The path to profitability for Uber and Lyft looks more like a dead end
September 20, 2019
Beth Kindig
Lead Tech Analyst
The ride-sharing companies are subsidizing rides and overspending on technology, and soon their very business model may be upended in California.
Ride-share company earnings prove that if you lower the bar to the ground, it’s easy to leap over.
Uber UBER, -1.28% and Lyft LYFT, +1.42% each reported staggering losses recently, yet the reports were delivered with positive spins.
Lyft released “record second-quarter results” while losing roughly the same amount of money as in previous years. Lyft’s improving loss guidance was meant to look attractive at $850 million to $875 million per year, compared with the $1.15 billion-$1.175 billion previously forecast. But that amount is higher than in both 2016 and 2017.
Uber had an epic $5 billion quarterly loss, which is about $1.3 billion when adjusted for certain items. In what universe does a company with a $58 billion market cap report any losses at all, let alone what’s projected to be $4 billion for a full year.
Below, I look beyond the earnings reports to review a few of the systemic issues that affect Uber and Lyft. It’s important to look for the cause of the losses.
1. Ride subsidies destroy potential profits
The S-1 filings disclosed a risk that overshadows the path to profitability for both companies. An excerpt from Lyft’s S-1 filing says:
“We grow our business by attracting new riders to our platform and increasing their usage of our platform over time. … We also offer incentives for first-time riders to try Lyft, as well as incentives for existing drivers and riders to refer new riders. … We often also provide incentives to existing riders to encourage them to expand their use of our platform. If we fail to continue to attract riders to our platform and grow our rider base, expand riders’ usage of our platform over time or increase our share of riders’ transportation spend, our results of operations would be harmed.”
In 2017, Reuters published that Uber passengers pay only 41% of the actual cost of their trips, citing research from transportation consultant Hubert Horan. At the time, Reuters warned that this creates an “artificial signal about the size of the market” after Uber had released limited financial data as a private company that showed losses of $708 million per quarter. Four years later, with a $1.3 billion quarterly loss, there’s no evidence anything has changed.
The problem with subsidizing rides is that investors aren’t able to determine what would be required for profitability, how much the cost of a ride would have to increase to cover expenses, and if increasing prices would negatively affect demand. Therefore, the real-world revenue is unknown, and the losses reflect the effects of subsidies.
2. Business model under threat in California
Lyft and Uber have scaled their companies, but it comes with the variable cost of human labor. Ideally, you want fixed costs for R&D on platforms, software, hardware and other products to create the margins that technology is known for.
Lyft and Uber are mobile applications, but the business model is more of a large-cap human-resources department with many variables around wages, and now, regulations due to independent contractor classifications.
The systemic issue is that the mobile app holds very little intellectual property, with the primary value of the product resting in the mobilization of a massive workforce of nearly 1.9 million people, per Lyft’s S-1 filing, and 3.9 million drivers with Uber. We know there isn’t intellectual property in ride sharing, as there are many such companies globally: China’s Didi, Singapore’s Grab, India’s Ola, Europe’s Bolt (previously Taxify) and MyTaxiApp, and Dubai’s Careem (which is being bought by Uber).
Therefore, the value of the companies is in the workforce, not the technology. This also happens to be the biggest risk.
Uber and Lyft face legislation in California that may require them to reclassify independent contractors as employees. The ride-share companies maintain they are exempt from the law, which is set to go into effect in January. That could lead to a statewide ballot initiative in 2020.
It’s a stretch to think California taxpayers would side with Uber and Lyft. California is especially burdened by workers who make less than minimum wage in a state with high living costs. The lack of health care, and Social Security and tax withholdings from a workforce the size of Uber’s and Lyft’s means costs must be absorbed by taxpayers. Meanwhile, hundreds of Uber and Lyft drivers have organized protests in the state, which doesn’t help for voter sentiment.
Most importantly, these companies have no profits to absorb a change in the business model, such as being required to pay minimum wage or health care. Uber is offering $21 per hour as a compromise, instead of facing the overhead of becoming an employer, but it’s unclear how much Uber pays per hour now to calculate the impact. This would also set a precedent for workers in other states, who might pursue a similar arrangement.
On the one hand, the companies are subsidizing rides up to 60% to lure customers, and on the other, workers are protesting. That is not a good formula.
3. Autonomous vehicles are farther away than they appear
This leads us to the only hope for ride sharing to become profitable: To remove the human driver through autonomous vehicles (AV). Over a year ago, I wrote that regulation hurdles between levels 2 and 3, and delayed deployments, will put immense pressure on stocks that are overvalued based on AV speculation.
For background, we are at Level 2 for commercial purposes. Audi was set to be the first company to release a Level 3 system, which was denied by regulators in early 2019. To remove the driver, we will need to be at Level 4 or Level 5. (See this article for AV levels.)
ABI Research, an advisory firm that reports on market-foresight trends, predicts 8 million consumer vehicles with Level 3 to Level 5 autonomy will ship in 2025. Compare this to the 94.5 million vehicles sold in 2017, which equates to 8.5% of sales.
This is a small and fairly insignificant percentage of market share to be chasing six years ahead of deployment. Yet, headlines are a continual churn of autonomous vehicle “moments” — every partnership, every mile driven, every make and model that adds another feature. The headlines don’t make it clear we are not able to commercially release Level 3 AV right now — and that includes Tesla TSLA, +1.28% and Google’s GOOG, +0.51% GOOGL, +0.49% Waymo.
