Uber Vs. Lyft

About: Uber Technologies, Inc. (UBER), Includes: LYFT
by: Hudson Far West

Uber's total Ridesharing business generated $9.2bn vs. $2.1bn for Lyft in 2018.

Uber's total Ridesharing business excluding incentives/subsidies generated ~$8bn vs. Lyft Ridesharing (ex-incentives/subsidies) of $1.9bn in 2018.

Uber's total US & Canada Ridesharing business appears to generate $4.3bn (ex-incentives/subsidies), which would imply its market share is ~70%.

Uber and Lyft Ridesharing businesses are subsidizing rides at a similar rate.

Based on my analysis I estimate a market valuation (note: not my personal valuation) of Uber's US & Canada Rideshare business standalone to be ~$40bn currently.

Perhaps the most straightforward valuation exercise to do for Uber is to strip out its US & Canada Ridesharing business and compare it with Lyft's business, which would essentially be a direct Market Comp (note: not my personal valuation). In this note I attempt to do that and arrive at a market valuation for Uber's US & Canada Ridesharing business of ~$40bn.

Uber – Core Platform Adjusted Revenue

UBER's S-1 has a lot to analyze, but I would like to start our analysis with ‘incentives’, another word for the much talked about subsidies Uber and Lyft have been providing drivers and passengers which has helped fueled growth. I would like to first focus specifically on what Uber defines as 'Core Platform Adjusted Net Revenue'

We define Core Platform Adjusted Net Revenue as Core Platform revenue (NYSE:I) less excess Driver incentives, (II) less Driver referrals, (NASDAQ:III) excluding the impact of legal, tax, and regulatory reserves and settlements recorded as contra-revenue, and (iv) excluding the impact of our 2018 Divested Operations. We believe that Core Platform Adjusted Net Revenue is informative of our Core Platform top line performance because it measures the total net financial activity generated by our Core Platform after taking into account all Driver and restaurant earnings, Driver incentives, and Driver referrals. Excess Driver incentives are recorded in cost of revenue, exclusive of depreciation and amortization, and Driver referrals are recorded in sales and marketing expenses.

Source: Uber S-1

In layman's terms, ‘Core Platform Adjusted Revenue’ is essentially the revenue Uber generates stripping out subsidies it has been giving drivers to retain them. Some of those incentives are built into the cost of revenue line, while others are recorded as sales and marketing expenses. To Uber's credit it breaks this out and this is the picture we get…

Source: Uber S-1, Hudson Far West Analysis

A quick summary of the table above shows:

  1. Uber's Ridesharing business is getting less dependent on driver incentives to drive growth (i.e. incentives as a % of rideshare revenue) and generated $9.0bn from its Ridesharing business after excluding driver incentives
  2. Uber Eats business is tremendously dependent on driver incentives - its Adj. Revenue essentially halves when you strip driver incentives out
  3. 'Other Core Platform' revenue doesn't appear to have any driver incentives built in as the figure is the same as the reported figure

Here is another consolidated view of how Uber's business looks when you break out the adjustment made to get to 'Core Platform Adj. Revenue'.

Source: Uber S-1, Hudson Far West Analysis

Customer Incentives

I believe another adjustment must be made to Uber's 'Core Platform Adjusted Revenue', which strips out 'Customer Incentives' (i.e. discounts, promotions, refunds, credits given to Uber customers), which is disclosed and reflected in 'Sales and Marketing' expenses.

Source: Uber S-1

If we adjust Uber's 'Core Platform Adjusted Revenue' for 'Customer Incentives' we come out with the following…

Source: Uber S-1, Hudson Far West Analysis

For the purposes of this illustrative analysis we will assume 'Customer Incentives' only apply to Uber's Ridesharing and Eats business as we are not given a more specific breakdown as we were with 'Driver Incentives' and this is likely a reasonable assumption given Ridesharing and Eats represent 97%+ of Uber's 'Core Platform'. Finally, I include an illustrative output showing what % Driver and Customer Incentives (i.e. subsidies) represent of 'Total Core Platform Revenue'…

Source: Uber S-1, Hudson Far West Analysis

As a last step, let’s assume that in 2017 and 2018 the $949m and $1.4bn, respectively, of 'Customer Incentives' is proportionally distributed (by revenue) between Eats and Ridesharing and does not follow the uneven distribution of the ‘Driver Incentives’. I believe this is a conservative way to look at Uber’s Ridesharing business (excluding incentives/subsidies) and should be the Base Case assumption. Uber's Core Rideshare Adj. Revenue ex-incentives/subsidies appears to be $7.8bn.

