It's been two months since I predicted that Uber (UBER -2.03%) and Lyft (LYFT -3.43%) would beat the market in 2020, a call that I assure you was as contrarian as it seemed outrageous at the time. The ride-hailing duopoly had come under hard times since going public with 10-figure annual deficits and California tightened gig-economy restrictions. Wall Street's penchant for going unicorn hunting in a forest well stocked with members of the 2019 IPO class didn't help, either.
The pessimism has taken a backseat so far in 2020. Uber shares are soaring 26% through the first three weeks of the year. Lyft is a relative slacker with its 12% year-to-date gain but is easily smoking the market with its 3% return this month. Let's turn our attention to why Uber -- and the ridesharing market in general -- is shifting out of reverse this year.
Image source: Uber Technologies.
1. Uber is cutting its losses in unprofitable markets
Wall Street doesn't typically applaud companies in retreat, but analysts have been gushing this week about Uber's decision to unload its Uber Eats business in India. Uber is selling the profit-eating business to Zomato in exchange for a 9.99% stake in the company.
Uber Eats is growing faster than Uber's flagship personal mobility platform, but not every market is ready for on-demand restaurant delivery services. India is a market that could be several years away from where the niche is in more developed countries, and it wouldn't be a surprise if Uber sheds other businesses that don't have a clear path to profitability in the next few years.
2. Being the top dog matters
Lyft and Uber realize that posting double-digit revenue growth in the otherwise sleeping transportation industry isn't enough to impress investors. The market needs to see less red ink to validate the nascent industry, and both companies are taking steps to turn the corner. Lyft is hoping to be profitable on an adjusted-EBITDA basis by as early as the end of next year, and Uber is also driving in the right direction on that front.
Lyft turned heads when it went public just ahead of Uber as the faster growing of the two companies, but there are advantages to Uber being substantially larger, with a global footprint. Appearing on CNBC's Squawk Box this morning, CEO Dara Khosrowshahi offered up the advantages of being the top dog.
"We are structurally set up more efficiently and more optimally than anyone else to move to profitability," he said. "This environment is perfect for us."
3. Last year's drop is a good thing
The silver lining behind the brutal debut for Uber and Lyft is that they closed out 2019 trading 34% and 40% below their IPO prices, respectively. Broken IPOs are often busted for a reason, but Uber isn't a third the company it was when it went public in the springtime of last year.
Uber is growing, and it's only made up roughly half the ground it lost in 2019 so far this month. With market demand expanding and Uber coming up with creative ways to survive regulatory barriers, it's easy to see why Uber is a hot stock in 2020. There will always be enhanced risks when investing in IPOs, but for now, Uber appears ready to deliver enhanced rewards, too.
