Is Uber or Lyft stock a Buy?

Reading Time: 7 minutes

Should you buy Uber stock following the IPO? Both Uber and Lyft have caught a lot of attention in the wave of tech IPO’s that have hit the market this spring. Lyft already IPO’d and surged initially, but has since fallen 33%, which in turn hurt Uber’s expected valuation. Uber priced its IPO at $45 – the low end of its valuation range

I’ll try to help provide some insights into the businesses and “what you need to believe” to invest in these companies. The bull case for Uber stock and Lyft stock is that “transportation-as-a-service” or “TaaS” is a new market. While Uber and Lyft are fiercely competitive today, and unprofitable, the market is really 2 players (in the US) and that should ease over time (“think of the great duopoly’s of Visa and Mastercard” the bulls will tell you).

So let’s rehash the investment case:

  • “TaaS” is a large market and growing
  • Upside possible from the “end” of car ownership (and entry of autonomous cars)
  • These are “platform businesses” that can leverage their user base to expand into adjacent markets (UberFreight, UberEats, third-party delivery, scooters, bikes etc.)
  • Only two players today. Now that they are public, competitive behavior should cool as the CEOs will be beholden to new investors
  • This isn’t priced in to Uber or Lyft stock yet because investors don’t realize the potential

I struggle with the last point for several reasons. Uber and Lyft are not actually the only two players – taxi’s do still exist. While you may not take one every time to the airport, they wait for you when you arrive in a new city as the marginal provider of transportation. When the Uber wait is too long or there is surge pricing, yellow cab is still there… My point is that pricing for Uber and Lyft can only go so high. And who knows if the companies that have succeeded in China and elsewhere are waiting in the wings to enter the US market (and drive down prices). 

If Uber and Lyft can’t raise the the price of your ride, maybe they take more of the driver’s fare. That’s possible, but they also have to incentize the drivers to drive and beat the hell out of their car. As I calculated in my post on what driver’s might make, it is a decent wage, but if you squeeze that too much, they just won’t drive anymore.

Do I think Uber is the Facebook of transportation? No. Facebook increased the return on investment for all advertisers and increased the total pie. Uber drove down the price of taxi medallions because it added significant supply to the market (everyone can now be a driver) and drove down prices.

The other bull case for Uber or Lyft stock is that they will win the race to autonomy. The reason why this would be so important to the stocks is that autonomy is viewed as a winner-take-all business (think google maps – do you really need another provider?).

There again, I struggle. Calling the winner in autonomy is anyone’s guess. Why would I bet on Uber or Lyft winning vs. Google? I can’t, I can only speculate. And to speculate, I would have to bet that others are not pricing it into the stock. Google spends over $1bn on Waymo a year. I have no insight into this market

Next, to the notion of Uber reducing car ownership. There have been anecdotes of people forgoing car ownership, but that doesn’t seem to be impacting car purchases yet. Car sales, measured by units, are at all-time highs. It’s slowing, but its because we are selling nearly 17MM cars per year and have been for ~5 years. 

Prices too have marched up since the Great Recession. In December 2018, the average price paid for a car was $37.5k, up from $30K in 2013. If Uber and Lyft are having an impact, it is hard to decipher this from the data.

Indeed, while Uber is growing bookings significantly and reported revenue, their growth rates have slowed dramatically. As shown below, Q1’19 adj. rideshare revenue growth is only +9%.

That is materially different than the +21% for the reported bookings. This is revenue that is adjusted to reflect driver earnings as well as incentive comp. An example is provided below: 

As you can see, the driver pay and incentives matter materially here. “Excess” incentives are defined as “payments, including incentives but excluding Driver Referrals, to a Driver that exceed the cumulative revenue that we recognize from a Driver with no future guarantee of additional revenue.” 

Is this number improving for the Company? Hmmm…

Granted, this does include incentives for UberEats and Rideshare incentives are expected to improve for Q1’18 compared Q1’19, but hard to see that the conditions overall are less competitive.

As an aside, I recently had an Uber driver tell me he was going to buy the Uber IPO (he admitted he didn’t study it much, just knew they were growing). That actually could be an interesting employment hedge… if the drivers are hurting, Uber may be doing well – and vice versa!

