A bumpy road to prof­itabil­ity

Ride-hail­ing giants still los­ing money on way to IPOs

South Florida Sun-Sentinel (Sunday) - - Classifieds - By Cathy Bussewitz

NEW YORK — Ride­hail­ing giants Uber and Lyft have re­de­fined what we ex­pect from trans­porta­tion, hook­ing cus­tomers on the im­me­di­acy of on-de­mand rides with a few clicks on a smartphone.

But whether the com­pa­nies can turn their pop­u­lar­ity into profits is a ques­tion in­vestors are ask­ing.

Lyft started to an­swer those ques­tions Fri­day when the com­pany went pub­lic. The stock opened at $87.24 on the Nas­daq, up 21 per­cent from its of­fer­ing price of $72, be­fore clos­ing at $78.29.

Uber will be right on Lyft’s heels as it prepares to start trad­ing.

But while both com­pa­nies are grow­ing fast, they are los­ing money just as quickly and face sig­nif­i­cant chal­lenges to prof­itabil­ity. Last quar­ter, Uber lost $865 mil­lion while Lyft lost $249 mil­lion.

Their com­pe­ti­tion puts pres­sure on prices in a mar­ket where rid­ers can eas­ily switch be­tween apps to find the best fare. Complaints by driv­ers over wages could put pres­sure on Lyft and Uber to bump their pay. And both com­pa­nies are hing­ing fu­ture prof­itabil­ity on the de­vel­op­ment of au­ton­o­mous ve­hi­cles, which would lower driver ex­penses but could take many years to reach mass adop­tion.

“Both com­pa­nies have some in­her­ent struc­tural weak­nesses and cer­tainly when you look within Lyft’s fil­ing, they do not re­veal any plan for ad­dress­ing those struc­tural weak­nesses and mi­grat­ing or cre­at­ing a path to prof­itabil­ity in the fore­see­able fu­ture,” said Stephen Beck, man­ag­ing A ride-hail­ing ve­hi­cle picks up pas­sen­gers in New York City. Lyft’s shares shot up as the com­pany went pub­lic Fri­day.

part­ner of cg42, a man­age­ment con­sult­ing firm. “They’re just mov­ing from ven­ture cap­i­tal­ists keep­ing them afloat to the pub­lic mar­kets keep­ing them afloat.”

Un­prof­itable tech IPOs have been com­mon in the past six years, and the percentage of money-los­ing tech com­pa­nies head­ing into the pub­lic mar­kets is ri­val­ing 2000, when the dot-com bub­ble burst, ac­cord­ing to data from Jay Rit­ter, fi­nance professor at the Univer­sity of Florida.

The main dif­fer­ence be­tween now and 2000 is that the startups in the cur­rent crop are more ma­ture, with many of them hav­ing been around for a decade or more with sub­stan­tial sales, Rit­ter said.

Dig­i­tal scrap­book­ing com­pany Pin­ter­est, which lost $63 mil­lion last year,

re­cently an­nounced plans to list its stock on the New York Stock Ex­change. Also wait­ing in the wings are Airbnb, the short-term rental com­pany; Slack, the mes­sag­ing app; and Zoom, the video con­fer­enc­ing com­pany.

Lyft’s IPO is prov­ing pop­u­lar with early in­vestors. Its fi­nan­cial fil­ing this month high­lighted the com­pany’s growth. Rev­enue tripled from $343.3 mil­lion in 2016 to $1.1 bil­lion in 2017, and then dou­bled to $2.2 bil­lion in 2018. Rev­enue per ride also in­creased, which some an­a­lysts saw as a positive sign that the com­pany is get­ting costs un­der con­trol.

“The ride shar­ing in­dus­try story is growth, and that’s the big­gest value to ex­ist­ing and po­ten­tial in­vestors, frankly,” said Ale­jan­dro Or­tiz, re­search an­a­lyst

at SharesPost.

