In True Silicon Valley Fashion, Mega Start-Ups Uber and Lyft Sacrifice Profits for Incredible Growth

Uber is racing Lyft to be the dominant player in the ride hailing scene. Although both have similar business models, Uber has a bigger war chest and has been posting more impressive growth. However, there are some key differences in how both companies are approaching challenges the nascent ridesharing industry is facing and, more importantly, Lyft is making huge gains in areas that Uber is still struggling in.

In this clip from the Industry Focus: Consumer Goods podcast, Motley Fool's Vincent Shen and John Rosevear go over last year's earnings numbers for both companies; then they dive into some of the challenges Uber and Lyft are seeing and the different ways the two companies are dealing with them.

A transcript follows the video.

This podcast was recorded on June 7, 2016. 

Vincent Shen: Uber and Lyft have been able to reach the so-called "unicorn" status through their core ride-hailing service. Just to give you a sense of their size and their growth, investors for Uber have included some fellow tech companies like Microsoft and Baidu, a lot of institutional names like Goldman Sachs, BlackRock, government funds, and even some industry leaders like Jeff Bezos. As the biggest player, there has been a lot of fundraising for them, over $10 billion, I think, to date, which has given them quite a bit of a war chest, so to speak, to essentially expand as aggressively as they have.

They have a much bigger worldwide, global footprint than Lyft does, which is still very much focused in the United States, but there were some leaked financials last year that I wanted to share with you from Uber that I thought were pretty interesting, giving you an idea of how this is basically a company that's bleeding growth, but also highly, highly unprofitable, which is common for these Silicon Valley start-ups.

Net revenue, or total bookings, actually, let's start there, were $3.6 billion for the first half of 2015. That's, essentially, everything that the drivers collect. They take a cut that's about 75%, so net revenue actually for Uber was about $663 million for that first half of last year. Keep in mind, that is up from $495 million in all of 2014. Just in that first half of the year, they're already on pace to easily double the prior year amount.

Some of their expenses that are coming in, 24% of their net revenue went to operations support; 27% went to general and administrative expenses, and then here's the kicker: 44% of their net revenue, so some $295 million for that period, went to sales and marketing. The competition in this transportation industry, this niche, you might even call it, has been very intense. Their GAAP losses amounted to about $671 million in 2014, and then $987 million, just for that first half of 2015.

Those are the most recent numbers I could find; whereas for Lyft, on their side, they're at a much smaller scale, where they had about $127 million loss in the first half of 2015 on $47 million in revenue. They think their run rate, in terms of actual gross bookings, is at about $1 billion, and potentially more in the coming year, but they spent more than twice of their revenue, again, over the same period, on marketing. You can see how they're just trying to one-up each other.

Moving forward, just wanted to talk a little bit about some of the challenges that they faced also. I know when we were speaking yesterday about this, you mentioned some of the legal hurdles, the regulatory hurdles, and just also the issue of finding drivers. If you could touch on that more, I'd love to hear it.

John Rosevear: Well, I mean, we've all read about his. Uber and Lyft go into some city somewhere, and the taxi drivers protest and flip out, and the regulators say, "Well, we can't have unlicensed, hackney carriages" or whatever. In some places, this has been easy, and in some places like New York, they've worked to compromise, and in some places like Austin, Texas, for the moment anyway, Uber and Lyft gave up. They said, "The rules you're demanding here are too onerous for us," and they went away.

There's been a lot of that. Uber, separately, has huge issues in China, where they are being outpaced by Didi, the local company, which is much bigger in China, in part because Didi is native to the country and native to dealing with China's very complicated government regulations and pacifying the officials in every city and so forth, to operate, whereas Uber has spent a lot of money trying to keep up and has maybe not kept up. There's a lot of skepticism that Uber is going to be able to really challenge Didi in China, whereas Lyft hasn't even bothered. Lyft partnered with Didi. Didi invested in Lyft, actually. I mean, they've gone right around those.

It's interesting that one of the big differences between the two companies is that Uber is doing things on its own and Lyft is doing them through partners. We talk about retaining drivers, hiring, retaining drivers. That's a huge thing for both of them. One of the problems is people come and want to drive and they don't have what is deemed a suitable car, a car that's fairly nice and fairly new and that has a backseat that passengers can easily get in and out of. Uber has set up various leasing programs, including one that is getting some controversy right now, called Uber Xchange, which is a subprime leasing program for drivers with poor credit. You make weekly payments on your car that I think come out of your Lyft earnings, but it's a huge markup over what you'd pay if you just went to a Toyota dealer or whatever and got the same car.

Evan Niu, our senior technology specialist, has a great article on this on Fool.com right now. It's really the charges that they're charging these drivers are really extreme, and it's the company store thing. You've always got to work more to stay ahead of the company store and your debt to the company store.

Lyft is doing something a little different here. Lyft has, and I will look here to find the name of it briefly, they have something called Express Drive. This is something they've set up with their most recent big investor who is not a Silicon Valley name, it's General Motors (GM -0.17%). GM and Lyft are doing some really interesting things. This is the first thing that came out of that partnership. It's a rental program. They started it in Chicago and they're going to roll it out to other cities over the next year or so.

You rent, by the week, a GM vehicle. It starts at $99 a week, but here's the key. The more rides you give for Lyft during the week, the cheaper it is, and it can go right down to nothing, where Lyft is paying it. That $99 a week includes insurance and maintenance. The terms are more flexible, and this is part of how Lyft has been working against, with some of the controversy that has come around Uber. They're saying, we're the kinder, gentler company. We're a little nicer to drive for. We take better care of our drivers, we provide a little better service. Whether all of that is true is open to some discussion, but that's certainly been their positioning, and it does seem to be working for them. Yeah. The big problem for them both is retaining and finding, drawing drivers. That's part of the expansion. I mean, they want more customers, and they want more drivers to serve those customers.

When we look at some of the deals like Wal-Mart, that's something that could grow into a big side business over time, but of course, they'll need to crowdsource the drivers to do it, at least for the next several years, because it's interesting that both of these companies are making big moves toward self-driving vehicles, which will replace drivers and time, or at least, that's the thinking. I think that's the real investment bet here.