There are two players so we should compare what they look like. For starters, Uber is much bigger than Lyft and is global. How has that scale played out on the financials? Still a bit too early to see benefits. It’s clear you can see Uber expanding into other markets, while Lyft is focused on the core. 

Clearly, they both burn cash. This actually surprised me a bit. Before the financials were released, I would have viewed the companies as platforms and apps, or asset-light businesses, whereas all the asset-heavy stuff is left to the drivers. Similar to AirBNB, where the homeowner faces the cost of serving the guest and the platform just takes a fee. 

Clearly, that is not the case. They spend a lot on data centers and other infrastructure (more on cash flow at the bottom of this post

We should compare and contrast the two players as well (feel free to add anything in the comments):

Pros of Uber:

  • Larger scale – ride sharing is 5x the size of Lyft.
  • More diverse business with options – UberEats, UberFreight, autonomous… with the added scale. You could argue Lyft is also entering these, but Uber appears to have the lead
  • Valuation seems less demanding – basing that only on Lyft’s valuation and other travel comps

Cons of Uber:

  • Clearly losing share to Lyft
  • Operates in highly competitive markets – as if ride sharing wasn’t competitive enough, Uber got into UberEats (a zero barrier to entry business, but I get why they did it), and freight brokerage

Pros of Lyft:

  • Singular Focus – nothing other than “transportation-as-a-service”. There is some support of companies that focus on one goal tend to execute on that rather than be stretched in all directions
  • Increasing Share – overthe past 2 years, Lyft’s share has grown from 22% to 39%, taking advantage of Uber’s PR mishaps while also being competitive
  • More Upside in Core Market – Similar to the bullet above, if Lyft continues to take share, it seems clear that it will be at the expense of Uber. Given Lyft is 1/5 the size of Uber, there is plenty of share to give

Cons of Lyft:

  • Smaller company / less scale
  • No “other bets” – Similar to google’s “other bets” segment, Uber benefits from its core delivery business, cross-synergies with UberEats, and other bets.  Lyft has autonomous capability, but its anyone’s guess on who wins the war here.
  • Entering more capital intensive businesses – with the entry into scooters and bikes in scale, it appears Lyft is going to now be reinvesting in that business.  (Funny enough, I saw a piece that said Bird Scooters last less than a month)

Perhaps Uber should trade at a significant premium to Lyft due to scale, global presence, and “Amazon” view of transportation. Jeff Bezos wanted the everything store, Uber will be the transportation store. Conquer all, forget profits in the near term, it is all about the next 10+ years…

At $45/share, that means Uber is valued at $82.4BN while Lyft is valued at $15.7BN at $55/share. That places them both at exactly 7.3x 2018 sales…

Perhaps investors are saying Lyft will grow core earnings faster. Perhaps they like the market share gains. Perhaps they view Uber’s other ventures as dilutive. Maybe there is negative view on autonomous given Otto was caught stealing trade secrets and that put them behind. Either way, I am a bit surprised to see Uber trading for the same price (long UBER stock / short LYFT stock anyone?).

I will be passing on both Uber stock and Lyft stock. I just don’t see this as a great market and I think it will be forever competitive. It seems like a race to the bottom for both attempts to gain and retain riders and drivers. Yet, there is nothing binding one to either. Therefore, I don’t see much pricing power here, as noted above.

Interesting Insurance Dynamic Not Discussed Often

One last thing — as I was building the cash flow statement for these companies, I noticed working capital changes were an inflow of cash, largely due to changes in an insurance reserve.

At first, it seems that Uber and Lyft are negative working capital businesses (i.e. the more sales grow, they actually get cash in the door like an insurance company that they can reinvest). That could possibly be a great thing. Lo and behold, I learned Lyft and Uber actually have self-insurance.

In other words, when a driver accepts a rider on Lyft, up until the ride is finished, Lyft is responsible for insuring the trip. This is a huge cost.

In fact, cost of revenue is really made up of two main items: Insurance costs and payment processing charges. Payment processing is the merchant fees that credit cards charge. Insurance costs include estimated losses and allocated lost adjustment expense on claims that occurred in the quarter. It also includes changes to the insurance reserves. These latter two items make up the bulk of COGS.

