The ride-hailing industry is expected to grow to nearly $300 billion in ten years’ time, according to Goldman Sachs. In bigger U.S. cities, such as San Francisco, the ride-hailing market is much bigger than the traditional taxi market.
As two of the biggest ride-hailing companies are Uber and Lyft, we take a look at their business models and how quickly they can earn you money.
The biggest ride-hailing company in the world by revenue, Uber, makes money by taking a cut of the fares. Furthermore, Uber also has a food order and delivery business – Uber Eats, and a freight shipping business – Uber Freight.
Uber’s ride-hailing service is the main generator of the revenue, despite the continous growth of Uber Eats and Uber Freight segments of the business. The company reported that Uber’s Rides accounts for more than ¾ of the business’ increased generated income in the Q3 2019.
On the other hand, Eats generated 17% of Uber’s revenue in the third-quarter of 2018, while Freight added a further 6% to the total revenue of the company. Its ride-sharing business has become profitable, but other segments of the business are dragging the company down.
“If you’re losing as much money as Uber, it makes sense to leave those businesses to other companies who have the competency,” said Dan Morgan, portfolio manager at Synovus Trust.
A few days ago, shares of Uber jumped higher after the company reported a fourth-quarter loss that was narrower than analysts had expected. Moreover, Uber’s management moved the key profitability goal from Q1 next year to the fourth-quarter of this year.
So far, Uber reported losses of at least $1 billion every quarter. For the entire last year, Uber reported a loss of $8.51 billion. This is significantly higher than the envisaged $1.35 billion loss projected for this year.
Lyft was founded in 2012 with the goal being to “improve people’s lives with the world’s best transportation.” Similarly to Uber, Lyft earns money by taking a cut from the fares i.e. 20%. The company has invested many resources in branding, unlike Uber, as its cars always have a pink moustache on their front grill.
In March last year, Lyft went public. At the end of the first day, Lyft was valued at around $22 billion, compared to less than $16 billion which it is valued today. The last time Lyft reported earnings, in October last year, shares of the company rose on better-than-expected quarterly results.
Lyft’s annual revenue is around $3.5 billion. Similar to Uber, Lyft reported a quarterly loss of $463.5 million for the third quarter. However, Lyft expects to become profitable by the fourth quarter of 2021, which is one year later than Uber.
Still, Lyft’s projections were received positively by the analysts since the previous guidance mentioned the end of 2022 as the profitability target.
Business model: Diversification vs Focus
Despite the fact that they belong to the same industry, which doesn’t offer much space for innovation, the two companies have adopted two different business models. In essence, Lyft’s specifically focuses on passengers and consumer transportation, while Uber is working on a few different projects, such as food delivery, developing its own self-driving cars, or passenger drone technology.
This is one of the reasons many investors prefer Lyft compared to Uber, due to the simpler and more focused approach, as well as the fact that it is focused on the North American market mainly, which is the most profitable ride-hailing market in the world.
“Lyft is focused on consumer transportation, focused on North America, and focused on taking care of our drivers and passengers, and that’s paying off,” said Logan Green. Lyft has a share of 39% in the North American ride-hailing market.
On the other hand, Uber dominates the U.S. ride-sharing market. Moreover, the diversification of their business is not necessarily a bad thing as Uber Eats, for instance, is in the top three U.S meal delivery companies by sales. Uber is also trying to penetrate Asia and Europe, although it has been struggling to do so due to different and more strict regulations than in the United States.
“I’d take Lyft over Uber because Uber wants to be all things to all people. You’d think they’d learn from their mistakes. They tried in China and had to back out of China. I think being less ambitious in this business, until you figured out a business model, is better,” said Aswath Damodaran of New York University’s Stern School of Business.
As outlined above, both companies are struggling with profitability. Uber is taking a more aggressive approach by investing more into money-losing side businesses, while Lyft remains true to its core business – moving people around.
Looking at the stock performance, 23 out of 37 market analysts have Uber as a “buy” with the average price target of $48.83, compared to the current price of $40.33. On the other hand, the average price target for Lyft is $69.18, while the current market price is $53.54. Similarly, 21 of 37 have a “buy” rating set on Lyft stock.
Uber and Lyft are at the forefront of the ride-sharing industry. Uber’s market valuation is nearly five times that of Lyft’s, mainly due to the fact that it is engaged in other business segments as well, such as food delivery or a freight shipping business.
Some analysts prefer Lyft due to the simpler and more focused approach on moving people around and caring about its drivers and passengers. On the other hand, Uber is trying to move simultaneously in different markets, despite the fact that only the ride-sharing business is profitable.
Overall, Uber is slightly ahead of the curve in the context of overall profitability as it targets the fourth-quarter of this year to become profitable, which is 12 months earlier than Lyft.
Both companies are likely to benefit the most from the expanding ride-hailing industry. Still, Lyft may be a less risky bet due to its focus on passenger transportation, while Uber continues to lose money on other ventures.