It's curious. A week ago, ride-hailing outfit Lyft (LYFT -3.35%) warned its investors to brace for higher costs. Namely, the company intends to pay its drivers more in an effort to attract them, and then keep them active. Then, just this week, Lyft rival Uber Technologies (UBER -2.94%) suggested it will be cutting costs, particularly scrutinizing its payroll expenses. As CEO Dara Khosrowshahi reportedly put it in a letter to Uber's employees, "We will treat hiring as a privilege and be deliberate about when and where we add headcount."
Given their similarities, one would expect both companies to (more or less) be in the same proverbial boat.
Image source: Getty Images.
The thing is, these announcements suggest the two ride-hailing outfits are moving in different spending directions specifically because their current expense paradigms are quite different. The companies' adjustments will actually make each one's budget look more like the other's.
A simple comparative chart puts it all in perspective.
Not quite like the other
They may be in the same basic business, but they're far from being carbon copies of one another. Uber Technologies is about eight times bigger than Lyft in terms of revenue.
This difference in scale forces the two organizations to use at least slightly different relative budgets. The cost of renting corporate offices, for instance, is going to be roughly the same for each regardless of the two companies' different sizes. Similarly, the cost to develop an app is the same regardless of how many people use it.
By and large, though, you'd expect Lyft's and Uber's expenses to look rather comparable. They aren't. In fact, both companies' biggest expense -- drivers -- are surprisingly different. This expense is part of the "cost of revenue" portion on the comparative graphic below.
Data source: Uber Technologies, Lyft. Chart by author.
Uber's first-quarter cost of revenue is nearly 60% of revenue itself, while Lyft's only accounts for about half of its Q1 top line. Though it's just one quarter, the first quarter's budget breakdown is pretty similar to each company's historical spending. Now Lyft intends to ratchet up its cost of revenue with expanded driver incentives, while Uber is seemingly looking to curb this relative expense. While the two organizations appear to be moving in different directions, both are moving in the right relative direction for them. Although the ride-hailing industry is still too new to know what the "right" figure is, it's not exactly a stretch to suggest the ideal cost of revenue is somewhere in the middle, around the 54.5% mark.
There are other eye-opening disparities on the chart as well, although the wide gap between their general and administrative support expense lines isn't one of them -- as was noted, some expenses like rent or corporate administration are more fixed than variable. For a smaller company like Lyft, managing it will cost relatively more.
Rather, the other noteworthy differences here are how much (relatively) more Lyft spends on technological research and development, and how much less it's spending on all-important sales and marketing. On both fronts, however, it's spending much less than Uber Technologies simply because Uber is so much bigger. Looking at the same idea from a different perspective, on an absolute basis, Uber Technologies is spending 10 times as much as Lyft is on sales and marketing, making it difficult for the smaller player to achieve the scale it needs to bring it closer to profitability.
As they say, size matters.
Buckle up
Its smaller size doesn't inherently make Lyft un-investable. It is, however, something current and prospective shareholders should consider as they weigh the company's success while it overhauls its budget. Will ramped-up driver incentives pay for themselves, or will they simply make the organization less profitable? At the same time, can Lyft afford to continue spending so little on sales and marketing as long as Uber Technologies is spending so much more? A sheer lack of riders was one of Lyft's top challenges last quarter. In this same vein, will tightened personnel purse strings prevent Uber from attracting and retaining the people it needs? It's difficult to say.
One thing is for sure, though: Investors are about to start getting answers to these budget overhaul questions.