Source: Uber S-1, Hudson Far West Analysis

As an Upside Case if we assume 'Customer Incentives' were split 50 / 50 between Eats and Ridesharing this is how it would look...

Source: Uber S-1, Hudson Far West Analysis

Lyft – Core Platform Adjusted Revenue

Based on disclosure found on F-15 of Lyft's S-1 I believe we can replicate the above Uber analysis for Lyft.

Source: Lyft S-1

Below is a breakdown of Lyft's business excluding these incentives/subsidies.

Source: Lyft S-1, Hudson Far West Analysis (note: for this analysis Vehicle Solutions is included in Ridesharing)

If you compare the figures, Lyft appears to be subsidizing its business in a very similar way to Uber’s Ridesharing business in our Base Case (i.e. 14% vs. 15% (Uber)) and ~5% more in our Upside Case (i.e. 14% vs. 9% (Uber)).

Uber Ridesharing vs. Lyft Ridesharing

To summarize, after stripping out driver and customer incentives/subsidies, Uber’s Ridesharing business generates $7.8bn of total revenue vs. Lyft’s $1.9bn in 2018. Our next exercise will try to make an educated guess regarding how much of Uber’s Total $7.8bn Ridesharing business relates to the United States & Canada.

Uber Ridesharing – United States & Canada

Let’s begin our analysis by following the disclosures that Uber gives us in its S-1.

Source: Uber S-1

We know from the table above 56% of Total Core Platform (i.e. Eats, Ridesharing and Other) revenues come from the United States & Canada. So, we need to attempt to strip out Uber Eats / Other Core revenue stemming from the United States & Canada OR create a way to estimate the Ridesharing portion. I believe we can estimate the latter through Gross Booking disclosure in Uber’s S-1.

Source: Uber S-1

Given that US & Canada growth, on average, is likely lower than outside Uber's international operations let’s assume on average (in 2018) 50% of Gross Bookings stemmed from Uber’s US & Canada Ridesharing and Eats business (vs 48% in Q4 2018 as Uber’s international operations probably accounted for increasing growth and the 2018 geographic revenue breakdown also implies that). It would give you the following result…

Source: Uber S-1, Hudson Far West Analysis

To further our analysis let’s make two assumptions.

  1. Gross Bookings are distributed in North America in the same manner they are for the whole business (i.e. 84% of Rideshare & Eats Bookings come from Rideshare)
  2. Let’s apply a 25% Take-Rate to Uber’s US / Canada Rideshare Bookings, which is in line with Lyft’s 26.8% take-rate in Q4 2018 and Uber’s disclosure that its take rates vary from 12% to 25% across regions in 2018.

Source: Uber S-1

This is the result we get…

Source: Uber S-1, Hudson Far West Analysis

In addition, let’s now apply our Base Case assumption on % of Incentives that make up Rideshare to get Core Rideshare Adj. Revenue for Uber US & Canada, which is directly comparable to Lyft’s $1.9bn figure we calculated after stripping out incentives.

Source: Uber S-1, Hudson Far West Analysis

As a final step, let’s sense check the $4.3bn figure to see whether the result is logical (the analysis also implies that Uber Eats US & Canada business is ~$330m ex-incentives, or ~40-45% of Uber Eats total revenue ex-incentives).

I believe a good sense check would be to see what the figures say about implied market shares of Uber vs. Lyft on a Gross Billing and Net Revenue basis in the US / Canada Ridesharing market.

Source: Uber S-1, Hudson Far West Analysis

These figures appear to be in line with Uber’s S-1 US / Canada market share estimate of >65% and almost exactly in line with independent research firms Second Measure and Earnest Research. However, this does not match up with Lyft’s 39% market share estimate and further calls into question Lyft’s market share claim.

Uber United States & Canada Rideshare Business – Valuation

To conclude this analysis, we will do a simple trading comp analysis to estimate the value of Uber’s United States & Canada Ridesharing business. Currently, Lyft is valued at $16.1bn (as at its Apr 16th closing share price of $56.25). This would imply a 2018 Revenue multiple of 7.5x, which would yield a $39bn valuation for Uber’s US & Canada Ridesharing business. In addition, Uber’s business will likely be given a premium to Lyft’s due to its leading market position, bringing the valuation ~$40bn+.

Simple Market Comp Valuation (Note: Not my personal valuation)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.