It’s surprising Uber and Lyft would attempt to fund autonomous vehicles. After all, they’re not high-tech companies with robotics and artificial-intelligence experience. They certainly don’t have the reserves to fund R&D, as Google/Waymo do, or the talent to compete with AV specialists that have been working on this problem for over a decade, such as Torc Robotics, which works with industrial systems for companies including Caterpillar CAT, -0.72% and Daimler Trucks.
Keep in mind, Tim Cook of Apple AAPL, -0.81% has called autonomous systems one of the most difficult AI projects to work on. Ideally, there is a successful, core business funding autonomous R&D — as Google has operated at a loss on its AV projects for a long time. Instead, Uber is losing $1.3 billion from the core business, yet has the resources to pursue flying taxis.
From an investment perspective, the better bet is a successful core business that can absorb the R&D on other projects.
4. Uber lockup expiration is looming
In July, Lyft’s stock was trading at $67. After the Aug. 19 lockup expiration, in which early investors could sell their shares, it’s now at $48.
Early investors have lost a lot of money on Lyft, whose shares traded at $79 the day the company went public. On March 14, I warned my readers two weeks in advance of the IPO that these weak fundamentals and product-market-fit issues were insurmountable, even when Wall Street analysts predicted the stock would reach $100.
My next warning is the Uber IPO lockup, which expires the first week of November. While I don’t expect an immediate dump on day one of the lockup expiring, there should be a noticeable unwinding in the months that follow. This is a possibility for all IPOs, even ones with solid financials. So one can only imagine what might happen to a large-cap stock that’s losing $4 billion per year while potentially facing deeper losses from California legislation.
This article appeared on MarketWatch September 20th, 2019.
Gains of up to 2,880% from our Free Newsletter.
Here are sample stock gains from the I/O Fund’s newsletter --- produced weekly and all for free!
2,880% on Nvidia
750% on Bitcoin
*as of Nov 20, 2024
Our newsletter provides an edge in the world’s most valuable industry – technology. Due to the enormous gains from this particular industry, we think it’s essential that every stock investor have a credible source who specializes in tech. Subscribe for Free Weekly Analysis on the Best Tech Stocks.
If you are a more serious investor, we have a premium service that offers lower entries and real-time trade alerts. Sample returns on the premium site include 4,490% on Nvidia, 900% on Chainlink, and 1,120% on Bitcoin. The I/O Fund is audited annually to prove it’s one of the best-performing Funds on the market, with returns that beat Wall Street funds.
Get a bonus for subscription!
Subscribe to our free weekly stock
analysis and receive the "AI Stock: 5
Things Nobody is Telling you" brochure
for free.
More To Explore
Newsletter
Semiconductor Stocks Exposed To China With Tariffs Incoming
Semiconductor stocks will come into focus in 2025 as geopolitical tensions rise. China is likely to retaliate following Trump’s most recent threats of 10% additional tariffs to all Chinese goods. This
Shopify Stock Is A Black Friday Beneficiary That Faces Key Test In Q4
Black Friday and Cyber Monday e-commerce sales broke records again this year, with Adobe pointing out that US sales increased 10.2% YoY to $10.8 billion on Black Friday while Cyber Monday sales rose 7
Nvidia’s Stock Has 70% Potential Upside For 2025
Nvidia once again posted a $2 billion beat to consensus revenue estimates in Q3, reporting YoY growth of nearly 94% to over $35 billion in revenue. Data center revenue more than doubled in the quarter
Nvidia Stock Is A Buy On Dips Before Blackwell Arrives In 2025
Nvidia’s stock broke to all-time highs recently, trading at $148 in early November and $147 yesterday. The stock has left many investors wondering “what comes next” after the unrelenting, historic sur
AI Spending To Exceed A Quarter Trillion Next Year
Big Tech’s AI spending continues to accelerate at a blistering pace, with the four giants well on track to spend upwards of a quarter trillion dollars predominantly towards AI infrastructure next year
Palantir Stock: How High Is Too High?
Palantir proved again in Q3 that it’s undeniably one of the stronger AI software stocks in the market outside of the cloud hyperscalers. The company reported visible AI-driven growth and persisting bu
Bitcoin Bull Market Intact as Risk Increases
In December 2022, we boldly stated that “Bitcoin is a buy” when it was trading around $17,000. We were positioning for a new bull cycle and projected a target between $75,000 - $132,000. Despite Bitco
Tesla Stock: Margins Bounce Back For AI-Leader
Tesla is arguably one of the most advanced AI companies in the world, yet its stock is dictated by margins. Over the past three years, Tesla’s average gross profit per vehicle has declined by 60%, fal
This Stock Is Crushing Salesforce, MongoDB And Snowflake In AI Revenue
In this article, I break down how Palantir’s AIP is putting it a step above peer Salesforce, MongoDB and Snowflake with visible AI growth, and its undeniable ‘secret sauce’.
Nvidia, Mag 7 Flash Warning Signs For Stocks
In this report, my team will address the risks brewing in the market. The strange behavior in the bond market could be signaling that the FOMC has made a policy error. This coupled with key tech stock