Morning Markets: Uber and Lyft have each reported their Q3 earnings. And both companies put up better-than-expected numbers while promising future profits. How have investors reacted to the news?
Uber and Lyft represent enormous bets by venture capitalists and other private investors, wagers that the companies hit on a new sort of service that could not only generate tens of billions of dollars in global use but also, in time, profits.
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However, in the period after the two companies went public this year their share prices have struggled under the weight of slower-than-expected growth, and sharp, unrelenting unprofitably. Lyft and Uber’s reported results changed the narrative surrounding the unicorns, shifting the public’s perception of the companies from impressive upstarts to expensive question marks.
The struggles of Lyft and Uber as public companies made related, yet-private companies like Postmates, DoorDash, and even Didi seem like less-than-likely IPO candidates. The market reception that first Lyft, and, later, Uber received also has the potential to chill private market investment into on-demand companies more broadly.
But things have improved in the last few weeks for the two ride-hailing giants, at least in terms of operating results. Each company put a stake in the ground regarding future profitability, and their recent results came in ahead of expectations.
Let’s examine the market reaction to all the news, and tie it back to the private companies who won’t be able to accept Uber and Lyft being their comps if and when they try to go public themselves.
In late October, Lyft promised investors and the technology community at large that it would generate positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the final quarter of 2021. Its shares rose.
A week later the company reported its third quarter results, including quick revenue growth ($955.6 million, up 63 percent from $585.0 million), expanding losses ($463.5 million, up 86 percent from $249.2 million), and improving adjusted losses ($121.6 million, down 50 percent from $245.3 million).
The results beat expectations, with adjusted losses per share coming in 9 cents per share better than expected ($1.57 per share instead of $1.66). Revenue also beat the $915 million street expectation.
Lyft also raised its Q4 revenue and 2018 revenue guidance, saying that it expects Q4 revenue to be between $975 million and $985 million, and revenue growth to be between 46 percent and 47 percent year-over-year. For its 2019 revenue guidance, Lyft said it expects to be between $3.57 billion and $3.58 billion, up from between $3.47 billion and $3.5 billion. Its annual revenue growth rate is also expected to be 66 percent, up from between 61 percent and 62 percent.
After rising some in the wake of the its adjusted profitability promise, the company’s shares have fallen since its earnings report. A good question is why. But before we try to answer that, let’s look at Uber.
This week Uber reported its Q3 results. As Uber is a more global company, and as it has more business lines than Lyft, it’s results are harder to parse out. So, let’s get ourselves a summary and then devote ourselves to the details.
The first thing to know is that Uber made a similar profit promise during its earnings call. Namely that Uber will generate full-year adjusted EBITDA in 2021. That’s better than Lyft’s claim of reaching positive adjusted EBITDA by Q4 of the same year.
Let’s look at Q3. Here are the high-level figures:
Revenues of $3.8 billion were better than the $3.7 billion expected, up 30 percent year over year. And looking at the bottom line, the net loss of $1.1 billion included $400 million in stock-based compensation. The total net loss came in at 68 cents a share, better, in fact, than the 81 cents a share loss expected by the Street.
Along with beating expectations, the company also drew a better picture of its full-year results. Uber’s full-year profitability has improved, and it’s promising to see that its losses aren’t as bad as expected.
Very simple, and very clean to understand, right? Kinda. Uber’s business is a mix of growth-y unprofitable revenue and slower-growth, more lucrative top line. Let’s quickly examine each of Uber’s newly demarcated revenue segments:
- Rides: $12.6 billion in gross bookings (+20 percent, YoY), $2.9 billion in resulting adjusted net revenue (+23 percent YoY), and $631 million of adjusted EBITDA (+52 percent YoY).
- Eats: $3.7 billion in gross bookings (+73 percent, YoY), $392 million in adjusted net revenue (+105 percent, YoY), and negative $316 million of adjusted EBITDA (-67 percent YoY).
- Freight: $223 million in gross bookings (+81 percent YoY), $218 million in adjusted net revenue (+78 percent YoY), and negative $81 million of adjusted EBITDA (-161 percent YoY).
- Other Bets: $30 million in gross bookings, $38 million in adjusted net revenue, and negative $72 million of EBITDA.
- ATG and Other Technology Programs: $17 million in adjusted net revenue and negative $124 million of EBITDA (+6 percent YoY).
From this perspective we can see that Uber’s core business (Rides being 76 percent of its revenue) generates quite a lot of adjusted profit. Enough, indeed, for Uber to claim that the sum “fully cover[s] Corporate G&A and Platform R&D” costs. That’s quite good!
What is less good is that as we’ve seen, Eats turns growing gross bookings into sharply negative (and worsening) adjusted EBITDA. Why does Uber invest in Eats, if the business is so unprofitable? Growth.
Uber has long been valued on growth. Sans Eats, Uber’s growth rate is slow and its GAAP losses sticky. You can’t grow 20 percent year-over-year, give or take, and lose $1.16 billion in a quarter (30 percent of GAAP revenue). It’s too much. So, Uber needs a growth business, and thus Eats is a priority. And, therefore, the company’s adjusted EBITDA will remain negative for years to come as Uber endures longer losses to allow for greater revenue growth.
It’s easy to forget how rich the two companies are in the shadow of their losses. Uber reported “[u]nrestricted cash and cash equivalents were $12.7 billion” at the end of Q3. Lyft’s tally is over the $3 billion mark at the same point in time.
The firms can therefore self-fund for ages; there’s little risk of either company running out of cash. To make that clearer, let’s examine the companies’ Q3 operating cash flow. Uber had $878 million in negative Q3 operating cash flow, giving it years of room to run, for example.
The question then becomes why Lyft and Uber are trading down now, just as the two companies are promising future profits and pushing their forecasts up. Two reasons, I think. First, it’s clear that the companies’ GAAP losses ($463.5 million in Q3 from Lyft, $1.16 billion in Q3 for Uber) are going to continue for the foreseeable future; neither company has made a commitment to staunching its GAAP red ink.
Continuing, a big piece of each GAAP net loss figure is share-based compensation, telling public market investors that every quarter when Lyft and Uber report adjusted profit, they are looking past a lot of dilution to get to the better-seeming figure.
Secondly, because it’s a little clearer than before that Uber and Lyft’s long-term estimates of 20 to 25 percent adjusted EBITDA margins are probably just about right. That means that the company’s future multiples will only be so high.
Today, according to YCharts, data, Lyft’s trailing revenue multiple before trading began was 2.9, while Uber’s came in at 3.7. Those ratios probably don’t have much space to climb over time; investors looking for a bet with a higher chance at multiples expansion would therefore covet companies with higher gross, and profit-margins.
Throw in slowing revenue growth as the two firms continue to scale and you find a mix that isn’t as exciting as the firms were when they were fast-growing upstarts.
One last thought. We’re seeing Lyft tout its product focus and slimmer losses as advantages. And Uber is putting its money into other businesses and a global presence. We don’t know which method will prove more long-term lucrative, but we’re seeing two divergent bets on the ride-hailing market harden around their differences. It’s going to be a very exciting few years.
Illustration: Dom Guzman