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Uber vs Lyft - Who should investors hail?

AInvestThursday, May 9, 2024 4:52 pm ET
5min read

Uber ($UBER(UBER)) and Lyft ($LYFT(LYFT)) are both prominent players in the ride-sharing industry, and their business models share several similarities but also have notable differences. Over the past few years, Uber has outperformed Lyft, but recent management changes and business model restructuring at Lyft have shown promising improvements, suggesting it may be closing the previously wide gap. This past quarter, in particular, has highlighted Lyft's progress. We aim to compare these two leading ride-hailing companies to determine which currently presents a better investment opportunity.

Here"s a comparison and contrast of their business models:

Similarities

Both Uber and Lyft operate on a platform-based business model where they connect drivers (supply) with passengers (demand) without owning the vehicles. This allows for lower capital expenditure compared to traditional taxi services.

Both companies have diversified beyond basic ride-sharing. They offer multiple levels of service, such as economy rides, luxury rides, and carpooling options, to cater to different customer needs.

They rely heavily on technology with mobile apps that include features for booking rides, tracking ride status, and managing payments. This technology stack also supports dynamic pricing models that adjust fares based on current demand conditions.

Both utilize a gig economy model where drivers are treated as independent contractors rather than employees. This reduces operational costs like benefits and salaries that are typically associated with employment.

Differences

Uber has a broader global footprint, operating in many countries around the world. It has also expanded into other logistics and transportation sectors, such as food delivery (Uber Eats) and freight. Lyft focuses primarily on the North American market. It has traditionally concentrated more on transportation and less on diversifying into unrelated fields, although it has also ventured into bike-sharing and scooter services in certain areas.

Historically, Uber has taken a more aggressive approach to entering new markets, often flouting local regulations and dealing with the consequences later. This has led to legal challenges and a sometimes negative public perception. Lyft has generally pursued a more conciliatory approach toward regulators and has cultivated a friendlier image as a more ethical alternative to 

Uber often engages in aggressive pricing strategies and extensive marketing campaigns. It has also formed significant partnerships with other industries, such as automotive companies for self-driving technology. Lyft tends to focus more on community and user experience, promoting values such as inclusivity and safety. It has also engaged in partnerships but often with a focus on sustainability and social impact.

Uber's larger scale and diversity of services have allowed it to generate more revenue, though it has also faced significant financial losses in many of its operational years. Its approach to achieving profitability includes aggressive cost-cutting and efficiency improvements. Lyft has also faced challenges in achieving profitability, focusing more on improving operational efficiencies and cost management within its more focused business model.

Uber Q1 Results

Uber's recent Q1 earnings report highlighted a setback in its path to profitability, as the company posted a significant earnings per share loss of ($0.32), primarily due to unrealized losses on equity investments and increased litigation costs. This underperformance was coupled with a Q2 gross bookings forecast that fell short of expectations, indicating a slowdown in momentum. In contrast, Lyft surpassed its quarterly estimates, suggesting it is benefiting from operational improvements such as shorter wait times, minimum wage guarantees for drivers, and new app functionalities.

During Q1, Uber reported a 26% year-over-year increase in Mobility Gross Bookings in constant currency, totaling $18.7 billion, although this was slightly below expectations. Factors such as weaker demand during Brazil's Carnival and shifts in the timing of Easter and Ramadan affected the results. Despite these challenges, Uber's Mobility revenue margin improved by 130 basis points year-over-year to 30.2%, and adjusted EBITDA rose by 82% year-over-year to $1.4 billion, surpassing the company's own forecasts. In the Delivery segment, Gross Bookings grew by 17% to $17.7 billion, slightly above estimates, supported by new user growth and higher order frequencies, and was further boosted by a new partnership with Instacart.

Looking ahead, Uber's guidance for Q2 suggests modest expectations with gross bookings projected between $38.75 billion and $40.25 billion, which is slightly below analyst expectations. The company anticipates a slight quarterly decrease in Mobility's adjusted EBITDA due to increased investments, even as it aims for an adjusted EBITDA of $1.45 billion to $1.53 billion for the quarter, reflecting growth of 58-67%. This guidance reflects Uber's cautious but continuing efforts to balance growth with profitability, amidst a competitive and shifting market landscape.

Lyft Q1 Results

Lyft's Q1 earnings report showcased notable improvements across several metrics, indicating the potential effectiveness of the new management's strategies, despite challenges with competitive pricing and cost pressures. The company reported earnings of $0.15 per share, which was significantly higher than the FactSet consensus of $0.06. Revenue saw a substantial year-over-year increase of 30%, reaching $1.3 billion and surpassing expectations. Gross bookings also grew by 21% year-over-year to $3.7 billion, reflecting strong demand, while adjusted EBITDA rose to $59.4 million from $22.7 million in the previous year's first quarter, both figures exceeding guidance.

