5./15 WEST
Introduction
Uber Technologies (NYSE:UBER) is uniquely positioned to benefit in the ride-hailing market in the coming years. The company's management team has excelled at setting up the company for a better future than its main U.S. competitor, Lyft (NASDAQ:LYFT). Uber has more successfully rebuilt its supply and demand situation regarding driver and customer imbalances, and Uber has created a sticky product, Uber One, to increase market share and loyalty. On the other hand, Lyft, due to scale, lacks the ability to implement services like UberOne. The difference in the competency of the management team, thus, has likely created a situation where Uber is enjoying a tailwind while Lyft is fighting a headwind. Therefore, because I believe that this trend of Uber being in a better position for Lyft to accelerate in 2023, Uber is a buy.
Uber vs. Lyft
Uber's management team proved to be far more competent than its counterpart at Lyft. While the difference was not noticeable for the past few years, today, I believe it to be fairly obvious for two reasons.
One, Uber's management team was more successful in addressing the supply and demand imbalances between drivers and customers than Lyft. The first noticeable difference between Uber and Lyft was the implementation of an upfront pay policy for drivers. To allow drivers to have more visibility, Uber implemented an upfront payment system in July of 2022 while Lyft only followed Uber months later in October of 2022. More importantly, Lyft's driver incentive package to lure drivers during the supply and demand imbalance lacked Uber's incentive package due to management's poor decisions. Looking at Lyft's 2022Q3 earnings call transcript, Lyft CEO, Logan Green, said that the "third-party data that we track shows a 1% drop in market share quarter-to-quarter" against Uber because of the "additional driver incentives that the competition temporarily put into market," which shows that the driver incentives drove Uber's stronger growth over Lyft's. Although Mr. Green has said that Uber's drivers' incentive package is no longer in the market after his comment, I believe the reasoning was due to the driver and customer imbalance starting to ease. As the picture from Uber below shows, the driver and customer imbalance for Uber started to normalize and ease during 2022Q3 ending the need for Uber to implement driver incentives. Overall, I believe it is fairly apparent that Uber's actions to address driver imbalances were better than Lyft's.
Uber
Two, Uber's launch of Uber One allowed Uber to obtain more loyal customers. Uber One is a subscription service launched in 2021 that allows paying customers, $9.99 a month, to receive a 5% discount on all Uber rides and deliveries on top of preferred pricing. Further, customers get to enjoy a 0$ delivery fee for food and grocery deliveries.
As one can tell, it is a service aimed at customers using or will potentially use Uber Eats delivery. The advantage of this program exists for this reason. Lyft does not have any similar service while Uber enjoys 12 million Uber One users; thus, customers using food and grocery delivery services will be more inclined to use Uber over Lyft. Unlike Lyft, Uber has a factor that brings sticky loyalty to its platform.
Therefore, I believe it is reasonable to argue that Uber may see a significant market share increase in 2023 and beyond. The company, with more scale, will be able to pressure Lyft continuously.
Result
Uber, due to the above reasons, is in a far stronger position than Lyft compare to pre-pandemic times. In 2019, Lyft had revenue of $3.6 billion, which grew about 14% to $4.1 billion in 2022. On the other hand, only accounting for Uber's mobility business, the company had a 2019 revenue of $10.6 billion, which grew about 32% to $14 billion in 2022. Uber's growth, coming out of the pandemic, was more than double that of Lyfts. Uber came out stronger from the pandemic while Lyft struggled relatively to Uber.
Further, when comparing the growth rates of both Uber's mobility business and Lyft's revenue growth rate from 2022Q1 to 2022Q4, Uber still came out on top. Lyft's 2022Q1 revenue was $875.6 million, which grew about 34% to about $1176 million in 2022Q4. Uber's revenue, on the other hand, grew by about 64.3% from 2022Q1 with $2518 million to 2022Q4 with $4136 million. Therefore, even when comparing the most recent data, Uber's growth rate far surpassed Lyft's growth rate. I believe this signals that Uber will likely outperform and take additional market share away from Lyft leading to a harder competitive landscape for Lyft as Uber's scale continues to expand.
Risk to Thesis
Valuation discrepancy is the biggest risk to the thesis. Today, valuations calculated based on 2024 and 2025 forward price-to-earnings show that Lyft's valuation multiple is less than Uber's.
Lyft's 2024 and 2025 forward price-to-earnings ratio was estimated to be about 14.3 and 11.7, respectively. On the other hand, Uber's 2024 and 2025 forward price-to-earnings ratio was estimated to be about 45.2 and 21.5, respectively. Further, while Lyft is expecting $0.17 in eps in 2023, Uber is not expected to report a positive eps in 2023. Thus, it could be said that my bullish argument for Uber over Lyft is already priced into the current stock price.
However, I believe that Uber's higher valuation is justified. Uber is not only growing at a faster pace than Lyft in the mobility business, but the company is also more diversified in its product offerings. Uber has a substantial footprint in the food and grocery delivery business, which is the reason for Uber's lower eps expectation in 2023. Therefore, I believe the valuation of multiple discrepancies between the two companies to be justified.
Summary
I believe Uber has clearly outperformed Lyft during the few years following the pandemic, and I continue to believe that Uber will outperform Lyft in the years to follow. Uber's management team responded better to driver shortages compared to its Lyft counterparts while launching the Uber One program to create a sticky service for a more loyal customer base. These efforts resulted in Uber's mobility business growing far faster than Lyft's. Therefore, as both companies continue to strive for profitability, I believe Uber will outperform Lyft.
