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 Ubers reported results changed the narrative surrounding the unicorns, shifting the publics 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.
Lets examine the market reaction to all the news, and tie it back to the private companies who wont 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 companys shares have fallen since its earnings report. A good question is why. But before we try to answer that, lets 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, its results are harder to parse out. So, lets 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. Thats better than Lyfts claim of reaching positive adjusted EBITDA by Q4 of the same year.
Lets 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. Ubers full-year profitability has improved, and its promising to see that its losses arent as bad as expected.
Very simple, and very clean to understand, right? Kinda. Ubers business is a mix of growth-y unprofitable revenue and slower-growth, more lucrative top line. Lets quickly examine each of Ubers newly demarcated revenue segments:
From this perspective we can see that Ubers 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. Thats quite good!
What is less good is that as weve 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, Ubers growth rate is slow and its GAAP losses sticky. You cant grow 20 percent year-over-year, give or take, and lose $1.16 billion in a quarter (30 percent of GAAP revenue). Its too much. So, Uber needs a growth business, and thus Eats is a priority. And, therefore, the companys adjusted EBITDA will remain negative for years to come as Uber endures longer losses to allow for greater revenue growth.
Its 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. Lyfts tally is over the $3 billion mark at the same point in time.
The firms can therefore self-fund for ages; theres little risk of either company running out of cash. To make that clearer, lets 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, its 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 its a little clearer than before that Uber and Lyfts long-term estimates of 20 to 25 percent adjusted EBITDA margins are probably just about right. That means that the companys future multiples will only be so high.
Today, according to YCharts, data, Lyfts trailing revenue multiple before trading began was 2.9, while Ubers came in at 3.7. Those ratios probably dont 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 isnt as exciting as the firms were when they were fast-growing upstarts.
One last thought. Were 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 dont know which method will prove more long-term lucrative, but were seeing two divergent bets on the ride-hailing market harden around their differences. Its going to be a very exciting few years.
Illustration:Dom Guzman
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As Uber And Lyft Promise Profits, A Look At The Market's Reaction - Crunchbase News
