Deep Dive What the Lyft, Uber IPOs say about ride-hailing's future

An analysis of the companies' S-1 documents suggest both are deeply concerned about profitability, and are pinning much of their hopes on autonomous vehicles.

With both Lyft and Uber having filed paperwork with the Securities and Exchange Commission (SEC) for their initial public offerings (IPOs), investors and the public now have a window into the opportunities ahead for the ride-hailing industry — and obstacles to its future success.

Based on their S-1 documents, it would appear both companies feel there is room to grow, not only in ride-hailing but also in other ventures including food delivery, micromobility and autonomous vehicles (AVs). And while they acknowledge there are barriers to growth, especially rising operating expenses and continued financial losses, the companies have come a long way.

“What began as ‘tap a button and get a ride’ has become something much more profound: ride-sharing and car-pooling; meal delivery and freight; electric bikes and scooters; and self-driving cars and urban aviation," Uber CEO Dara Khosrowshahi wrote in a letter to potential investors included in the S-1 filing.

“We take this responsibility to serve our communities and stockholders seriously, and we look forward to proving that with actions and results,” Lyft co-founders Logan Green and John Zimmer wrote in a letter to potential investors in their own S-1.

Losses

Perhaps most striking from the S-1 documents are both ride-hailing companies’ significant financial losses, even as their revenue continues to tick upward. It could have played a role already in the significant downward movement Lyft's shares have had since it started trading on Nasdaq, adding to the sense of uncertainty surrounding both companies. Uber has yet to start trading on the New York Stock Exchange.

Uber had already been moving toward disclosing its finances as a private company. In its last round of financial disclosures in February, the company said that while it took in $3 billion in revenue in Q4 of 2018, it had a net loss of $865 million. Its S-1 notes that the company incurred operating losses of $4.0 billion and $3.0 billion in the years ended December 31, 2017 and 2018, respectively.

It's a similar story for Lyft, which disclosed to potential investors that it incurred net losses of $682.8 million, $688.3 million and $911.3 million in 2016, 2017 and 2018, respectively. Both companies went on to say expenses will likely continue to increase due to further investments, something that made analysts nervous before the IPO documents were filed.

Matt Curtis, founder of the Smart City Policy Group, which advises cities and businesses on the sharing economy, said that position marks a major shift for both Uber and Lyft, who up until now could've made use of their vast sums of venture capital to cover any losses.

“The ride-share companies have been fighting a single-front war solely searching for market growth,” Curtis told Smart Cities Dive in an interview. “Now they'll be forced to fight a two-front war: the front to continue to grow their market share but now also their fight against their own budget and their need for to show a profit. They haven't had to do that before.”

For their part, both Uber and Lyft say that while profitability may not be in their immediate future, they are working to get there. Uber notes it is investing heavily to increase users of its platform, including drivers, restaurants and shippers, and is also looking to expand into new markets, up its research and development game and invest in new “products and offerings." Lyft notes it is expanding its driver support offerings and its Express Drive flexible rental car service to help people rent cars and potentially drive them for the company or for their own use.

“The ride-share companies have been fighting a single-front war solely searching for market growth."

Matt Curtis

Founder, Smart City Policy Group

For both companies, revenue growth is a priority. “Any failure to increase our revenue sufficiently to keep pace with our investments and other expenses could prevent us from achieving or maintaining profitability or positive cash flow on a consistent basis,” Lyft wrote in its filing. “If we are unable to successfully address these risks and challenges as we encounter them, our business, financial condition and results of operations could be adversely affected.”

Ironically, the desire for Uber and Lyft to continue to compete — and drive down each other’s prices in doing so — could mean the path to profitability is a long one.

“I hear some say that duopolies have always allowed both to win, like PepsiCo and Coca-Cola. But this is different,” an investor with the online moniker "From Growth to Value" wrote on Seeking Alpha. “The moat is not that strong. If Uber and Lyft would raise their prices substantially, one of the smaller competitors (Juno, Gett, and Via in the US) could seize market share of Lyft and Uber.”

Labor issues

One area that has remained controversial for both companies is their fight to keep their drivers classified as independent contractors rather than employees, and both filings with the SEC outline their belief that a change would adversely harm their business models.

“We believe that Drivers are independent contractors because, among other things, they can choose whether, when, and where to provide services on our platform, are free to provide services on our competitors’ platforms, and provide a vehicle to perform services on our platform,” Uber wrote.

But having drivers classified as independent contractors means companies do not need to provide salaries or benefits, and they both note they are involved in multiple legal challenges against that at the federal, state and city level.

On the day of Lyft’s IPO, Gig Workers Rising, which advocates for better wages and benefits, protested outside the company’s headquarters calling for “employees to remember us drivers,” and saying they get “almost none of the reward.” The organization, which brings together workers from across the app-based gig economy, called on the companies to provide a living wage, transparency, benefits and the ability to unionize and be represented. It carried out similar action when Uber filed its S-1.

