Better Buy: Uber vs. Lyft

Both companies are in the ride-hailing business, but Uber Technologies (UBER -0.38%) and Lyft (LYFT 1.87%) are different in one important way: Uber is eight times bigger than Lyft, as measured by revenue.

Size doesn't always matter. Indeed, smaller companies are often nimbler than their larger counterparts. Conversely, larger companies typically enjoy more raw financial firepower. Investors' comparisons of organizations of different sizes in the same business should take these factors into consideration.

With that as the backdrop, how do Uber and Lyft compare as prospective investments?

Uber has a huge weight advantage

If you were expecting the Uber vs. Lyft faceoff to favor Lyft due to its smaller size, don't give up on the David and Goliath paradigm. There are plenty of smaller companies out there equipped to outmaneuver their bigger competitors.

It's just that Lyft isn't one of them. The hurdle is the nature of the ride-hailing business itself. Although each company has developed its own platform, little about the technologies they use is especially unique. More to the point, neither company's tech provides it with an edge like a game-changing (and patent-protected) drug or a new kind of microchip would. 

Ride-hailing is just -- well, ride-hailing. It's a pretty simple business. This business can be executed in a variety of ways, but none of them alters the way revenue is ultimately collected and then turned into profits.

In this sort of situation, therefore, access to more spendable cash is the distinguishing factor. Uber's got access to a heck of a lot more of it than Lyft does. This, in turn, allows Uber to simply outspend its smaller rival in areas like advertising or research and development, and still have some left over to tuck away for later use.

The table below comparing the two companies' 2022 income statements puts things in perspective. Don't worry so much about the raw dollar amounts; everything is relative. Instead, notice how much more of its total revenue -- as a percentage of revenue -- Lyft has to spend on certain expenses than Uber does.

Uber is spending far more on sales and marketing, yet proportionally, it's only spending marginally more of its revenue on it than Lyft is. Uber is spending more than twice as much as Lyft is on compensating its employees and managing its business. Yet Lyft's general and administrative spending is burning through much more of its revenues.

Connect the dots. Size matters.

Sure, in theory, Lyft could cull some of its spending so its budget looks more like Uber's, proportionally speaking. That's much easier said than done though. A television ad costs the same on a per-minute basis whether the advertiser is big or small. A magazine ad costs the same amount per page regardless of how many customers the company buying it has. Developing and maintaining a ride-hailing app incurs the same basic costs for Lyft that it does for Uber, even if Lyft has less cash to work with.

As long as Uber is able to outspend Lyft without putting itself into a dire financial situation, Lyft will be on the defensive. That doesn't make for a compelling investment thesis.

Don't count on Lyft to figure something out anytime soon

Never say never. It's always possible Lyft could experience a eureka moment and come up with a game-changing service or a major cost-saving idea. The likelihood of that happening, however, is relatively low. Ride-hailing isn't a complicated business. Any cost-culling or creative marketing ideas that either outfit has come up with have probably already been taken advantage of by both companies.

In fact, new Lyft Chief Executive Officer David Risher's plan of getting "back to the basics" suggests he's not interested in experimenting with new ideas that may never be worth their implementation costs.

With all of that being said, there is perhaps one glimmer of hope for Lyft's future: the prospect of an acquisition. As Bloomberg Intelligence analyst Mandeep Singh noted in March after Risher was named Lyft's CEO, "We think Lyft may explore strategic options, including a sale."

Even so, that would be more of a defensive, survivalist move. As Singh also explained, "Lyft is in a tough competitive position, given operational challenges vs. larger rival Uber," and any sale would ultimately stem from a continued "risk of cash burn and market-share loss."

A company that feels compelled to sell itself usually doesn't command a premium price. So if you really want to buy a ride-hailing stock, market share leader Uber is the name to go with, even if only because Lyft is so uncompelling.