They may both be in the ride-hailing business, but Uber Technologies (UBER -0.13%) and Lyft (LYFT 2.33%) couldn't be more different -- at least in terms of fiscal results. The former is inching its way toward operational profitability. At its current pace of progress, the latter may never work its way out of the red.
Investors are seemingly starting to see this disparity too. Uber shares are up more than 50% from the low reached in the middle of last year. Lyft's stock, meanwhile, is in the red for the same timeframe.
There's an important lesson buried here, however, that's worth exploring in some detail.
The same, but (very) different
Uber is still in the red, to be clear, reporting an operating loss of $142 million last quarter, capping off the full year's operating loss of $1.8 billion. Both losses are much smaller than year-ago comparisons, though. Indeed, the full-year loss was essentially cut in half, while the quarterly is only about one-fourth of Q4 2021's loss.
How? With the exception of its actual cost of revenue (drivers, mostly), Uber's key expense items remained flat while the top line continued to grow. As a percentage of its growing revenue, most of Uber's expenditures are shrinking.
Data source: Uber Technologies. Chart by author. All figures are in millions.
The same can't be said of Lyft. In fact, its cost of revenue grew 40% year over year last quarter, dramatically outpacing a 21% top-line improvement. General and administrative costs nearly doubled thanks to severance costs. Even stripping that unusual cost from its spending, however, still leaves the organization's G&A costs in a bigger-picture uptrend. And nearly all of Lyft's expenses are up on a year-over-year basis, pushing the company deeper into the red rather than toward profitability.
Data source: Lyft. Chart by author. All figures are in millions.
Simply put, Lyft can't get the same handle on spending that Uber has.
Size matters
It's certainly frustrating to Lyft's shareholders, but it shouldn't be entirely surprising.
The two similar companies are seemingly moving in different fiscal directions for one overarching reason: size. Uber's got plenty of it. Lyft doesn't. In terms of revenue, Uber is about 10 times the size of Lyft.
Granted, more revenue means Uber is spending more on variable costs like driver compensation and administrative support. More revenue, however, also means Uber can spend more on research and development, which in turn maintains its technological edge. Other costs are fixed, facilitating greater cost-efficiency for larger organizations. Rent for corporate offices, for example, costs about the same per square foot no matter how many customers an organization serves.
Perhaps the biggest benefit of Uber's greater size, however, is its ability to promote its service heavily enough and frequently enough to get consumers' attention in the first place.
Uber spent just a little of $1.0 billion on promoting its product last quarter, whereas Lyft spent $114 million on sales and marketing during the three-month stretch in question. On a per-ride basis, Uber only spent around $0.56 on sales and marketing during Q4, while Lyft spent roughly ten times that figure. Just as notably, Uber spent less on marketing last quarter than it did during the same quarter a year earlier, , yet still produced a 23% year-over-year improvement in trip-count. Lyft spent slightly more on promotional activity in the final quarter of 2022 than it did in the last quarter of 2021, but only saw an 8.7% improvement in the total number of rides given between then and now.
There's the rub -- Lyft may not be able to win market share from Uber if it can't afford to advertise more, but it really can't afford to market itself until and unless it gains more scale stemming from more market share. In the meantime Lyft is still floundering under the relatively greater weight of its other expenses.
The big takeaway for investors is twofold.
First, this is why it's difficult for small companies to become big companies when they're doing the same thing big companies are doing. Small companies trying to penetrate an established market need to offer something unique and compelling to poach competitors' customers. Lyft's product isn't exactly a unique one.
Second, this is why Lyft is essentially unownable right now, while Uber is a compelling investment prospect. Its margins are expanding with its size, with Uber made plainly clear during its fourth-quarter earnings call that it's "approaching GAAP operating profitability in 2023, with increasing operating leverage." That's in contrast with Lyft's Q1 revenue guidance of around $975 million and an EBITDA outlook of around $10 million. The former figure is only about 11% better than the year-ago comparison, while the latter would be down considerably from Q1-2022's adjusted EBITDA number. It doesn't suggest last quarter's struggle was a one-off.
That's not to say potential headwinds like market saturation and other types of competition should be ignored; taxis and buses may well become en vogue again at some point in the future. Lyft may also eventually figure out how to expand its business on a budget. Never say never.
Given its growing losses since revenue began to recover in earnest back in 2021 though -- in addition to -- the market's got every right to start asking Lyft's management tougher questions of. It may want to start by asking when and where Lyft can curb costs in other areas so it can afford to spend more or marketing and sales.
