The market still seems confused about Lyft (LYFT +1.76%) and Uber Technologies (UBER +2.18%), the ridesharing rivals that went public earlier this year.
Not only are both stocks trading (at the time of this writing) down about 20% from the prices at their initial public offerings -- an underwhelming showing considering that 2019 has been a bumper year for IPOs -- but strangely, the stocks often move in tandem. The market seems to believe that what's good for one is good for the other and the same for the bad things, even though the two are cutthroat competitors. This pattern was on display recently when the companies reported second-quarter earnings on consecutive days.
Lyft's results came out after market close on Wednesday, Aug. 7, and both ride-hailing stocks surged in the next day's trading. Investors were delighted to see Lyft smash its own guidance for the quarter and raise its outlook for the full year. But what really had them bidding up both companies was Lyft saying that prices were beginning to rise, a signal that price competition between the two companies may be easing, meaning profitability may not be as far away as some fear.
Lyft's stock jumped as much as 9.3% and it finished the session 3% higher. Uber, meanwhile, shot up 8.2% on news about the price war potentially cooling off. After market close that day, Uber reported its own quarterly results and in trading the next day, both stocks gave up their gains as Uber's second-quarter numbers included just 14% revenue growth and an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) loss that more than doubled from the prior year to $656 million. Uber shares fell 6.8% on that Friday, and lost another 7.6% on Monday, Aug. 12. Lyft stock, meanwhile, dived 9.5% in the two sessions following Uber's results.
Though the market doesn't see it this way, Lyft and Uber are moving in vastly different directions. Lyft is still posting skyrocketing growth, with revenue up 72% in the second quarter, Meanwhile Uber is stalling out; its top line increased just 14% in its most recent quarter, or 26% after adjusting for currency translation and driver awards related to the IPO. Revenue from ridesharing, Uber's primary business despite efforts to shift focus to Uber Eats, increased by an anemic 2%, or 17% after adjusting for the driver awards.
Both Uber and Lyft still look overvalued according to conventional metrics, but Lyft looks like the much better buy today. In addition to its vastly faster growth rate, Lyft has a number of advantages over its larger rival.
Image source: Lyft.
1. Lyft is gaining market share
Uber remains the clear leader in U.S. ridesharing, with about 70% of the domestic market, according to data from Second Measure, and the company has mostly stabilized following a disastrous 2017. That year included allegations of strikebreaking at New York's Kennedy Airport; accusations of rampant sexual harassment by employees; a lawsuit alleging the stealing ofntrade secrets from Waymo; revelations that Uber used underhanded tactics to dupe regulators in a program called Greyball; and, finally, the ouster of co-founder and CEO Travis Kalanick, who was replaced by Dara Khosrowshahi, the former CEO of Expedia.
However, the latest round of results indicate that Lyft continues to gain ground on Uber. Both companies added nearly identical amounts of revenue in the second quarter. Lyft's top line grew by $362.4 million, while Uber added $398 million in revenue. Using Uber's preferred adjusted revenue figures, the company increased revenue by about $700 million.
But investors should remember that Lyft operates primarily as a ridesharing service in North America, although it also owns several bike-share networks (following its acquisition of Motivate last year) and a nascent scooter business. Uber, on the other hand, operates globally. It also has Uber Eats, a fledgling freight business, and a stake in micromobility (scooters and bike-share) through its acquisition of Jump last year and its $335 million investment in Lime, also in 2018.
In North America, Uber's revenue grew by $283 million in the quarter, and a considerable percentage of that growth appeared to come from Uber Eats. That shows that Lyft is still growing much faster in the only market it currently operates in.
Uber CEO Dara Khosrowshahi may have the hardest job in Silicon Valley these days. Image source: Uber.
2. Lyft is founder-led and mission-driven
Kalanick's years at the helm of Uber had several consequences. The brash entrepreneur, regarded as a "force of nature" among investors and venture capital firms, imbued the company with a win-at-all-costs mentality. Khosrowshahi has taken pains to try to repair Uber's image as a bullying scofflaw.
He often seems to be playing defense at a time when the company should be at its most ambitious, flush with cash following a bountiful IPO. Uber's debut itself seemed to be an exercise in weakness, as Khosrowshahi consistently tamped down expectations. While most companies try to price their initial offerings as high as the market will bear, Uber did the opposite, pricing at just $45 a share after initially declaring a range of $44 to $50. Today, a company that Wall Street bankers had once valued at $120 billion is now worth less than half that; its market cap was $59 billion on Friday.
In Uber's prospectus, Khosrowshahi often sounded apologetic for the company's past behavior, and promised to do better. In his personal letter to investors, he said: "I want to close with my commitment to you: I won't be perfect, but I will listen to you; I will ensure that we treat our customers, colleagues, and our cities with respect; and I will run our business with passion, humility, and integrity." Later in the document the company pledged to "Do the right thing. Period." That's a declaration that investors would take for granted from any other publicly traded company.
Khosrowshahi is no doubt in a tough position due to Kalanick's behavior, but it's worth asking if something important is lost with Kalanick gone. After all, Kalanick is the one who built the company from the ground up, and made it into a global behemoth, the envy of other start-ups. Plenty of early investors feel loyal to Kalanick (who still sits on Uber's board), as he made them a fortune. Bradley Tusk, an early investor in the ridesharing juggernaut and its first "political strategist," recently said on CNBC's Squawk Box, "They've lost their mojo. Clearly, there's not a lot of confidence in the leadership. Some of what Travis represented in innovation, change, and intensity is lacking at the company now, and the stock is clearly reflecting that."
