Uber vs Lyft: where next for ridesharing stocks?
Uber and Lyft are both moving toward profitability, but it is becoming clear who will get there first.
Uber’s 2019 adjusted loss should be its last
Uber reported adjusted net revenue of $3.73 billion in the final three months of 2019, rising an impressive 41% from the $2.64 billion reported the year before. Uber generates the majority of its revenue from its ridesharing operation, but it also has smaller but faster-growing units including its food delivery business Uber Eats and a small freight unit, Uber Freight, that ships goods for other businesses.
Quarterly ride revenue increased 30% to $3.03 billion, following an 18% rise in gross bookings. Uber Eats also continued to see strong growth with revenue jumping to $415 million from just $165 million the year before as gross bookings leapt 71%. Meanwhile, income from its freight unit rose 75% to $219 million to match a similar increase in bookings.
Uber is still firmly in the red after reporting a loss before interest, tax, depreciation and amortisation (loss EBITDA) – Uber’s preferred measure of profits - of $615 million in the final quarter (Q4). However, that was a marked improvement from the $817 million loss recorded a year earlier and proof that it is moving toward profitability.
This is down to the rides business becoming more profitable, delivering adjusted EBITDA of $742 million compared to just $195 million the year before. However, its other interests continue to drag down its overall results, with the loss at Uber Eats swelling to $461 million from $278 million. While the overall loss EBITDA narrowed, Uber’s quarterly net loss still widened to $1.1 billion from $887 million the year before.
Uber’s performance in Q4 was broadly in line with analyst expectations, with the net loss coming in slightly less than expected while revenue was in line with targets. The company said it ‘consistently outperformed’ its adjusted EBITDA targets last year.
Over the full year (FY), Uber posted a 26% increase in revenue to $14.14 billion as a result of gross bookings and the number of trips completed both rising over 30%. While still strong, that is a marked slowdown from the 43% annual revenue growth reported in 2018 versus 2017.
Uber’s annual loss EBITDA widened to $2.75 billion from $1.85 billion in 2018, while its net loss ballooned to a huge $8.5 billion from a $997 million loss. Plus, it continued to burn through cash after reporting a net operating cash outflow of $4.3 billion in the year, nearly three times more than what was seen in 2018.
Where next for Uber?
‘We recognise that the era of growth at all costs is over. In a world where investors increasingly demand not just growth, but profitable growth, we are well-positioned to win through continuous innovation, excellent execution, and the unrivalled scale of our global platform,’ said Uber chief executive officer (CEO) Dara Khosrowshahi.
Less than a year ago, Uber was under fire after shocking the market with an admission that growth was slowing and that it may never make a profit. But what a difference a year can make. Uber’s better-than-expected performance last year has prompted the company to make a bold statement that it will deliver its first quarterly positive adjusted EBITDA in the final three months of 2020. Previously, it had said it wanted to report its first annual profit in 2021, although it still expects to deliver this.
Uber has now effectively set itself a deadline, and one that will be welcomed by investors if it can deliver on its promises.
How to buy and sell Uber shares
Lyft hits revenue milestone but is further away from profitability
Uber’s smaller rival Lyft, which only operates in the US and Canada and solely concentrates on ridesharing with some interests in scooters and other modes of rentable transport, continues to grow at a faster pace than its larger peer but is further away from moving out of the red and into the black.
The company said it made more than $1 billion in quarterly revenue for the first time ever in the final three months of 2019, growing 52% year-on-year (YoY) from $669.5 million. That followed a 23% increase in passengers, matching the increase seen in revenue per rider to $44.40.
Lyft said its quarterly adjusted loss EBITDA – also its preferred profitability measure – narrowed to $130.7 million from $251.1 million the year before. However, its net loss widened by almost $100 million – to $365 million from $249 million. Revenue comfortably beat analyst expectations while its losses were slightly better than anticipated.
For the FY, Lyft’s revenue grew to $3.6 billion from $2.2 billion, with its adjusted loss EBITDA narrowing to $678.9 million from $943.5 million. Still, its annual net loss was considerably larger than the year before, swelling to $2.6 billion from just $900 million in 2018. Like Uber, top-line growth has slowed compared to 2018, when annual revenue more than doubled YoY.
