Morning Markets: Sorry for the delay. Divvy’s round was super interesting and then Cheddar sold itself for $200 million. But better late than never. For today, Morning Markets will be Afternoon Markets, and we’re looking into the long-term profit prospects of two key tech shops.
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Lyft is public and Uber is under two weeks from the same. After untold billions, the two American ride-hailing giants are floating their shares publicly, putting their results on display and leaving the private markets behind.1
It’s an era-defining moment. With Uber joining Lyft as a public company, and following Snap and Pinterest and other richly-valued domestic decacorns, a large chunk of wealth is turning liquid. The only sticking point in the otherwise pretty portrait of success is that nearly every decacorn is dripping red ink as it crosses the private-public divider.
And the red ink isn’t about to stop flowing. Zoom aside, Pinterest has a solid path to profitability but remains distant from the result. Snap is still losing about as much as it brings in as revenue ($310 million in GAAP net losses against $320 million in top-line in Q1’2019) and so on. Uber and Lyft themselves are each unprofitable as well.
But what their respective IPOs have brought along with their past results, are their future expectations. Each told the market what they expect to generate in profit margin in the future. So let’s see how far they are from those results now.
Given the sheer number of IPOs that we have covered in recent weeks, it’s hard to keep the numbers straight. So, here are a few refresher figures for your enjoyment.
We’ll examine at the most recent quarter we have for Uber and Lyft, the fourth of 2018. It’s the best period for our uses for a few reasons. Namely that it doesn’t include a huge benefit Uber received for certain divestments, and it’s the most recent period we have reported from both firms.
We’ll start with Uber, listing its adjusted net revenue (more conservative than its GAAP revenue figure), adjusted EBITDA, and GAAP net income, along with the resulting ratios:
- Uber Q4 2018 adjusted net revenue (ANR): $2,644 billion
- Uber Q4 2018 adjusted EBITDA (aEBITDA): -$817 million
- aEBITDA margin (aEBITDA/ANR): -30.9 percent
- Uber Q4 2018 GAAP net income: -$887 million
- GAAP net margin (GAAP net income/ANR): -33.5 percent
What does that blizzard of acronyms tell us? That Uber is more profitable on an adjusted basis (aEBITDA) than when counting all costs (GAAP net income). And that even on an adjusted basis, Uber’s profit margins are quite negative. Putting up an aEBITDA margin of -30.9 percent is harsh at scale as it translates into a large adjusted loss in dollar terms.
But let’s not get too caught up in Uber in the abstract. Let’s run the same experiment with Lyft, using its revenue (it only reports one sort), aEBITDA, and net income.
- Lyft Q4 2018 revenue: $669.6 million
- Lyft Q4 aEBITDA: N/A
- Calculated aEBITDA margin: N/A
- Lyft UQ4 2018 GAAP net income: -$248.9 million
- GAAP net margin: -37.2 percent
Sadly Lyft doesn’t provide aEBITDA on a quarterly basis, and we cannot calculate it on our own as the company doesn’t provide certain constituent pieces on a quarterly basis either. But we do know that Lyft’s 2018 aEBITDA of -$943.5 million in 2018 was 103.5 percent of its 2018 net income. So, for our purposes, we can presume that Lyft’s net margin is conservative compared to its aEBITDA margin.
I know that was messy and slightly annoying. But what we have now is a good grasp as to how unprofitable Uber and Lyft were in the final quarter of 2018.
Now let’s talk about the good news.
Much hay has been mucked about Uber and Lyft’s current unprofitability. But in the future, what do the two companies expect in terms of profit margins? They each told us, to a degree.
Both Lyft and Uber reported expected future profit ratios. Adjusted profit, that is. Uber reported an expected adjusted EBITDA margin of 25 percent, and Lyft a similar metric with a 20 percent expectation. (I’ve asked Lyft if its 20 percent future EBITDA margin is an aEBITDA figure or not; I recall it as aEBITDA but as the firm’s roadshow isn’t accessible by Crunchbase News at this time, we’re slightly stuck. We’ll update if we hear back, but we’ll use aEBITDA as it’s what the firm reports in its S-1.)
How far are the companies from those results?
Uber’s aEBITDA margin in Q4 of -30.9 percent puts it 55.9 percent from its expected 25 percent aEBITDA result. Now, the firm did provide some context around the figure:
Namely that it expects its take rate (as a percent of gross bookings) to remain flat. That’s either pessimistic or optimistic depending on your view of Uber’s current company-driver relations relating to pay. Uber also notes that it expects costs to grow more slowly than adjusted net revenue, helping it expand margins there.
Uber then notes a 2018 aEBITDA margin (measured against ANR instead of GAAP, the same as our calculations) of 18 percent in 2018. That puts its 25 percent goal just 43 percent away. Why is our figure of the same gap a higher 55.9 percent? Because Uber had worse aEBITDA margin in Q4 than it did in the full year.
Now, Lyft. The gap from Lyft’s net margin to its expected 20 percent aEBITDA result (recall our prior caveat about EBITDA versus aEBITDA in Lyft’s case), is 57.2 percent. Provided that Lyft’s aEBITDA ran worse than its net margin in 2018, we can presume the gap between its future aEBITDA and present-day results is slightly larger than the 57.2 percent result.
What does the difference between Uber and Lyft’s profit results, and their expected, future profits results tell us? That the work ahead is simply enormous and larger than I expected it to be. The firms are miles away from adjusted profit breakeven. Getting to a more healthy 20 percent or 25 percent adjusted profit margin will take incredible success. And even then, the company’s GAAP margins will presumably be thinner than their adjusted metrics.
And so it is a long climb up to net margins that may land in the teens for the two richly valued firms.
Illustration: Li-Anne Dias.