Ride-sharing IPOs Come Up Lame
It’s hardly an understatement to claim that the Uber Technologies Inc (NYSE:UBER) initial public offering (IPO) was one of the most hotly anticipated IPOs of all time. The company was floating around valuations as high as $120.0 billion, an unbelievable number, made all the more unbelievable by the fact that Uber has yet to make a single dollar.
But after coming out of the gate in a very weakened state, can Uber stock—and Lyft Inc (NASDAQ:LYFT) stock—recover?
First, before we get into the future of the ride-sharing stocks, let’s go over the recent past, namely the Lyft IPO and Uber IPO.
Both companies went public within the past three months, and both have not exactly been met with a warm welcome on the public markets.
Chart courtesy of StockCharts.com
LYFT stock is down 22% since its IPO in March, while UBER stock is down 12% since it went public in early May. In both situations, we have been seeing investor disappointment.
So what led to this weak performance?
Overvaluation, for one. There is currently a sense of dissonance between Silicon Valley, Wall Street investors, and the broader public.
The long story short is that because bankers, venture capitalists, entrepreneurs, etc. liked the Uber and Lyft—not just for what they offered, but their very essence—they figured the companies were fated for grand success. (Source: “Why Silicon Valley Loved Uber More Than Everyone Else,” The Atlantic, May 24, 2019.)
That’s why the “Uber for X” phenomenon began: Silicon Valley and Wall Street loved the value proposition of ride-sharing.
Take a commonly used service (taxis), innovate (app technology) and reduce costs (private contracting versus employees). Not to mention that the long view on Uber and Lyft is that autonomous vehicles will come in and reduce costs even further.
The result? Main Street wasn’t buying it. And on the public market, Uber slashed $50.0 million off of its early valuations, eventually settling at $70.0 billion.
Now, $70.0 billion is still an enormous sum, especially considering that the company is notoriously cash-flow-negative. However, the fact that the company nearly halved its valuation within weeks is telling.
So that’s how we got to such weak post-IPO performances by Lyft Inc and Uber Technologies Inc (Lyft suffers from many of the same problems that Uber does, only on a smaller level).
But with both stocks bleeding heavily in their first few weeks on the market, can they recover? And more importantly, can investors make money off of these ride-sharing stocks?
Lyft and Uber Stock Potential
While the start of Uber and Lyft on the stock market has certainly been less than ideal, these companies aren’t totally doomed. After all, these are highly popular services that continue to expand.
The two companies have huge shares of the U.S. market and are fighting over the global market right this moment.
Lyft recently claimed to have a 35% share of the U.S. ride-sharing market, up from 20% in the previous 18 months, tallying a growth of 75%. (Source: “Lyft claims it now has more than one-third of the US ride-sharing market,” CNBC, May 14, 2018.)
While those numbers were somewhat in dispute (some place it closer to a 70/30 split favoring Uber), the ultimate takeaway is that Lyft and Uber are the two largest ride-sharing providers and have pretty much divvied up the market between them.
And both companies are looking to expand into other areas of the transportation sector. Both Uber and Lyft are looking into bike-sharing as an expansion of their respective businesses, with Lyft scoring a big win when it acquired North America’s largest bike-sharing operator, Motivate. (Source: “Lyft Bets Big On Bikes in NYC, And Uber Is None Too Happy,” Wired, November 29, 2018.)
And of course, both companies are looking into eliminating one of their biggest expenses: drivers.
With the advent of autonomous vehicles, part of the incentive for investors to consider Lyft and Uber is that self-driving cars will soon populate the roads, allowing ride-sharing companies to dramatically reduce costs, leading to a huge surge in profits.
With that in mind, Lyft has partnered with Waymo LLC, the autonomous vehicle division of Alphabet Inc (NASDAQ:GOOG). Alphabet, you’ll remember, is the parent company of Google. (Source: “Lyft and Waymo Reach Deal to Collaborate on Self-Driving Cars,” The New York Times, May 14, 2017.)
Not to mention that Uber and Lyft’s operating losses—while dismal, considering these are multi-billion-dollar companies—are trending in the right direction. (Source: “Lyft Fills In Some Blanks, But Not the Big One,” Bloomberg, March 18, 2019.)