Perhaps to try and stave off those protests, Lyft announced in March it would offer bonuses to its “most dedicated drivers,” and also allow them to use those bonuses to buy stock in the IPO. It also announced new "driver services" to help drivers save money. Meanwhile, Uber noted it aims “to reduce driver incentives to improve our financial performance,” and so “we expect driver dissatisfaction will generally increase.”

New York City became the first city to regulate ride-hailing, which included the introduction of a minimum wage of $17.22, with cities like Seattle and San Francisco studying how they might follow suit. Before the New York City Council passed those regulations last summer, both companies warned of negative consequences — including higher fares — while Lyft argued they already paid a living wage.

As various legal actions and investigations continue — Lyft said it is “regularly subject to claims, lawsuits, arbitration proceedings, administrative actions, government investigations and other legal and regulatory proceedings at the federal, state and municipal levels” — the issue of driver pay and status is sure to keep coming up.

Competition, expansion and uncertainty

In order to move toward profitability, both companies said they would need to continue being aggressive in expansions and acquisitions, especially as competition for business heats up. Last year, Uber bought dockless bike and scooter company Jump as part of a slew of partnerships to move customers away from car ownership. Meanwhile, it has inked deals to collaborate with cities like Cincinnati, OH and Denver, and has made moves to encourage sustainable travel and investment in infrastructure.

Lyft has done similar work, including acquiring docked bike-share company Motivate, the company that controls bike-share systems in some of the biggest cities in the United States. It also has invested in and rolled out its own dockless scooters and has plans for dockless bikes of its own, and has inked partnerships to boost sustainability and transit.

Lyft

Curtis said the companies are not yet ubiquitous in smaller cities that are “off the beaten path,” while some coastal areas popular with vacationers could also represent new frontiers for expansion. He also said that the companies will look to further position themselves as one-stop shops for different modes of travel, something that they are already embracing by connecting transit, ride-hailing and dockless vehicles.

“Long-term I believe their integral connection to all these different transportation solutions will help them continue to grow,” Curtis said. “It may be a slow and steady growth … but I foresee them going through a period of growth for a long time as we continue to tackle our transportation challenges that we have in every city large and small right now.”

Analysts at Lipper Alpha Insight questioned if the ride-hailing market has room to grow, given it still dominates Uber’s revenue over other ventures such as Uber Eats. "That suggests it has already captured a big chunk of that market,” the analysts wrote.

Future technology

Both S-1s note the importance of future technology, particularly AVs, in helping grow and maintain their businesses. Uber’s paperwork mentions Google-backed Waymo 20 times, showing how concerned it is about its competitors. Both companies said not prioritizing safe AV technology, either in partnership with another company or developed in-house, could spell trouble.

“In the event that our competitors bring autonomous vehicles to market before we do, or their technology is or is perceived to be superior to ours, they may be able to leverage such technology to compete more effectively with us, which would adversely impact our financial performance and our prospects,” Uber warns in its filing. Lyft said it is “difficult to predict [AVs’] acceptance, growth, the magnitude and timing of necessary investments and other trends.”

Both companies have already invested heavily in AV technology with time, research and resources, though Uber temporarily suspended its efforts after the fatal collision with a pedestrian in Tempe, AZ. The company’s S-1 indicates it sees a long transition period with both self-driving and human-driven cars on the streets, with AVs used at first for short trips only.

Meanwhile, Lyft has made moves in its AV unit, including through partnerships and acquisitions to fund, develop and manufacture self-driving systems. The company also hired John Maddox, the former CEO of AV research institution the American Center for Mobility (ACM), and was granted a patent in December for a system to allow AVs to display messages and communicate to pedestrians, bikers and other drivers.

But things are moving quickly, including among AV competitors, and the speed of that change has some experts worried about Uber and Lyft pinning all their hopes on AVs. "The risks for these companies and any other companies are technologies changing overnight,” Elliot Lutzker, chairman of the corporate law practice at the Davidoff Hutcher & Citron, LLP law firm in New York City, told Smart Cities Dive in an interview.

Jeremy Bowman, an analyst for financial services company The Motley Fool, said that the intense competition between Uber, Lyft and other companies in the AV space could cause issues. Bowman noted that the likes of Waymo, General Motors and Ford will be stiff competition for the two ride-hailing giants, while the potential for a ride-hailing service from Tesla will also weigh heavily. He also noted that 75-80% of the cost of a ride comes from driver compensation, so eliminating the driver creates competitive challenges.

“Autonomous vehicles would eliminate that expense, so an AV rideshare should be significantly cheaper than what Uber and Lyft charge today, provided the cost of the technology isn't prohibitively expensive,” Bowman wrote. “That could upend Uber and Lyft's entire business model and eliminate the industry's greatest barrier to entry, which is the companies' large base of drivers.”

Follow Chris Teale on Twitter

Filed Under: Transportation

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