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Lyft steering smoother ride to profitability by 2021 than Uber: analysts

Uber Technologies Inc.'s more complicated business model will steer the company down a bumpier road to profitability than its ride-hailing rival Lyft Inc. as both companies aim for positive earnings in 2021, experts said.

Lyft announced Oct. 22 it intends to post a profit on an adjusted EBITDA basis in the fourth quarter of 2021, while Uber said Nov. 4 it expects full-year 2021 adjusted EBITDA to be positive.

Lyft's strict focus on ride-hailing in North America will likely help the company achieve its profitability target, while Uber's more complex ventures, which include loss-making food delivery and logistics businesses, could slow down its goals, analysts said. Uber and Lyft executives, meanwhile, remain confident in their goals as the ride-hailing industry evolves.

"I think as an industry, people look back and see there was a lot of coupons and incentives in the market. For us, it was about building up that critical mass so that we could offer three-minute ETAs to our customers so that we could compete with the baseline similar product. We're past that. ... So there's a focus on profitable, healthy growth," Lyft co-founder and President John Zimmer said during a Nov. 20 RBC Capital Markets conference in New York.

The San Francisco-based companies are promising profitability after their stock prices dropped sharply following their IPOs as the companies continued to post billions in losses. From 2016 through the first nine months of 2019, Lyft lost $2.86 billion on an adjusted EBITDA basis, while Uber's adjusted EBITDA losses for the same period totaled $9.12 billion, according to data compiled by S&P Global Market Intelligence. Including one-time costs such as share-based compensation and incentives, net losses for the period rose to $10.8 billion for Uber and $4.5 billion for Lyft.

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Uber's shares closed at $29.11 on Nov. 25, down 35.3% from its May 10 offering price of $45, while Lyft's closing price of $48.94 was down 32% from its offering price of $72 on March 29. Since going public, Uber's market capitalization dropped 34.4% to $49.66 billion as of Nov. 25 and Lyft's dropped 29.2% to $14.57 billion, according to Market Intelligence data.

A Lyft spokesperson told Market Intelligence the company did not have anything more to share about its path to profitability, and Uber did not respond to a request for comment.

Different rides to profit

Lyft and Uber have two distinct business models that will impact the way forward, industry experts said. Lyft is focusing on ride-hailing in North America, whereas Uber is a global company with several businesses including food delivery and services for truck drivers.

"Lyft has a clear, defined path to profitability," Santosh Rao, head of research at Manhattan Venture Partners, said in an interview.

Uber, on the other hand, has "too many moving parts," he said, adding that the ride-hailing business is profitable but the other ventures are weighing Uber down.

Even so, Rao said he thinks both companies will reach their profitability goals around 2021.

"As long as there is a path to profitability, a few months here and there does not matter," he said.

Fourth-quarter earnings will be key for Lyft since stock compensation and IPO lockup period expenses will be behind them, Rao said. While Lyft's lockup period expired Aug. 19, Uber's ended Nov. 6.

Uber can use its ride-hailing business to subsidize the less profitable parts of the company, said Brad Erickson, a senior research analyst with Needham and Co. Uber's rides business posted adjusted EBITDA of $631 million for the third quarter of 2019, according to its earnings report. Uber Eats, meanwhile, lost $316 million in the third quarter and Uber Freight lost $81 million.

Erickson said there has been a lot of focus on Uber's profitability but that the company is focused on growth.

"You can look at a lot of companies in the rearview mirror and say, 'Yeah, they were burning cash until they weren't' " he said in an interview. "That's kind of how it works. That's why you invest in growth."

The complexity and global nature of Uber's business is hurting its stock compared with Lyft's simpler business model, Erickson said.

"It kind of looks like [Uber is] throwing spaghetti at the wall, but in reality, if you step back from it, they're trying to create the largest transportation platform in the world," Erickson said.

Rao voiced a similar sentiment, saying Uber "wants to be the Amazon of transportation."

"They want to be everything, they want to be everywhere," he said. "That's going to take a while."

Ali Mogharabi, a senior equity analyst with Morningstar, said Lyft's fourth-quarter 2021 profitability goal is realistic.

"There is some pricing stability or rationalization as it appears that neither Lyft nor Uber is aggressively pricing to grab riders, mainly due to the network effect that both companies have," he said.

This effect is when riders attract drivers, which improves estimated time of arrival, which helps attract riders, and so on.

"So, the pricing, and what we think may also be higher ride frequency, likely will improve Lyft’s monetization of its riders, which are still growing year over year," Mogharabi said.

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Uber made its trading debut May 10 on the New York Stock Exchange.

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Eats gobbles up Uber's profits

For Uber, the successful ride-hailing part of the business is weighed down by the Uber Eats business.

Uber's adjusted EBITDA margin for its ride-hailing business, which the company says is adjusted EBITDA as a percentage of adjusted net revenue, was 22% for the third quarter, according to the company's earnings.

"They're just going to continue to grow that business, and I would expect that EBITDA margin percentage to continue to rise," Erickson said of Uber's rides business. "That's the single biggest contributor to its profitability."

The pressure from Eats' continued losses could delay Uber's profitability goal until 2022, Morningstar's Mogharabi said.

"Uber Eats' take rate is improving, but it's more than offset by aggressive promotions and higher overall customer acquisition costs in what appears to be a very competitive market," he said.

Mogharabi said competition from food-delivery service Grubhub Inc. could force Uber to continue cutting prices and offering promotions to entice Eats customers.

Grubhub posted $1 million in profit on $322 million in revenue in the third quarter while Uber reported a net loss of $1.16 billion. Uber Eats' revenue was $645 million in the third quarter of 2019, according to the company's earnings. The companies' revenue comprises fees charged to restaurants and customers. Grubhub is mainly U.S. focused, with the delivery service available in more than 2,700 U.S. cities and London, while Uber Eats is available in 13 countries.

Uber Eats also remains in a testing phase in some international markets, Mogharabi said.

Erickson said the Eats business is losing a lot of money considering it is not as big as the rides business, which could prompt the company to make some changes.

"Over the next 12 to 18 months, they're going to take a hard look at concentrated markets for [Uber Eats] where they lose a disproportionate amount of money," he said.

Erickson said he expects Uber to either make acquisitions to improve the Eats business or exit some markets.

"So one way or the other, one year, two years, three years from today, Uber Eats will not be losing anywhere close to what they're losing right now," he said.

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Lyft started trading March 29 on the Nasdaq.

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Executive confidence

Uber CFO Nelson Chai said the Eats business is less than 4 years old and the food-delivery category has grown quickly.

"There is a lot of incentive spend in the marketplace," Chai said Nov. 20 during the RBC Capital Markets conference. "Our confidence around where we think Eats can be long term is really based on seeing what's happened on rides as you pull back on some of the incentive."

There will also be some rationalization over time on the Eats side, Chai said.

"So if you think that the funding world will continue to get tighter, we think that there'll be less money going over to a lot of our food competitors, which we saw on the rides side of the business already," he said.

Uber has "enough levers at our control" to reach profitability in 2021, Chai said, adding that Uber would not give guidance on where exactly profitability will occur.

Lyft's Zimmer said the company's focus on North American consumer transportation benefits the company.

"This focus pays off in this type of use case," he said Nov. 20. "We're not distracted by food, by delivery, by other countries."