See the chart below for Lyft’s improving revenue versus costs.
Autonomous Vehicles May Not Save Uber and Lyft
While there is reason to be supportive of Lyft and Uber going forward, there are also reasons to be doubtful. And the main one lies with both companies’ bets on autonomous vehicles.
Remember, both companies have lost a lot of money.
Combined, the two ride-hailing firms have lost some $3.8 billion in 2019 alone, according to the companies’ IPO filings. (Source: “Uber and Lyft are betting on self-driving cars to become profitable. But that may not happen, new research from MIT suggests.” Business Insider, last accessed May 29, 2019.)
But the companies are betting that, within the next few years, autonomous vehicles will be able to wipe out that disparity.
However, according to a recent research paper from MIT, that bright future may be on the optimistic side.
“Although the cost proposition of autonomous taxis (ATs) may be improved by more closely matching supply with demand, we demonstrate that achieving maximum utilization would still leave ATs fiscally uncompetitive with conventionally driven vehicles (CDVs),” wrote Ashley Nunes and Kristen Hernandez. (Source: Ibid).
Based on data from San Francisco, a single market where you’d imagine that Uber and Lyft are very popular, the research shows that it costs between $1.58 and $6.01 per mile to operate autonomous vehicles with single occupants. Compared to the oft-used $0.40 (or less)-per-mile estimate, the problem becomes evident.
The fact is that it’s not so simple to swap out flesh-and-blood drivers for robots; there are plenty of costs to be incurred along the way. Between insurance, licensing fees, maintenance, cleaning, fuel, safety, and vehicle financing, it becomes far more expensive that it would appear at first blush to operate a fleet of autonomous vehicles.
Multi-passenger trips could be a bright spot for the companies, but the study says that utilization rates would need to go way up.
“In a single ridership model, we find capacity utilization rates would need to improve by nearly 100% and margins lowered by 37% for autonomous vehicles to achieve cost parity with their conventionally driven counterparts,” the researchers wrote.
The study shows that, in a multiple ridership model, utilization rates would need to increase by 30% to achieve cost parity.
The overall takeaway: it’s going to be very expensive for ride-sharing companies to switch to autonomous vehicles, and the only way to even come close to profitability is to increase the usage rates of multi-ride passenger trips, something that many consumers are uninterested in.
And all that is without even mentioning the liability costs that automatization would incur.
A self-driving Uber car already killed one person. It would be naive to think that this will be the last autonomous-vehicle-related death, especially if those vehicles come to dominate the roads in the near future. (Source: “Why Uber’s self-driving car killed a pedestrian,” The Economist, May 29, 2018.)
If Uber is the operator and owner of these autonomous vehicles, each accident could be a potential legal disaster for the company.
Of course, Uber and Lyft will lobby hard to get the laws surrounding insurance and autonomous vehicles to be changed to be more favorable to them. But as it stands, it’s a very real possibility that the two companies will have to litigate every accident involving autonomous vehicles until a law governing ride-sharing autonomous vehicles is put in place (if ever).
The point being is that there is a lot to be worried about when you look at Lyft and Uber, and the culmination of all these worries may be enough to dissuade many investors.
There’s no doubt in my mind that both Lyft Inc and Uber Technologies Inc can recover. In fact, I firmly believe that both stocks have the potential to eventually be very strong.
But potential is not reality, and for investors looking for safe long-term picks, they many want to look elsewhere.
There are so many question marks surrounding the two companies—from the speed of technological innovation, to the legal barriers, to possibly faulty profit projections—that it’s nearly impossible to recommend them with any kind of certainty.
I had believed that the stock market would be warmer to the two ride-sharing app companies when they when public. Maybe that’s because I’m a frequent user and was subject to the same bias I outlined above that many analysts have shared.
In any case, the fact is that these companies are not profitable, may not be profitable anytime soon, and face a number of challenges along that path. With so many things up in the air, investors might want to stick to safer picks.
But for those looking for a riskier buy, both Lyft stock and Uber stock have the potential to be big winners in the years to come.