Khosrowshahi has a challenging job ahead of him: managing the demands of drivers looking for better pay and benefits, customers wanting low prices and great service, and investors who want to see growth as well as profitability. That he must mend relationships and the company's reputation in the wake of the turbulent Kalanick era, while dealing with critics still pining for Kalanick to return, only makes things harder.
Lyft faces no such dilemma. The reputation of its founders, John Zimmer and Logan Green, is sterling by comparison, and the company has generally been perceived as the friendlier of the two ridesharing services. It was the first to allow drivers to be tipped; its "surge pricing" hikes are generally more modest; and it was Lyft, not Uber, that introduced the fundamental innovation of a ridesharing service where drivers drove their own cars. In its early days, Uber was just a luxury black-car service.
More recently, Lyft pledged last April to make its rides carbon-neutral, buying carbon offsets, and the company has executed on that promise. Uber has made no such proposal to address the environmental impact of its business. What was that again about doing the right thing?
Lyft's mission statement is also much clearer and more achievable than Uber's. According to Lyft's prospectus, its mission is to "Improve people's lives with the world's best transportation." It's a simple statement, yet potentially world-changing, especially when you imagine things like self-driving cars taking off. Uber's mission statement is so vague it's basically meaningless: "We ignite opportunity by setting the world in motion." I don't know what that means, and I don't think Uber does either.
Notably, Uber doesn't have the singular focus on ridesharing that Lyft does. Layering on businesses like Uber Eats, Uber Freight, and Uber Copter may be appealing to growth-minded investors, but that strategy could also be a distraction from the company's core business, ridesharing, as well as its potential profitability. With its wide-ranging ambitions, it's not surprising that Khosrowshahi loves to compare Uber to Amazon, but Uber's ability to match Amazon's growth over the last generation seems doubtful at this point.
That Lyft continues to be led by the same duo who built the company looks like a clear advantage for the No. 2 ridesharing service, as does the clarity of its mission statement.
A Waymo self-driving vehicle. Image source: Alphabet.
3. Lyft is better positioned for the self-driving revolution
With every passing month, it seems like the so-called self-driving revolution may be turning into science fiction. Automakers and tech companies are trying to design vehicles that can drive themselves safely in the wide range of situations that human drivers face, but are finding the challenge to be extremely difficult.
However, technology always gets better, and it seems like a good bet that autonomous vehicles (AVs) will be mainstream one day, even if it takes longer than many technologists thought just a few years ago. The shift is likely to be gradual rather than sudden, though, and Lyft seems like it will be better prepared than Uber.
In part because it's been able to leverage its reputation as a much more trustworthy partner than Uber, Lyft has significantly more partnerships with AV tech companies and automakers than its chief rival does. Lyft has partnered with Aptiv (NYSE: APTV), an AV technology company, to provide more than 50,000 self-driving rides in Las Vegas through next May, one year into their partnership. In Phoenix, Alphabet's (GOOG +1.87%) (GOOGL +1.78%) Waymo has made rides in its autonomous vehicles available through Lyft.
In addition, General Motors (GM 0.11%) is a major investor in Lyft, plunking down $500 million for a 9% stake in 2016. GM's Cruise AV division is now valued at $19 billion, a sign that it's set to be a serious player in autonomous vehicles. Though GM's working relationship with Lyft appears to be dormant at the moment, as long as it remains an investor (with a stake now worth over $1 billion), a meaningful partnership on AVs could spring to life at any time. More recently, Ford (F +0.89%) also said it was teaming up with Lyft to take AVs mainstream.
Uber's involvement in autonomous vehicles, on the other hand, is probably best known for the first and only pedestrian death caused by a self-driving vehicle, when one of its AVs hit a woman crossing a road in Tempe, Arizona, in March 2018. That prompted a suspension of its AV road tests for eight months. It's since gotten its AVs back on the road for testing, but the company's reputation as excessively risk-taking, and as a corporate bully willing to flout regulations, would seem to make it poorly suited to lead the AV revolution -- especially considering the risk and the negative press surrounding AV-related traffic accidents.
Uber has forged a partnership with Toyota (TM 0.08%), which appears to be its only significant tie-up with an automaker or AV tech company. Last year, Uber received a $500 million investment from the Japanese carmaker, and the two companies committed to delivering self-driving cars by 2021. Still, in terms of AV-related relationships, Lyft is the clear winner.
Not only does Lyft have significantly more partnerships than Uber, but its status as the No. 2 ridesharing service makes it more appealing for carmakers and AV tech companies to team up with. Lyft poses much less of a threat to them than Uber, which some see as a rapacious monopolist. Similarly, Uber has feuded with Waymo, in and out of court and those battles make it unlikely that Waymo, widely regarded as the leader in AV tech, will work with Uber in a significant way, and serve as a reminder to other potential partners that Uber may not be a desired ally.
In a high-level comparison between the two companies, it's clear that Lyft is growing much faster than Uber, has a management team with a better track record, and has a degree of clarity about its future that Uber lacks. Finally, Lyft's stronger reputation and positioning have enabled it to forge a slew of partnerships with the companies that are most likely to make autonomous vehicles a reality.
Both companies are bleeding cash and remain overvalued considering their risks, but at this point Lyft looks like the much better buy.