Lyft says in its S-1 that, “By leveraging our data and technology, we are seeking to reduce cycle times, improve settlement results, provide a better user experience, drive down our cost of claims and have fewer accidents by drivers on our platform.”

Clearly, this would be great. But insurance is also one of the items that can be gamed in the future. By reserving less, Lyft and Uber and report higher earnings. This often happens in good times for banks, where they reserve less for bad loans to boots EPS until a recession hits and they realize they didn’t reserve enough.

Analysts typically are wrong in their expectations, but this could be something where they are especially wrong. If analysts think they can leverage COGS more than reality, the forward estimates people are baking in could be too high.

What does an Uber driver make? A look at the real economics of being a driver

Reading Time: 4 minutes

Have you ever gotten in a brand new car when you called an Uber / Lyft and thought, “this is a nicer car than what I drive… how much do they make driving for these apps?” Or maybe you think it is a reasonable way to help pay off the car the driver wants. What does an Uber driver make anyhow?

With the IPO of Lyft and Uber , I thought I would do a fun post and examine what an uber driver hypothetically makes driving for these apps makes. I’ve never driven for one of these platforms, so the assumptions are my own. In order to be somewhat reasonable, I will have to simplify a bit.

It isn’t possible to be exact here due to geographic differences, driver differences and automobile differences.

To set out some assumptions, I’ll assume:

  • The driver uses a Toyota Camry (the most popular model)
  • The car is 2 years old (important from a depreciation perspective)
  • The driver drives 20 hours per week (per Lyft S-1, this is 91% of drivers)
  • Average trip is 5 miles, but the driver also has 2.5 miles of “downtime”, which can means that he or she must drive around to find the next rider
  • The driver must get an oil change every 5,000 miles and you have to change your brakes 1x per year due to extra miles put on the car. You also need to change your tires due to the mileage assumptions
  • The Platform Commission is set at 40%.
    • Some may say, “hey, I think Lyft and Uber only take [25]% of the fare.”
    • Well apparently, that is not true. That is refuted in many places by real drivers online (here and here), and many note that they take up to 50% of your ride.
    • That said, they don’t take any of your tip money. I haven’t really modeled much in tips, so call my 40% figure instead of 50% some conservatism.

Alright so let’s break down what this looks like on a day / week / month and yearly basis. Some of the assumptions should be self explanatory here.

As you can see from the above, before we get into other maintenance costs, the uber driver makes about $21,258 per year, or $22 buck an hour, for driving. That’s not too bad and honestly higher than what I was expecting.

Now let’s fold in maintenance costs + depreciation.

In total, it looks like you can be making ~$18/hr by driving for one of the platforms. Not terrible, but also not what some people may have expected (Lyft has said its drivers can earn up to $35/hr… that seems very hard unless you ignore all expenses).

Touching on depreciation for a moment, I think its a non-tangible costs that many forget. In this scenario, we’re talking about starting with a 2 year old Toyota Camry. It has already passed the steepest part of its depreciation curve. Drivers typically add 10,000 to 12,000 miles to their car per year, and in this case I am assuming the driver adds and extra 50,000. That will accelerate normal depreciation and that is why I used 15% instead of ~5% between 2017 and 2016 values shown in the Camry depreciation curve shown below (source of this info can be found here).

Imagine if you bought that Camry new though… you lost 40% of your value in 2 years (perhaps more driving for a ride-hailing service). Now think about this added cost, which although not tangible is very real, and you picked up a Mercedes instead.

Here is that curve for a Mercedes Benz C-Class. While less sharp in the first 2 years, buying a two-year old model does not save you from further depreciation. You are also talking about bigger dollars. Imagine buying that C class new in 2018 for $49k….. it is now worth $36k. If you told yourself you would drive for Uber to help pay for it new, well you just wiped out its value. (Uh oh, now this has turned into a lesson on why you don’t buy new cars…)

Anyway, I must say that the $/hr earned via a ride hailing app was actually higher than I expected. Sure, you don’t get health insurance or any other benefits and maybe you have some additional tax work to do, but might be worthwhile. If you have an older car that’s nearly fully depreciated, yet acceptable to Uber & Lyft, I could see the merits there as well.

What do you think? What other costs / inputs am I missing?