Ridehailing

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Includes: DIDI, LYFT, UBER
by: David Ruggles
Summary

Ridehailing is a financial disaster for investors, and for incumbents.

Taxi services - indeed transportation in general - are an intrinsically low margin.

Uber and Lyft can never capture more than a slice of that low margin.

By Mike Smitka

...taxis have never made much money, so interposing an app between rider and driver can never make much, either...

Ridehailing is a financial disaster for investors, and for incumbents. By subsidizing riders, they've been able to capture market share from cabs and limo services, whose businesses appear to be down by over 50%. Medallion prices in NYC have crashed, so investors in such businesses, almost exclusively local entrepreneurs, have taken a bath. But it looks to me like investors in Didi Chuxing (DIDI), Uber (NYSE:UBER), Lyft (NASDAQ:LYFT) and their many, many rivals will do the same. Indeed, neither Uber nor Lyft provides a compelling story that they have a route to profitability. Here are a few numbers.

Uber and Lyft provide varying levels of detail in their quarterly financial reports and IPO filing. For Uber, revenue per gross booking, ridehailing adjusted net revenue (RANR) and RANR per trip are all down. They provide almost no details of their costs. Here are two key metrics I've culled for them:

2017Q1 Q2 Q3 Q4 2018Q1 Q2 Q3 Q4 2019Q1 Q2
Adj Net Revenue $1,309 $1,630 $1,982 $2,282 $2,423 $2,574 $2,656 $2,644 $2,761 $2,873
Ridehailing ANR $1,184 $1,447 $1,752 $2,000 $2,119 $2,223 $2,286 $2,282 $2,331 $2,314
Rideshareing ANR per trip $1.53 $1.63 $1.78 $1.84 $1.87 $1.79 $1.70 $1.53 $1.50 $1.38

Lyft does better in providing information. They stopped reporting total rides with 2018Q4, and they have only reported rider and driver incentives for scattered time periods; they do provide the total number of active riders. Excluding 2019Q1 with its IPO expenses, the only cost number that's improved on a per-active-rider basis is sales & marketing. In contrast, insurance reserves, costs of revenue, operations & support, R&D (a large and to me mysterious item) and general & administrative, as well as total operating costs, are all up on a per-rider basis.

Lyft 2017Q1 Q2 Q3 Q4 2018Q1 Q2 Q3 Q4 2019Q1 Q2
Rides 70.4 85.8 103.1 116.3 132.5 146.3 162.2 178.4 no data no data
Active riders 8.1 9.4 11.4 12.6 14.0 15.5 17.4 18.6 20.5 21.8
Insurance reserves per rider $21.96 $24.79 $26.75 $29.88 $33.30 $37.09 $39.76 $43.56 $45.71 $53.45
Revenue per rider $21.42 $25.29 $26.59 $27.34 $28.27 $32.57 $33.65 $36.04 $37.86 $39.78
Cost of revenue per rider $14.64 $15.31 $16.58 $16.51 $18.61 $18.92 $18.54 $19.73 $22.58 $28.90
Operations and support per rider $4.47 $4.57 $4.24 $4.44 $4.28 $4.35 $5.32 $6.38 $9.13 $6.97
R&D per rider $2.90 $3.00 $3.26 $3.79 $4.51 $4.15 $4.44 $5.17 $30.78 $14.21
Sales & Marketing per rider $10.42 $11.43 $14.50 $16.66 $12.05 $11.30 $13.86 $11.77 $13.42 $8.30
G&A per rider $1.90 $1.86 $2.38 $2.57 $3.19 $3.02 $3.58 $3.86 $9.95 $6.72
Total operating costs per rider $37.47 $39.31 $44.13 $46.98 $45.90 $45.07 $49.06 $50.52 $94.29 $70.65
Net operating revenue (loss) per rider ($16.14) ($13.89) ($17.50) ($19.63) ($17.53) ($12.50) ($15.44) ($14.52) ($56.43) ($30.87)

The whole sector is a disaster. I've scanned news for Didi, Grab and various others on a periodic basis, in several languages. Nothing I've found indicates anyone makes (or has ever made) a profit. Taking Lyft's 2019Q2 operating loss per rider, with about 10 rides per active rider per quarter (last reported 2018Q4), they need to increase what they charge by $3 a ride to break-even. To make a decent profit, they have to bump prices by $5. That is an underestimate, because it will surely lose them market share, and drivers. And with fewer drivers, response times fall, making getting a Lyft even less attractive. In econ jargon, demand is surely relatively price-elastic, and that's under the assumption that Uber also raises prices. And that means that Lyft and the others in the segment need to shrink if they are to ever make money.

Taxi services - indeed transportation in general - are an intrinsically low margin. Trying to capture part of that margin by interposing an app between the person paying the fare and the person receiving the fare doesn't change that fundamental fact. Uber and Lyft can never capture more than a slice of that low margin.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.