There's no denying the growing popularity of ridesharing services. Market leader Uber and recently public Lyft (LYFT 6.47%) saw their revenue soar 42% and 103%, respectively, last year. However, with both companies losing a lot of money -- a combined $4 billion in operating losses in 2018 -- some are wondering how long investors will be able to overlook the red ink.
The Wall Street Journal's Eliot Brown is arguing that going public may eventually force Uber and Lyft to increase their fares. Some investors, ride-hailing executives, and even academics are wondering if the two popular transportation apps will have to improve their margins now that they'll be accountable to public investors who will get to see quarterly snapshots. It may make good business sense to encourage companies to price their services more sustainably, but don't expect either company to jack up its rates anytime soon.
It's a race to the bottom
Lyft has quickly fallen out of favor with investors. It has consistently been a broken IPO since its seventh day of trading. If the weak sentiment carries over when the larger Uber goes public in the coming weeks, it could force the young industry to reconsider its pricing feasibility.
None of the levers available for Lyft or Uber to get closer to profitability are attractive. If rider rates go up, it will force more passengers to consider other ways of getting around. If the ridesharing platforms decide to ask for more than the 20% to 25% they're currently making for playing automotive matchmaker, they're going to lose drivers.
Lyft and Uber can also shave their marketing overhead, but that could be a lot more dangerous than it seems. Sales and marketing expenses at both companies roughly match their operating losses, but you can't zero out the overhead. Potential drivers expect decent incentives. Potential riders respond to heavy promotional activity. Uber spends more on incentives, refunds, and credits to end users than it does on actual advertising, and none of that will ever truly go away.
Neither company has to be profitable right now. Lyft just raised $2.2 billion, and Lyft will bankroll about $10 billion for its upcoming IPO. A lot of Wall Street winners aren't anywhere close to being profitable at the moment. As long as growth is there, and there are signs that scalability will eventually lead to profitability, investors will gladly accept the red ink that comes with providing riders attractive rates.
The day Uber and Lyft price their way out of growth is the day the steep market premiums vanish. A sustainable business model doesn't mean much if the business is shifting into reverse, so expect pricing to remain aggressive and competitive. Uber and Lyft will continue to lose money, because -- ironically enough -- it's the only way for today's investors to avoid losing their money.