Stockwatch: Bumps in the road for US ride-hailers

by Edmond Jackson from interactive investor |

While it's been a tough start for Lyft and Uber shares, the ride-hailing story is one to keep an eye on.

I keep an eye on "Lyft versus Uber" significantly because it's one of various cylinders firing US stocks. While macro is crucial – e.g. whether America is in a "Goldilocks" scenario of modest growth begetting interest rate cuts, or trade conflicts are able to torpedo this – the market is driven by stock stories and the extent they can capture public imagination.

A bull market takes shape significantly because upturn begets greater supply of innovative companies tapping investors for capital. Later on however the stories can be spurious as to generating real profits and best serve the interests of promoters offloading high-priced stock. Sustaining a bull market therefore needs a regular supply of healthy stories and the balance must not tip investor sentiment towards cynicism and fear.   

Last spring's flotations of ride-hailers Lyft (NASDAQ:LYFT) and Uber (NYSE:UBER) seemed one of the highest-profile events of the 2019 calendar, in terms of refreshing stock ideas – for a US market that is prone to lead other global stockmarkets.

Both are down double digits: Lyft by around 15% on its $72 flotation price despite results overall better than expectations; Uber down similarly from its $45 flotation in pre-market trading after its second quarter did genuinely disappoint.

Thus trading and reactions will be interesting – as to how the US stocks' engine is ticking over, at least at its "turbo-charged" end.

Can these companies become genuinely profitable?

Lyft's revenue has reassuringly soared 72% year-on-year in the second quarter, as more people use its services. Riders are up 41% and they are also spending more as shown by a 22% rise in revenue per rider.

Meanwhile price competition with Uber has eased as less money has been spent on promotions. However Lyft’s like-for-like net loss has jumped from $178.9 million to $644.2 million as costs have more than doubled to $1.54 billion – partly including investment towards driver-less cars and scooter rental.

Due to extra shares in circulation post flotation, the per-share loss has been cut from $8.48 to $2.23 – albeit worse than $1.74 expected.
Thus a mixed bag which affirms the ride-hailing story in terms of popular take-up while extending the timescale as to profitability – there being no guidance as such.

A positive angle is Lyft guiding expectations higher for its third quarter, saying growth will boost operating leverage hence the full-year revenue outlook could be around $3.5 billion, some $200 million higher than expected – with the loss probably $875 million at most, $300 million better than expected.

Unfortunately for sentiment - easily volatile until profits are established - Lyft has also brought forward the end of a post-flotation lock-up period on dealings to 19 August, which will free up over 250 million shares owned by insiders.

This reversed an initial rise in its stock as the market suspected whatever extent of unloading may sully Lyft's story once the details get published.

Uber is the more influential however, given its results fell short of overall expectations: revenue of $3.17 billion versus $3.36 billion anticipated, a near 6% miss; and a loss per share of $4.72 versus $3.12 anticipated, which is worse by just over 33%.

Losses excluding stock-based compensation were anyway worse by 30% on the first quarter, at $1.3 billion. Using his words carefully the CEO says:

"We think that" 2019 will be a peak investment year and 2020/2021 will see losses coming down".

He added that break-even could be achieved in the medium term if pushed:

"No doubt in my mind that the business will eventually be a break-even and profitable business."

Within the figures however, the core ride-hailing business achieved $12.19 billion gross bookings, a fraction above consensus for $12.11 billion, however on this measure Uber Eats fell short by way of $3.39 billion versus consensus for $3.51 billion.

Management claims it's the global leader for local food delivery though "with a lot of capital chasing a lot of growth we don't expect that business to be profitable in the next year or year after frankly."

Thus perception of ride-hailing stocks as liable to tilt between potentially value-accretive in the long run, similarly as Amazon (NASDAQ:AMZN) tested investors' patience for years, versus their being a classic over-blown ramp in a late-stage bull market – the companies exploiting investors' optimism to subsidise customer rides thereby build revenue, if dangerously value-destructive.

Are the stocks even worth trading?

In March I drew parallels with the late 1990s tech-stock boom when relatively new companies floated – e.g. Autonomy and Durlacher – which promptly outstripped valuations of even big caps in established industries. Durlacher fizzled out and the Autonomy founder is nowadays in a legal contest over misrepresentation, versus HP Inc which acquired Autonomy.

Pre-flotation financing rounds used to ratchet up notional values as speculators kept putting in money, often in the hope of flipping stock as soon as it traded publicly – or for insiders, when any lock-up period ended.  This is why the extent of Lyft stock being sold from 19 August will be quite critical for confidence.

Even so, I drew attention warily to Uber's potential as "the Amazon of transportation" given it has established a strong brand image covering some 600 cities in 65 countries. From a customer base in ride-hailing the aim is to extend also in electric bikes/scooters and freight, while food delivery is already to three-quarters of the US population.

Meanwhile Lyft seeks to exploit the realisation that cars are a blot on cities and the global climate, offering "transportation as a service" by way of alternative to car ownership. Thus in marketing terms, genuine public demand versus esoteric technology in the 1999-2000 boom that crashed and burned.

It still looks a way to go before either stock can establish genuine investment grade credentials, than long/short opportunities for close-wired traders – and even then, as these latest results show, very hard to outwit expectations.

Yet I'd keep an eye on this ride-hailing story – as to whether Lyft and Uber cab deliver on the hopes they've raised – given its liability to help define a bull market top, but also capability to add a pillar if the Uber comparison with Amazon can gain substance. Broadly for now: Avoid.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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