at-the-ready drivers and eager passengers. With virtually no vehicle inventory or expenses or salaries to pay independent contractor drivers using their own cars, the platform should drive network grows exponentially. By providing convenience, quality and value to riders and excellent compensation to drivers, the rideshare companies should be able to drive growth and ultimately profits heading into the autonomous age.

Phase I: Build the Network and Drive out Competition

To build this network, rideshare companies bolster driver supply with big promotions including front-loaded sign-up and referral bonuses and incentive bonuses. To bolster passenger demand, rideshare companies implement deep price cuts and promotions including fare discounts and referral discounts. These discounts and promotions were heavily subsidized by private investor funds. Uber and Lyft engaged in a race to the bottom price war that undercut taxi fares and even modes of public transportation. The price cuts continued to extremes as even smaller rideshare companies couldn’t compete. This war of attrition eventually boiled down to the biggest pockets and ultimately a duopoly emerged, Uber and Lyft. This burned through billions and billions in cash, so the race for more funding through public markets was on. The dream of autonomous vehicle networks around the corner, that would cut down driver costs and bolster profitability was the proverbial dangling carrot used by Wall Street to spur interest.

Phase II: IPO and Reality

Lyft was the first of the rideshare duopoly to IPO on March 29, 2019. With shares priced at $72, the highly anticipated IPO reached a peak at $88.60 right out of the gate before commencing a an eight-month stomach-churning downtrend that finally bottomed out in October 2019 at $37.07. Uber priced IPO shares at $45 but opened for trading well below due to the negative sentiment from Lyft stock performance. Uber shares peaked $47.08 before the downtrend bottomed out $25.58 in November 2019 as public markets underscored the harsh reality that unicorns only exist in a vacuum.

Sentiment Rebound

Both Uber and Lyft were still reporting massive losses amid driver protests that fueled the emergence of California’s AB5 bill that would require independent contractors to be reclassified as employees. Fears that AB5 adoption could spread to the rest of the nation and wrecking the rideshare operating model was the nail in the coffin as sentiment and share prices hit all-time lows. On the Lyft Q3 2019 conference call, the term “path to profitability” was introduced to separate itself from their money-pit competitor Uber.

Lyft CEO Logan Green made a bold statement at the Atlantic Equities conference that they would achieve adjusted EBITDA profitability a year ahead of time by Q4 2021. This reversed the sentiment as shares rallied. The complete liquidation of ousted ex-Uber CEO Travis Kalanick’s Uber stock further bolstered upside momentum as the overhang of supply dissipated. Lyft and Uber shares grinded higher heading into the Q4 2019 earnings release in February.  

Phase III: Reshaping the Narrative

Uber and Lyft had very different reactions to their respective Q4 2019 earnings reports and guidance. Uber reported narrower losses of (0.64) EPS beating estimates by $0.04 on revenues $4.07 billion for a 41-percent YoY increase. Gross bookings increased by 28% YoY. Lyft reported Q4 2019 losses of (1.19) EPS beating estimates by $0.20 on revenues of $1.02 billion for a 51.9-percent YoY increase. They also raised Q1 2020 guidance but kept full-year 2020 revenues in-line with losses between $450 million to $490 million versus ($508 million) estimates. While both stocks initially fell immediately on the earnings releases post-market, Uber shares ultimately proceeded to gap and grinded higher during the conference call. Uber one-upped Lyft but projecting adjusted EBITDA profitability by Q4 2020, one-year ahead of Lyft. This spurred an upside gap and grind. Lyft maintained its original Q4 2021 profitability forecast which fueled accelerated selling as shares gapped down and grinded lower the following day. The divergence in reactions underscores the reshaping of the narrative for Uber and Lyft.

Uber (Finally) Stimulating the Network Effect

After the smoke clears from the initial earnings reaction, the new narrative and accompanying sentiment is being written. Uber is the rideshare industry juggernaut that may finally be reaping the benefits of scale and platforming to trigger a network effect. Initially, the network effect wasn’t assumed possible due to the lack of stickiness, but the growing diversity of product lines outside of core rideshare presents the possibility of growing the synergies. While drivers and passengers may flip flop for better promotions, the true stickiness is they are still connected through the Uber app. The diversification of offerings through the Uber brand could be the growth driver that makes profitability possible.

Lyft Caught in a Catch-22 

Lyft has cubby-holed itself with the path to profitability model which calls for raising passenger fares while cutting driver pay to boost take rates. This is a dangerous approach that could unravel its network as drivers and passengers migrate to Uber. Lyft may have already pushed the edge as growth fell off in Q4. Indications also point towards Lyft resuming a price war by undercutting Uber’s fares to boost demand to a smaller network of drivers. This is a band-aid unless Lyft also resumes subsidizing driver incentives which further pushes out profitability targets. If Uber decides to engage in a price war, then that would also push out their profitability targets, but Uber would still emerge victorious in a war of attrition. On a side note, California’s AB5 may force drivers to choose between Uber or Lyft since they would be classified as employees. Again, Uber’s massive size could permanently pull drivers away from Lyft further unraveling their supply network and further bolster their market share. In upcoming articles, we will analyze the true path to profitability in the rideshare industry and the looming risks for the duopoly game as the narrative continues to evolve.