Lyft has been fo­cused on core mar­kets in North Amer­ica, and has stuck to its mis­sion of pro­vid­ing alternatives to car own­er­ship, of­fer­ing bike-shar­ing and scooter-shar­ing ser­vices in ad­di­tion to ride-hail­ing.

Uber has branched out, ex­pand­ing into food and freight de­liv­ery and ex­per­i­ment­ing with ser­vices from a short-lived peer-to-peer he­li­copter ser­vice to Uber Boat. It also has a greater in­ter­na­tional pres­ence for its ride-hail­ing busi­ness than Lyft, although Uber has ex­ited some mar­kets, of­ten sell­ing op­er­a­tions to a com­peti­tor in ex­change for a piece of the re­main­ing com­pany.

Both com­pa­nies are in­vest­ing in au­ton­o­mous ve­hi­cle tech­nol­ogy. Lyft has been work­ing with Ap­tiv to de­ploy a fleet of au­ton­o­mous

ve­hi­cles in Las Ve­gas, and fa­cil­i­tated 35,000 rides in au­ton­o­mous ve­hi­cles with a safety driver since Jan­uary, 2018. Uber’s au­ton­o­mous ve­hi­cle test­ing was sus­pended af­ter one of its self-driv­ing ve­hi­cles killed a pedes­trian while a backup driver was in the car. Uber re­sumed test­ing in Pitts­burgh in De­cem­ber.

At the same time, the com­pa­nies face stiff com­pe­ti­tion from Gen­eral Mo­tors and Google spinoff Waymo, which have been work­ing in the space longer than Uber and Lyft.

“It may be dif­fi­cult for these guys to catch up,” said Ali Mogharabi, se­nior eq­uity an­a­lyst at Morn­ingstar Re­search.

Mean­while driv­ers, who will rep­re­sent a sig­nif­i­cant cost to Uber and Lyft, are al­ready feel­ing squeezed by wages. Uber re­cently cut driv­ers’ share of trip rev­enues, said James Hicks, an Uber driver who helped or­ga­nize a driver strike in Los An­ge­les.

“It’s in­fu­ri­at­ing be­cause the pay was al­ready hard enough,” Hicks said.

Uber and Lyft have been pro­vid­ing rides at be­low­cost for years in the race to gain mar­ket share and com­pete with tra­di­tional taxi com­pa­nies.

“They’ve been able to do it be­cause there are ven­ture cap­i­tal­ists and in­vestors that have been will­ing to put in moun­tains of money and set it on fire in the ex­pec­ta­tion that they’ll make it up on vol­ume,” said Sam Abuel­samid, prin­ci­pal an­a­lyst at Nav­i­gant Re­search. “But so far that hasn’t hap­pened.”

That doesn’t mean Lyft and Uber are nec­es­sar­ily doomed for fail­ure. Other un­prof­itable com­pa­nies have pulled off high-pro­file IPOs in the past and still seen their stocks per­form well — as long as other key mea­sures of suc­cess such as rev­enue and cus­tomer growth are ris­ing at an im­pres­sive clip.

Ama­zon took over four years from its IPO to turn its first quar­terly profit as CEO Jeff Be­zos em­pha­sized low prices and free ship­ping to get shop­pers hooked on the e-com­merce ser­vice. It now has a mar­ket value of nearly $900 bil­lion, vy­ing with Mi­crosoft and Ap­ple for the high­est in the coun­try.

On the op­po­site end of the tech spec­trum are Google and Facebook. Both waited to launch their IPOs un­til they were highly prof­itable, and have re­warded share­hold­ers hand­somely.

“Wall Street even­tu­ally is go­ing to want to see some prof­itabil­ity,” said Daniel Mor­gan, vice pres­i­dent and se­nior port­fo­lio man­ager at Synovus Trust Com­pany. “That’s what drives stocks, is growth and earn­ings. Not just growth and all these sta­tis­tics that they’ve come up with.”


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