Uber, Lyft: Cut-Throat Competition, Heavy Losses Mean Bumpy Ride For Investors

Uber, Lyft: Cut-Throat Competition, Heavy Losses Mean Bumpy Ride For Investors

There is no let-up in the downward spiral of the share values of Uber Technologies (NYSE:UBER) and LYFT (NASDAQ:LYFT). Both ride-hailing companies have lost almost a quarter of their market capitalization during the past month on concerns that there is no clear path for these companies to achieve profitability.

The shares have plummeted since their IPOs: Closing yesterday at $32.24, Uber is down more than 22% from its maiden trade in May, while Lyft has plunged more than 43% from its March start, to end yesterday’s trading at $44.38.

Since they hit the public markets with their IPOs this year, their rides have become ever bumpier as their losses widened and competition grew even stiffer. In the second-quarter reporting season that ended recently, both companies spooked investors with higher-than-expected losses. Uber reported a net loss of $5.24 billion, while Lyft produced a $644.2-million loss — more than three times higher than its loss in the year-earlier period.

This dire financial situation begs this fundamental question: Is the ride-hailing business something that investors should get exposed to, especially when both companies are still facing questions about the basics of their business models?

A proposed California law, for example, could force the companies to reclassify their drivers as employees from gig workers, posing a major threat to their cost structures. The bill passed the California Assembly in May and California Governor Gavin Newsom voiced his support for the move last week.

On the business side, both companies have found it hard to win riders without offering discounts. Uber, which operates globally, is facing cut-throat competition from regional and smaller players.

According to a recent report in the Wall Street Journal, the underlying problem is low barriers to entry. There’s little to stop startups beating Uber at its own game of undercutting the existing offer.

In London, for example–historically one of Uber’s more profitable ride-hailing markets–the company’s position is under siege from new competitors, including a low-cost Estonian company called Bolt. “This kind of threat seems likely to last at least as long as there is venture capital financing to burn,” the report says.

Uber Chief Executive Officer Dara Khosrowshahi says he has a plan to not only survive but grow despite these competitive pressures. The company will use the strength of its evolving “platform,” that he says will one day create the largest modern transportation ecosystem, including its ride-hailing service, its fast-growing food-delivery business, Uber Eats, electric scooters, freight delivery, driverless vehicles and even flying cars.

For Lyft, which hasn’t diverted its focus away from its core ride-hailing business, a path to profitability is probably not as complicated as it is for its bigger rival. In the second-quarter, the company was able to drive strong rider and revenue per rider growth, while significantly cutting back on promotions.

“Lyft may not be the right fit for all investors, given the company’s current materially unprofitable state,” Piper Jaffray analyst Michael J. Olson wrote in a recent note. “But for those with a long-term view, and patience, we recommend owning shares at these levels.”

Bottom Line

Ride-hailing businesses, in our view, aren’t the right investments to be in this year. With competition growing and regulatory risks on the horizon, it’s hard to get excited about either Uber or Lyft. And this harsh reality is what’s crushing their share prices. Investors would be better off waiting on the sidelines and closely watching their operating performance in 2019 before making any bets.