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Here's Why I'm Still Not Buying Uber or Lyft

By Neil Patel – Aug 18, 2021 at 9:43AM

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These companies prove that managing the needs of multiple stakeholders is not an easy task.

Uber Technologies (UBER -1.39%) and Lyft (LYFT -0.00%) both went public in the spring of 2019 to a great deal of hype. Their stock price performances, however, haven't delivered for investors. Uber is up a measly 3%, while Lyft is actually down 31%, significantly lagging the broader S&P 500's return during that time. 

Admittedly, their stock prices have fared better over the past 12 months as the economy has slowly reopened, but there's still plenty to dislike about Uber's and Lyft's business models. While these two large-cap ride-hailing giants provide a necessary service that the world has clearly shown it needs, I'm still not buying their shares. 

Let me explain why. 

Businessperson hailing a ride.

Image source: Getty Images.

Where are the switching costs? 

The ride-sharing industry is a commodity-type business. This simply means that as a customer, I only care for the service that will take me where I want to go the fastest and the cheapest. In other words, I have minimal brand loyalty. For Uber and Lyft, this turns into a constant struggle to keep users coming back to their respective platforms.  

The same thing can be said for the drivers. You've probably noticed that many of them work for both Uber and Lyft, and they switch to whichever platform gives them the highest-earning potential at any particular time. Again, Uber and Lyft must deal with a neverending battle to satisfy their drivers' well-being, something that comes with tremendous costs. 

Consequently, one crucial competitive advantage that Uber and Lyft do not possess is high switching costs for its users, who have zero lock-in to either service. This is a key reason why achieving profitability has proven so difficult. 

A broken business model 

Because the pandemic decimated ride-hailing demand, drivers left Uber and Lyft altogether to either find work elsewhere or collect increased unemployment benefits. As a result, both companies have had to shell out incentives in an attempt to bring them back.  

For Lyft, money spent on incentives grew an eye-popping 92% quarter over quarter, while revenue rose just 26%. An incredible $375 million was used to attract drivers, which is quite substantial given sales were only $765 million. 

The situation for Uber is no different, as evidenced by its higher expenses. In the second quarter, the cost of revenue (which includes driver payments and incentives), accounted for 53% of sales, higher than the 48% it was in the prior-year period. Additionally, the company launched a $250 million stimulus in the first quarter to boost driver earnings. 

Even with all of this promotional activity, the number of active drivers on Uber and Lyft is still not enough to satisfy rising demand stemming from the lifting of restrictions. And both companies have had to increase prices for riders. "In major cities like New York, San Francisco, and L.A., demand continues to outplay supply and prices and wait times remain above our comfort levels," Uber CEO Dara Khosrowshahi said on the latest earnings call. 

The current environment for Uber and Lyft shows how hard it is to keep all stakeholders happy. Riders want lower prices, while drivers want more income. And these companies have to lay out cash incentives to encourage both groups to use their respective platforms. Add to this the ongoing regulatory overhang (and public attention) of drivers wanting to be classified as employees, and you have an unsustainable business model. 

The investor takeaway 

Uber and Lyft are no longer private start-ups; catering to public market investors is a different game. They want profits and cash flow, something that still eludes these ride-sharing enterprises. And the way things are going, I don't think anyone knows with certainty when, or if, they'll generate those highly anticipated bottom-line figures. 

Think long and hard before buying shares. This is a ride you don't want to take. 

Neil Patel has no position in any of the stocks mentioned. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.

Stocks Mentioned

Lyft Stock Quote
Lyft
LYFT
$11.10 (-0.00%) $0.00
Uber Technologies Stock Quote
Uber Technologies
UBER
$28.35 (-1.39%) $0.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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