Uber Technologies Inc.'s more complex business model than rival Lyft Inc. gives the company more options to turn a profit in line with its own accelerated timeline, but those same factors could prove to be pitfalls, experts said.
Uber said Feb. 6 that it would be profitable in the fourth quarter of 2020, a quicker pace than the company's previous target of posting a profit in 2021. Experts say Uber's global business — which includes ride-hailing and the loss-making food-delivery and logistics segments — could offer more leeway to reach that goal as the company has more areas to cut costs or drive growth. But Uber's multiple ventures could still prove to be roadblocks toward its goal of positive earnings, according to experts.
There are "more potential banana peels that [Uber] could slip on this path to profitability," Tom White, senior research analyst at D.A. Davidson and Co., said in an interview. "But they also have more levers to pull to get there."
Lyft, meanwhile, did not change its profitability target from the fourth quarter of 2021 during its most recent earnings report Feb. 11. While Lyft's lack of update disappointed some investors who expected the move in response to Uber's revision, experts say Lyft could still beat its own goal by focusing on growth in the North American ride-hailing market.
From 2016 through 2019, Uber lost $9.74 billion on an adjusted EBITDA basis, while Lyft's adjusted EBITDA losses for the same period totaled $2.99 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 totaled $11.90 billion for Uber and $4.90 billion for Lyft.
Both companies continue to aim for profitability as global travel and tourism continue to take hits from the coronavirus outbreak. CEO Dara Khosrowshahi said during a March 4 conference that the virus will hit Uber's ride-hailing business, though Uber Eats is likely to benefit.
Lyft said in a Feb. 28 regulatory filing that the outbreak has led to production delays, while CFO Brian Roberts said March 3 that the virus has not affected ride-hailing demand.
Neither company has said the virus or other factors have changed their most recent targets. There are no new updates about Lyft's path to profitability, a company spokesperson said in an email. An Uber spokesperson also said the company had no further comments on its profit targets.
Pressure mounts on Uber to post a profit
Uber is facing investor pressure to show a clear path to profitability, experts said. The company opened at $42 per share on its May 10, 2019, trading debut. The stock dropped to an all-time low in November 2019 at $25.58. Uber closed at $34.53 on March 4.
"They're clearly getting signals from the market and some investors that they need to more tangibly and concretely show the pathway to being a sustainable, profitable cash flow business," White said.
The question is how much does the company need to rely on cutting costs and exiting less-profitable markets versus growing, he said.
In 2020, Uber's balance sheet will get a boost from selling its Uber Eats business in India, along with discontinuing service in Korea, White said. Several rounds of job cuts will also help slash costs, he added. About 1,185 jobs were cut throughout 2019.
The biggest move Uber can make is to rationalize incentives for drivers and customers, along with slimming down the Uber Eats business, Wedbush Securities analyst Dan Ives said.
Uber's rides segment brought in $742 million in adjusted EBITDA during the fourth quarter of 2019, up from $195 million year over year, while the Eats business lost $461 million during the quarter, compared to a loss of $278 million in the same quarter a year earlier.
"That continues to be a money-losing business that's been a clear cash drain," Ives said. "Ride-sharing on the core is profitable — the issue continues to be Uber Eats."
Even so, Ives said Uber is unlikely to completely sell off the food-delivery business because it is strategically important to the company's overall strategy.
"It's all part of that broader, holistic vision between Eats, [Uber Freight] and eventually autonomous [vehicles] as well," he said.
The company's other segments, including its Uber Freight business, which matches carriers with shippers, and its Advanced Technologies Group, also are dragging Uber's earnings down. In the fourth quarter of 2019, the freight business lost $55 million while Uber's technology business, which includes work on self-driving cars, lost $130 million.
Santosh Rao, head of research at Manhattan Venture Partners, said there will be consolidation in the food-delivery space in general, with reports of such companies as Uber, DoorDash Inc. and Grubhub Inc. in discussions to consolidate services.
"I don't know if [Uber] is anticipating that or they already have a plan so that they can really trim that cost, or maybe give up some routes and focus on profitable markets as opposed to everywhere," Rao said in an interview.
White said Uber would likely buy up other food-delivery competitors or at least be one of the remaining players after companies consolidate.
"They're just too big," he said. "They have a big balance sheet."
Rao echoed that Uber has more to work with than Lyft.
"They just have a bigger net, with more room to rationalize than Lyft does," he said.
Lyft's focus is on ride-hailing in North America. Source: Lyft |
Lyft's 'more balanced approach to profitability'
"I think they're trying to sort of take a more balanced approach to profitability between growing into it and maintaining discipline on operating expenses," White said.
The company's "low-cost mindset" is a key part of its path to profitability, CFO Roberts said during Lyft's fourth-quarter earnings call Feb. 11. Lyft tries "to stretch every dollar more than our competitors," he said at the time.
As a public company, Lyft also faces investor pressure to turn a profit, Ives said. Lyft shares debuted March 28, 2019, at $72 apiece but have fallen since, hitting an all-time low of $35 on Feb. 27. Shares closed at $40.27 on March 4.
White said Lyft could accelerate its profit timeline, but the company would probably see an impact on growth rate since it is gaining market share and growing faster now.
"They don't want to give up market share gains for the sake of trying to match Uber's target," he said.
If Lyft made cuts that sped up its profitability timeline by a few quarters, it could result in a smaller business and a potentially less attractive longer-term market share position, White added, but he would not be surprised if Lyft achieved EBITDA profitability before the fourth-quarter 2021 target.
Lyft needs to stay on their current track of beating quarterly earnings estimates, Rao said.
"They don't have anything to sell, unlike Uber that has these different markets all over the world that they're getting out of," Rao said.
The smaller ride-hailing company probably did not want to box itself in with an updated profit target, Ives said.
"I ultimately think it's conservative in terms of their forecast," he said. "Our sense is their conservative forecast after Uber was definitely disappointing, but I think part of it is they just didn't want to box themselves in as they grow out the business."