‘During the year, we focused on profitable growth and consistently improved adjusted EBITDA margin in each of the last four consecutive quarters, outperforming our outlook,” said Lyft’s chief financial officer Brian Roberts. ‘We grew annual revenues by 68% YoY and demonstrated operating leverage that delivered over 50% improvement in annual adjusted EBITDA margin.’
Unlike Uber, Lyft’s cash burn improved during 2019 with a net operating cash outflow of $105.7 million, down from $280.7 million in 2018.
Where next for Lyft?
‘Fiscal 2019 was an exceptional year across the board. We significantly improved our path to profitability while simultaneously reaching critical milestones toward our long-term strategy,’ said Logan Green, co-founder and CEO of Lyft.
Despite delivering better-than-expected results throughout 2019, Lyft has conceded it is further away from profitability than its rival Uber. It said it still expected to lose money throughout 2020, forecasting it will deliver an annual adjusted loss EBITDA of between $450 million to $490 million despite expecting a 27%-29% increase in revenue to $4.57 billion to $4.65 billion.
While Uber’s 2019 results spurred it on to say it expects to turn a profit sooner than it expected, Lyft did not comment on specific time frames when it released its annual results. However, late last year, when it released its Q3 results in October, Lyft said it expected to be profitable at the adjusted EBITDA level ‘in Q4 of 2021’ – a target that seems to still be in play.
Although Lyft has disappointed investors by not moving up the date of its profitability target, the company has outperformed the market’s and its own expectations throughout the year. If it can continue to perform how it has, then there is a chance that Lyft could hit profitability sooner than its current guidance suggests.
If Uber stays on track then it looks unlikely that Lyft can become profitable first – but investors should still be positive that Lyft remains on course. If Lyft succumbed to the temptation to bring forward its profitability plans then it could end up rueing its decision if it failed to deliver it, whereas sticking to its 2021 goal means it has the potential to deliver a positive surprise for investors either this year or next.
Uber vs Lyft: how to trade
The share prices of Uber and Lyft experienced different reactions upon the release of each firm’s results. The accelerated path toward profitability pushed Uber higher and shares have gained more than 11% since the close of trade on 5 February, the day before it released its results. Meanwhile, the lack of any update to guidance disappointed Lyft investors and shares have lost over 5% since the release of its results.
Still, brokers remain bullish on Uber and Lyft, with both stocks currently boasting a Buy rating. The target price for Uber suggests there is 17% potential upside from its current share price while Lyft shares could offer 21% upside. Notably, both stocks are currently trading well below their respective listing price (Uber’s initial public offering was priced at $45 while Lyft priced its shares at $72).
Source: Reuters. Potential upside calculated from share prices on 12 February 2020
Uber vs Lyft: winning the race to profitability isn’t everything
The headline news out of the two ridesharing firm’s annual 2019 results is that Uber is set to win the race to profitability over Lyft. Uber shareholders are right to be jubilant at this prospect while Lyft investors are justifiably disappointed – Lyft’s concentration on just ridesharing in North America was meant to help it escape the red quicker than its larger, more diverse and complex rival.
But winning the race isn’t everything and just getting over the finish line – and into the black – will be enough to win over investors even if Lyft takes an extra year to get there. The real problems will occur if there is a prolonged period between one achieving profitability before the other or if any fresh doubts emerge about either’s ability to escape the red.
Both Uber and Lyft have the potential to surprise the market this year, just as they did throughout 2019. Still, delivering positive adjusted EBITDA is only a small step in a much longer journey toward true profitability – both companies are still reporting large losses at the bottom-line and continue to burn through cash. They have a long way to go before becoming truly profitable and self-sustaining.
Both companies were previously sacrificing everything for growth and greater market share, such as their relentless approach to subsidising rides. However, both have now realised that delivering top-line growth is not enough to entice investors and that proving they have sustainable and profitable businesses is a much greater priority now that they are both publicly-listed companies. That is especially true as revenue growth slows at both businesses.
Both have scaled back their ambitions by exiting unprofitable markets to varying degrees, such as Uber’s decision to sell off its Indian food delivery business to Zomato last month or Lyft’s decision to cut jobs and pull its rentable scooters out of six major US cities. While it is difficult for both companies to backpedal on their growth plans, it is sensible for them to focus on the more profitable parts of their businesses before spending big on new but risky opportunities within the transport market.
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