Amidst these financial gains, Lyft reported a 23% increase in the number of rides year-over-year, signaling robust demand across various use cases. For the second quarter, Lyft anticipates gross bookings to be between $4.0 billion and $4.1 billion and projects adjusted EBITDA to be between $95 million and $100 million. The company's focus on customer satisfaction has led to the highest driver levels in over four years and the fastest pick-up times in the same period, contributing to greater pricing stability and a more competitive market position.

Looking forward, Lyft's management is gearing up for an Investor Day on June 6, where they are expected to discuss future strategies, potential international expansion, and long-term financial targets. Despite the positive trends, the company remains cautious, with a price target adjusted to $18 based on future EBITDA expectations, reflecting a significant discount compared to its peers. This caution stems from the need to demonstrate consistent performance improvements and effective margin management in the coming quarters.

The Tale of the Tape

  • Market Cap: Uber"s market cap is significantly larger at $141.9 billion compared to Lyft"s $6.97 billion. This reflects Uber's broader market presence globally and its diversified business operations beyond just ride-sharing.

  • Revenue and Bookings Growth

  • Q1 Revenue Growth: Lyft showed a higher revenue growth rate at 30% compared to Uber"s 15%. This could indicate that Lyft"s strategies or market segments are yielding better revenue growth, despite Uber's larger scale.

  • Q1 Bookings Growth: Lyft also leads in bookings growth with 21% compared to Uber's 17%. This suggests that Lyft may be expanding its customer base or increasing utilization rates more effectively than Uber during the period.

  • Profitability and Margins

  • Q1 Adjusted EBITDA: Lyft"s adjusted EBITDA growth was substantially higher at 161%, compared to 82% for Uber, indicating stronger efficiency improvements or cost management in Lyft over the short term.

  • Q1 Gross Margin: Lyft also reports a higher gross margin of 32.30% versus Uber"s 30.20%. Higher margins for Lyft might reflect more effective cost controls or a higher yield on its services.

  • Shares and Valuation

  • Shares: Uber has significantly more shares outstanding at 2.0 billion compared to Lyft"s 391 million, reflecting its larger company size and possibly a broader base of investment.

  • Forward P/E and Price/Sales: Uber has a higher forward P/E of 32.6x compared to Lyft"s 19.1x, suggesting higher earnings expectations priced into Uber's stock. The Price/Sales ratio also is higher for Uber at 3.7x versus Lyft"s 1.49x, further emphasizing higher valuation multiples reflecting perhaps Uber"s diverse business lines and stronger global footprint.

  • Stock Performance

  • 52-week High/Low Performance: Both companies are currently below their 52-week highs (-16.98% for Lyft and -17% for Uber). However, both are well off the lows. 

  • Yearly and YTD Performance: Lyft has outperformed Uber on a year-to-date basis with a 15.30% increase compared to Uber's 10.73%. Annually, Lyft shows an impressive surge of over 100%, vastly outperforming Uber"s 78.51% increase.

  • Summary

    Overall, while Uber is the larger entity with more diversified operations and a global presence, Lyft is showing stronger growth metrics in revenue and bookings, better profitability improvements, and superior stock performance recently. The higher valuation metrics for Uber suggest that the market may be pricing in stronger future growth or stability from its diversified business model compared to Lyft, which still is perceived more narrowly as a ride-sharing company.

    Heading into their earnings announcements, the market sentiment and positioning for Uber and Lyft reveal stark contrasts. Uber holds an overwhelmingly positive outlook with 47 Buy ratings and only 5 Hold ratings, with no Sell ratings at all. Additionally, only 2.6% of its shares are shorted, indicating limited bearish sentiment among investors. In contrast, Lyft presents a more cautious picture, receiving 9 Buy ratings, 31 Hold ratings, and 3 Sell ratings. Moreover, a significant 15.8% of its float is shorted, highlighting a considerably more skeptical view from the market.

    The diversified revenue stream of Uber should lead it to outperform Lyft over the longer run. But when we step back and look at positioning and sentiment and highlight the recent turnaround performance we see at Lyft, then we would tend to lean toward Lyft as the stock to hail for the next couple of months. 

    Uber's varied revenue streams position it for potential long-term outperformance compared to Lyft. However, when considering the current market positioning and sentiment, coupled with Lyft's recent turnaround efforts, Lyft emerges as the more appealing stock choice for the coming months.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.