Ridesharing rivals Lyft (LYFT 5.79%) and Uber (UBER 4.18%) went public around the same time in 2019. Blistering competition between the two contenders seems to be easing up as both companies aim to achieve profitable growth. The shift will result in higher prices for customers, but it could also mean that both companies boost their bottom lines and increase their appeal to investors.
Lyft signals slower growth
Lyft has grown revenue at a blistering pace over the previous two years, with compounded annual revenue growth (CAGR) of an astounding 85% in that period. Furthermore, the company is in the middle of 11 consecutive quarters of revenue growth. Admittedly, this growth is happening with negative earnings. Still, the company has $2.8 billion in cash and equivalents to work with while it attempts to scale its way up into profitability.
Revenue in the most recent quarter was up 52% from the same period a year ago, as active riders and revenue per active rider each rose 23%. However, the company's new focus on profitable growth is lowering its expectations for increases going forward.
For fiscal 2020, Lyft expects revenue to expand between 27% and 29%. A disciplined approach to growth could signal good things for Lyft, as it slows down the rate at which it burns its cash and gives investors confidence that the business can ultimately return capital to shareholders.
In stark contrast with Uber, Lyft has a more focused strategy, with a singular emphasis on consumer transportation. Additionally, Lyft is operating mainly in the U.S., compared with Uber's 69 countries.
Uber is further along in the path to profitability
Uber reported 111 million monthly active platform customers, up 22% from 91 million the previous year. Moreover, the number of trips increased to 1.91 billion, up 28% from a year ago.
Uber generates revenue from four segments, but the bulk comes from Rides and Eats (food delivery). Overall revenue in the quarter was up 37% year over year. Revenue growth is stronger in the Uber Eats segment, which grew GAAP revenue 68% in the most recent quarter, but Eats is less profitable than Uber's Rides business. In fact, Rides earned $742 million in adjusted EBITDA in the fourth quarter, a 281% gain year over year, while its Eats business lost $461 million in the same measure, down a further 66% from its year-ago loss. Investors would like to see more progress on Eats's path to profit.
Still, Uber may benefit from Lyft's decision not to compete in food delivery. Furthermore, its divestiture of the Uber Eats business in India and South Korea is following through on Uber's commitment to exit geographies in which it is not No. 1 or No. 2 in market share. Uber's disciplined approach here, combined with a lack of competitive pressure from Lyft, could give Uber a significant advantage.
Uber announced in the conference call that it moved up its timeline for when it expects to become profitable to the fourth quarter of 2020 (from the fourth quarter of 2021).
Importantly, CEO Dara Khosrowshahi said, "We recognize that the era of growth at all costs is over. In a world where investors increasingly demand not just growth, but profitable growth, we are well-positioned to win through continuous innovation, excellent execution, and the unrivaled scale of our global platform."
Which is the better investment?
Both companies provide remarkable growth opportunities combined with significant risk. While each company faces similar regulatory risk, Uber's challenges in that area are more significant.
On the other side of the coin, Uber's growth potential is more substantial, because of an international focus and its position in the rapidly expanding food delivery business.
If driverless cars become an option, it will be a game-changer for Lyft and Uber, because both companies' most significant cost is paying their drivers a share of ride revenue. Roughly 70%-80% of gross booking revenue goes to drivers. Autonomous vehicles remove that cost, and will usher in a new era of profitability. Of course, that's speculation at this point, and no one knows when or if driverless rides become a viable option. Nonetheless, the opportunity is significant enough to mention when evaluating these businesses.
When considering profitability, Uber has the edge with a negative 57.4% EBITDA margin over the past 12 months, versus negative 71.7% for Lyft. On valuation, Uber is trading at 4.4 times enterprise value to revenue while Lyft is changing hands at 3.4 times.
Choosing between one of these two tech stocks is difficult. Nonetheless, given the high level of risk, investors should look for larger returns. Therefore, Uber's broader growth prospects might make it the better buy versus Lyft.