Wall Street isn't entirely keen on ridesharing these days. Uber Technologies (NYSE:UBER) and Lyft (NASDAQ:LYFT) continue to trade below their IPO price tags, even if the two niche leaders have beaten the market since bottoming out on May 13.
Both companies are collectively losing billions a year at this phase of the booming industry's growth. It costs a lot of promotional money to strike the right balance between giving passengers a cost-effective mode of transportation while also incentivizing drivers to stay behind the wheel.
Analysts have generally favored Uber in pitting one upstart against the other. It's larger in a business where scale is everything. Uber also is better diversified in terms of both geography as well as operations. But not every Wall Street pro sees it that way. Stifel Nicolaus analyst Scott Devitt initiated coverage of Uber last week with a hold rating on the shares, despite having a buy call on smaller rival Lyft.
Favoring the underdog
Devitt is generally upbeat about Uber's role in redefining the transportation and food delivery markets, but he sees Lyft gaining domestic market share with Uber's personal mobility bookings slowing to a mid-20% clip. With Uber's take rate contracting in both personal mobility and at Uber Eats -- a necessary tactic to keep a healthy fleet of drivers at its beck and call -- in light of mounting competition both here and abroad, he's worried about decelerating growth in adjusted net revenue. Uber is still years away from profitability, and that also isn't helping. The silver lining here is that his $50 price target implies 15% of upside from here, so there's room for shareholders to come out ahead despite the officially neutral call.
Devitt is more upbeat on Lyft. He's boosting his price target on the country's second largest ridesharing stock from $70 to $76, a hearty 28% ahead of where the shares are now. He's encouraged by some of the partnerships that Lyft has brokered lately, teaming up with payment processors, a pair of airlines, and a leading hotelier on win-win deals to grow its reach. Lyft has strong momentum when it comes to growth in rider bookings, and that should help as it weans its users off of costly promotional incentives this year.
There's no denying that Uber is the market leader right now. It had a whopping 93 million monthly active platform consumers at the end of March. But Lyft is growing a lot faster right now. Revenue skyrocketed 95% in the first quarter, a sharp contrast to the 20% uptick in gross revenue -- and a mere 14% in net revenue -- at Uber during the same three months. However, Lyft is generating a little more than a fifth of the revenue that Uber commands. It will take Lyft a long time to grow to where Uber is now, and by then its pace will inevitably be a lot slower than it is these days. Uber also won't be standing still as Lyft grows, expanding its business by the time that Lyft joins Uber in generating annual revenue in 11 figures.
Uber's successful forays into food delivery and freight logistics help diversify its revenue streams. It has also already cleared the high hurdle of expanding in most of the lucrative international markets that Lyft will eventually try to crack. Both stocks can win, just as they have through the past two months despite trading below their original IPO prices. There are a lot of cars involved here, but this is not a race. Uber and Lyft can both cross the finish line as winners.